What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-02-08 compared with 2021-08-04 · 96 added, 193 removed, 151 unchanged (66% of the section changed)

15 unchanged sentences

We have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.

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.

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 critical components in a variety of X-ray based imaging equipment.

Our components are used in medical diagnostic imaging, security inspection systems, and industrial 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.

Varex has approximately 2,000 full-time equivalents employees, located at manufacturing and service center sites in North America, Europe, and Asia.

Varex has approximately 2,100 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:

4 unchanged sentences

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 400 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.

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 demand from our customers.

We continually invest in research and development and employ approximately 500 individuals in product development related activities.

Our focus on innovation and product performance along with strong and 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 and the General Economic Environment

Over the past 18 months, the unprecedented nature of the COVID-19 pandemic and its effect on the global economy significantly disrupted our business by increasing uncertainty in demand for our products as well as increasing variability in our supply chain and manufacturing productivity.

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

During the three months ended July 2, 2021, demand for many of our products has continued to recover and our business has continued to stabilize.

We believe that demand for our products has increased in part because end-users (such as hospitals) are making capital purchases that were previously deferred due to the uncertainty surrounding COVID-19.

It remains difficult to forecast future demand and there is no guarantee that the increase in demand will continue once the current backlog has been satisfied.

While we are encouraged by the recovery that we have seen, we remain cautious as many factors remain unpredictable.

In particular, new variants of the COVID-19 virus and uneven vaccination rates across the globe continue to make it difficult to forecast the trajectory and speed of any future recovery.

We continue to experience logistic, supply chain, and manufacturing challenges that we expect will continue into 2022.

As economies around the world begin to recover, shortages in raw materials have become more widespread.

During the three months ended July 2, 2021, we experienced shortages of materials and have used more of our inventory on hand than we have used historically.

Shortages of materials, particularly micro-controller chips and associated electronic components, have caused delays in manufacturing products for our customers.

The unprecedented nature of the COVID-19 pandemic and its effect on the global economy began to significantly disrupt our business in fiscal year 2020 by initially reducing demand for our products followed by strong recovery in demand but increasing variability in supply of raw materials and manufacturing productivity.

During fiscal year 2021, demand for many of our products recovered to pre-pandemic levels and business has continued to grow.

We believe that demand for our products has increased due to increased investments in healthcare and diagnostics coupled with end-users (such as hospitals) making capital purchases that were previously deferred due to the uncertainty surrounding COVID-19.

While we are encouraged by the recovery, we remain cautious as many factors remain unpredictable.

We continue to experience logistic, supply chain, and manufacturing challenges that we expect will continue throughout 2022.

As economies around the world continue to recover, shortages in raw materials have become more widespread.

We continue to experience shortages of certain materials and have used more of our inventory on hand than we have used historically, while also purchasing more materials that are critical to our processes, often at higher costs.

Shortages of materials, particularly micro-controller chips and associated electronic components, have caused and may continue to cause, delays in manufacturing products for our customers.

In some cases, raw material shortages and delivery delays from our suppliers are communicated to us with very little advanced warning, which has caused operational and customer order fulfillment challenges.

Over the past year, our ability to mitigate supply chain challenges was higher than it is currently.

For example, during fiscal year 2021, inventory levels decreased due to our strong growth and, despite a concerted effort, it has continued to be difficult to replenish that inventory.

While we are dedicating significant resources to manage, mitigate, and resolve these issues, we currently expect supply chain challenges to continue to impact our ability to deliver products to our customers over the next several quarters.

Increased freight charges and shipping delays have also become more common over the last few months and are expected to continue.

During the three months ended July 2, 2021, our manufacturing facilities continued to operate with minimal disruption.

In accordance with government guidelines, we have begun to modify certain COVID-19 related protocols, including social distancing and mask requirements.

In the event COVID-19 cases continue an upward trajectory, we may be required to re-implement certain COVID-19 related precautions.

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.

Increased freight charges and shipping delays have also become more common during the pandemic and are expected to continue into the foreseeable future.

Due to the rising cost environment, in addition to ongoing expense management, we have raised prices on certain products.

We expect to make pricing adjustments throughout fiscal year 2022.

During the three months ended December 31, 2021, our manufacturing facilities continued to operate without significant disruption due to employee absences, however, with the increasing prevalence of the omicron variant and the general increase in COVID-19 cases in the cities in which our facilities are located, we have experienced an increase in COVID-19 related employee absences that has made it more difficult to manufacture our products.

We have been taking significant precautions to maintain employee safety, such as continuing a mask requirement, strongly encouraging vaccination, and asking non-production related employees to work from home when possible.

The full extent to which the COVID-19 pandemic and ensuing supply chain challenges have 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 or that we determine are in the best interests of our employees, customers, suppliers, and stockholders.

For additional information on risks related to the pandemic and other risks that could impact our results, see Part II, Item 1A - Risk Factors.

For additional information on risks related to the pandemic and other supply chain risks that could impact our results, see Part I, Item 1A - Risk Factors.

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:

We have 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.

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 bucky systems.

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, which integrate 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.

The segments align our products and service offerings with customer use in medical and industrial markets.

In our Medical segment, we design, 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 other diagnostic radiography uses.

Our X-ray imaging components are primarily sold 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 our 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.

1 unchanged sentence

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.

Once our components are designed into our customers' equipment, our customers will typically continue to buy from us for any replacement components and for service and support for that equipment.

Some of our products are also included in product registrations for our customers' equipment that require regulatory approval to change.

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

The COVID-19 pandemic had a significant effect on hospitals, clinics and outpatient imaging centers as they encountered declines in elective procedures volume.

As a result, they reduced the capital purchases of imaging equipment from OEMs, which led to lower demand for X-ray imaging components for us.

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

Partially offsetting this was an increased demand for imaging equipment used to diagnose respiratory diseases, such as radiographic X-ray imaging systems and CT imaging systems.

The Company has experienced growth in demand for its products as health systems globally have continued to address healthcare services gaps.

However, the Company is not able to convert all the demand into sales due to on-going supply chain related interruptions and uncertainties, particularly with the availability of micro-controller chips and other electronic components.

As a result, uncertainty in overall sales volume is expected to continue into calendar year 2022.

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.

As a result, the number of diagnostic X-ray imaging systems, including CT, 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 a number of 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 recent years our business in China has been impacted by the trade war with the United States 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.

To mitigate the impact of tariffs on materials imported from China, we have implemented changes to secure more non-Chinese 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 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.

In recent years our business in China has been impacted by the trade war with the United States in three principal ways:

(1) imports of raw materials from China to the Unites States have become more expensive, (2) imports of raw materials and sub-assemblies from the Unites States to China have become more expensive, and (3) importing finished U.S.

manufactured products into China have become more difficult and 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.

To help mitigate the impact of tariffs, and to be closer to our global customer base, we continue to expand manufacturing capabilities at our facilities in China, Germany and the Philippines.

We have also implemented local sourcing strategies to 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.

5 unchanged sentences

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

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

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

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

The end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there can be significant 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.

3 unchanged sentences

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

During the three months ended July 2, 2021, we have continued to see improved conditions in this market.

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

During the three months ended December 31, 2021, we have continued to see improved conditions in this market.

Critical Accounting Policies and Estimates

7 unchanged sentences

There have been no changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those estimates and assumptions since the filing of our Annual Report on Form 10-K for year ended October 1, 2021.

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

Fiscal year 2021 is the 52-week period ending October 1, 2021.

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

Fiscal year 2022 is the 52-week period ending September 30, 2022.

Fiscal year 2021 was the 52-week period that ended on October 1, 2021.

The fiscal quarters ended July 2, 2021 and July 3, 2020 were both 13-week periods.

On a year-to-date basis, the three fiscal quarters ended July 2, 2021 and July 3, 2020 were 39 weeks and 40 weeks, respectively.

Discussion of Results of Operations for the Three Months Ended July 2, 2021 Compared to the Three Months Ended July 3, 2020

The fiscal quarters ended December 31, 2021 and January 1, 2021 were both 13-week periods.

Discussion of Results of Operations for the Three Months Ended December 31, 2021 Compared to the Three Months Ended January 1, 2021

Revenues, net

Three Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change % Change

(In millions) December 31, 2021 January 1, 2021 $ Change % Change

$ 155.7 $ 139.2 $ 16.5 11.9 %

4 unchanged sentences

Medical revenues increased $16.5 million primarily due to increased sales of digital detectors for dynamic imaging applications and higher sales of CT X-ray tubes.

Industrial revenues increased $10.3 million primarily due to increased sales of digital detectors, X-ray tubes, and connectors for security and non-destructive inspection applications.

The increase in medical sales was particularly strong in CT, Oncology, and Dental Modalities.

Industrial revenues increased $5.2 million primarily due to increased sales of digital detectors, X-ray tubes, connectors for security and non-destructive inspection applications and service revenues.

Three Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change % Change

(In millions) December 31, 2021 January 1, 2021 $ Change % Change

$ 46.0 $ 44.1 $ 1.9 4.3 %

4 unchanged sentences

Total gross margin 32.6 % 32.3 %

The increase in Medical gross profit was primarily due to the increased sales of digital detectors for dynamic imaging applications, the impacts of cost reduction measures taken by management in previous quarters and a favorable product mix in medical detectors.

Also during the three months ended July 3, 2020, there was a $13 million charge for the write-down of inventory associated with discontinued products and restructuring activity.

The Industrial segment gross profit increased as a result of increased sales of digital detectors for security and non-destructive inspection applications.

Also during the three months ended July 3, 2020, there was a $3 million charge for the write-down of inventory associated with discontinued products and restructuring activity.

The increase in Medical gross profit was primarily due to the increased sales of CT X-ray tubes partially offset by higher inbound freight and material costs.

The Industrial segment gross profit increased as a result of increased sales of digital detectors for security and non-destructive inspection applications and service revenues.

Operating Expenses

Three Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change

(In millions) December 31, 2021 January 1, 2021 $ Change

Research and development $ 17.7 $ 16.7 $ 1.0 6.0 %

3 unchanged sentences

16.6 % 19.4 %

Impairment of intangible assets $ — $ 2.7 $ (2.7) (100.0) %

As a percentage of total revenues

Operating expenses

4 unchanged sentences

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

Research and development costs decreased to 9.1% of revenues for the third quarter of 2021 primarily due to increased revenues, cost actions and improved material cost management.

Research and development costs decreased to 8.9% of revenues for the first quarter of 2022 primarily due to increased revenues, cost containment actions and improved material cost management.

Selling, General and Administrative

Selling, general and administrative expenses for the third quarter of 2021 decreased $2.2 million and decreased to 13.8% of total revenues primarily due to lower external audit, consulting and legal costs compared to the prior year quarter and cost reduction actions taken by management in prior quarters.

Selling, general and administrative expenses for the first quarter of 2022 decreased $1.3 million and decreased to 16.6% of total revenues primarily due to lower external audit, consulting, legal costs, and compensation compared to the prior year quarter.

Interest and Other Expense, Net

1 unchanged sentence

Three Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change

(In millions) December 31, 2021 January 1, 2021 $ Change

Interest expense

$ (9.9) $ (10.3) $ 0.4

Other income (expense), net 0.2 (6.1) 6.3

Other expense, net (0.8) (0.5) (0.3)

Interest and other expense, net

$ (10.7) $ (10.8) $ 0.1

Interest and other expense, net decreased during the three months ended July 2, 2021 compared to the prior year period, primarily due to lower other expenses, net, which were partially offset by higher interest expense.

Interest expense increased due to the interest related to our Convertible Notes issued during June 2020 and the issuance of our Senior Secured Notes in September 2020 which had higher interest rates.

Other expense, net decreased for the three months ended July 2, 2021, compared to the three months ended July 3, 2020.

Other expense, net during the three months ended July 3, 2020, consisted primarily of the impairment of certain investments in privately-held companies and an increase in the fair value of the deferred consideration related to the Direct Conversion acquisition, which did not recur during the three months ended July 2, 2021.

Interest expense decreased due to the partial redemption of the principal related to our Senior Secured Notes in July 2021.

Other expense, net increased due to increased foreign exchange expense during the three months ended December 31, 2021 compared to the three months ended January 1, 2021.

These increased expenses were partially offset by our losses in certain investments in privately-held companies being lower for the three months ended December 31, 2021 compared to the three months ended January 1, 2021.

Taxes on Income (Loss)

For the three months ended July 2, 2021, we recognized income tax expense of $3.1 million on a $15.3 million pre-tax income.

For the three months ended December 31, 2021, we recognized income tax expense of $1.7 million on $3.3 million of pre-tax income.

We are unable to recognize a tax benefit for pre-tax book losses in certain foreign jurisdictions.

For the three months ended July 3, 2020, we recognized income tax benefit of $11.6 million on $39.8 million of pre-tax loss.

Our tax expense for the three months ended July 2, 2021 increased, compared to the prior year, primarily due to increased pre-tax income in certain jurisdictions.

Discussion of Results of Operations for the Nine Months Ended July 2, 2021 Compared to the Nine Months Ended July 3, 2020

The nine months ended July 2, 2021 and July 3, 2020 consisted of 39 weeks and 40 weeks, respectively.

In the narrative text below, we do not highlight the differences between periods due to the extra week of operations in the 2020 period.

Nine Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change % Change

$ 463.1 $ 448.6 $ 14.5 3.2 %

128.7 119.7 9.0 7.5 %

Total revenues $ 591.8 $ 568.3 $ 23.5 4.1 %

Medical as a percentage of total revenues 78.3 % 78.9 %

Industrial as a percentage of total revenues 21.7 % 21.1 %

Medical revenues increased $14.5 million primarily due to increased sales of CT X-ray tubes, digital detectors for dynamic imaging applications and decreased sales of radiographic digital detectors.

Industrial revenues increased $9.0 million due to increased sales of linear accelerators for cargo inspection and other non-destructive inspection applications, and an increase in sales of digital detectors for security and non-destructive inspection applications.

Nine Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change % Change

$ 146.3 $ 105.2 $ 41.1 39.1 %

49.6 39.8 9.8 24.6 %

Total gross profit $ 195.9 $ 145.0 $ 50.9 35.1 %

Medical gross margin %

31.6 % 23.5 %

Industrial gross margin % 38.5 % 33.2 %

Total gross margin % 33.1 % 25.5 %

The increase in Medical gross profit was primarily due to a favorable mix of higher margin products and the impacts of cost reduction measures taken by management in previous quarters.

Also during the nine months ended July 3, 2020, there was a $13 million charge for the write-down of inventory associated with discontinued products and restructuring activity.

The Industrial gross

profit increased due to a favorable mix of higher margin industrial detector products.

Also during the nine months ended July 3, 2020, there was a $3 million charge for the write-down of inventory associated with discontinued products and restructuring activity.

Operating Expenses

Nine Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change

Research and development

$ 54.1 $ 61.6 $ (7.5) (12.2) %

As a percentage of total revenues

Selling, general and administrative

$ 94.2 $ 101.5 $ (7.3) (7.2) %

As a percentage of total revenues

15.9 % 17.9 %

Impairment of intangible assets $ — $ 2.7 $ (2.7) (100.0) %

As a percentage of total revenues

Operating expenses

$ 148.3 $ 165.8 $ (17.5) (10.6) %

As a percentage of total revenues

25.1 % 29.2 %

Research and Development

Research and development costs decreased to 9.1% of revenues due to cost actions taken by management in previous quarters and improved material cost management.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended July 2, 2021, decreased to 15.9% primarily due to lower external audit, consulting and legal costs and cost actions taken by management in previous quarters.

Interest and Other Income (Expense), Net

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

Nine Months Ended

(In millions) July 2, 2021 July 3, 2020 $ Change

Interest income

$ — $ 0.1 $ (0.1)

Interest expense

(31.3) (16.9) (14.4)

Other income (expense), net (2.5) (4.5) 2.0

Interest and other expense, net

$ (33.8) $ (21.3) $ (12.5)

Interest and other expense, net increased during the nine months ended July 2, 2021.

Interest expense increased due to the interest related to our Convertible Notes issued during June 2020 and the issuance of our Senior Secured Notes in September 2020 which had higher interest rates.

Other expense, net decreased during the nine months ended July 2, 2021 as compared to the nine months ended July 3, 2020.

Other expense, net during the nine months ended July 3, 2020 consisted primarily of the impairment of certain investments in privately-held companies and a decrease in the fair value of the deferred consideration related to the Direct Conversion acquisition, which did not recur during the nine months ended July 2, 2021.

Taxes on Income (Loss)

For the nine months ended July 2, 2021, we recognized an income tax expense of $4.7 million on $13.8 million of pre-tax income.

We are unable to recognize a tax benefit for pre-tax book losses in the U.S.

and certain foreign jurisdictions but have recognized tax expense for profitable foreign jurisdictions.

For the nine months ended July 3, 2020, the Company recognized income tax benefit of $10.9 million on $42.1 million of pre-tax loss.

Our tax expense for the nine months ended July 2, 2021 increased, compared to the prior year, primarily due to pre-tax income and valuation allowances in the U.S.

on credits and disallowed interest expense deductions and losses in certain foreign jurisdictions for which no benefit can be recorded.

For the three months ended January 1, 2021, we recognized income tax expense of $1.6 million on $4.7 million of pre-tax loss.

Our tax expense for the three months ended December 31, 2021 increased, primarily due to increased pre-tax income in certain jurisdictions, valuation allowance positions in the Unites States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Liquidity and Capital Resources

3 unchanged sentences

however, the borrowing base under the ABL Facility fluctuates from month-to-month depending on the amount of eligible accounts receivable, inventory, and real estate.

As of July 2, 2021 the amount available under our ABL Facility was $70 million, and the ABL Facility remains undrawn.

As of December 31, 2021 the amount available under our ABL Facility was $67 million, and the ABL Facility remains undrawn.

See Part II, Item 1A.

“Risk Factors” for a further discussion.

At July 2, 2021 we had $429.8 million in long-term debt and $32.9 million of current maturities of long-term debt, net of deferred issuance costs of $49.0 million.

On July 1, 2021, we announced, and completed on July 15, 2021, the partial redemption in the principal amount of $30 million of our $300 million 7.875% Senior Secured Notes due 2027 (the "Senior Secured Notes"), in accordance with the terms and conditions of the governing indenture.

The redemption price of the redeemed notes was 103% of the principal amount of the Senior Secured Notes, plus accrued and unpaid interest from, and including, April 15, 2021 to, but excluding, the redemption date of July 15, 2021.

On July 15, 2021, the Company redeemed $30 million of Senior Secure Notes by paying cash of $31.5 million, inclusive of the redemption premium and accrued interest, and recognized a $1.4 million loss related to the redemption premium and the write-off of previously recorded debt issuance costs.

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

At December 31, 2021 we had $433.7 million in Long-term debt, net and $2.8 million of Current maturities of long-term debt, net of discounts and deferred issuance costs of $43.6 million.

Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

(In millions) July 2, 2021 October 2, 2020 $ Change

(In millions) December 31, 2021 October 1, 2021 $ Change

Cash and cash equivalents

1 unchanged sentence

The following table summarizes the changes in our debt outstanding:

July 2, 2021 October 2, 2020

December 31, 2021 October 1, 2021

(In millions, except for percentages) Amount Amount $ Change

Current maturities of long-term debt

Senior Secured Notes $ 30.0 $ — $ 30.0

Other debt $ 2.8 $ 2.8 $ —

1 unchanged sentence

Non-current maturities of long-term debt:

Asset-Based Loan $ — $ — $ —

Convertible Senior Unsecured Notes 200.0 200.0 —

9 unchanged sentences

Total debt outstanding, net $ 436.5 $ 434.5 $ 2.0

Nine Months Ended

(In millions) July 2, 2021 July 3, 2020

Three Months Ended

(In millions) December 31, 2021 January 1, 2021

Net cash flow provided by (used in):

Operating activities

$ 42.0 $ 25.0

Investing activities

(12.9) (23.2)

Financing activities

2 unchanged sentences

Net cash provided by operating activities.

Cash from operating activities consists primarily of the net income (loss) adjusted for certain non-cash items, including share-based compensation, depreciation, amortization of intangible assets, deferred income taxes, income from equity investments and the effect of changes in operating assets and liabilities.

For the nine months ended July 2, 2021, compared to the nine months ended July 3, 2020, cash provided by operating activities were as follows:

• Net income of $9.1 million compared to a loss of $(31.2) million

• Non-cash adjustments to net income (loss) of $53.1 million compared to $50.8 million

• Operating assets and liabilities activity:

◦ Accounts receivable increased by $25.5 million compared to a decrease of $31.6 million,

◦ Inventories decreased by $24.6 million compared to an increase of $50.1 million,

◦ Prepaid expenses and other assets increased by $14.6 million compared to $7.7 million,

◦ Accounts payable decreased by $6.0 million compared to an increase of $21.7 million, and

◦ Accrued liabilities and other current and long-term operating liabilities increased by $1.2 million compared to $11.0 million.

Net cash provided by operating activities was $10.8 million and $7.1 million for the three months ended December 31, 2021 and January 1, 2021, respectively.

The increase in cash provided by operating activities was primarily due to improved operating performance and strong collections reducing our accounts receivable balance, partially offset by higher inventory purchases, and a decrease in accrued liabilities and other current and long-term liabilities.

Net cash used in investing activities.

Net cash used in investing activities was $12.9 million and $23.2 million for the nine months ended July 2, 2021 and July 3, 2020, respectively.

The decrease in cash used in investing activities was primarily due to higher capital spending during the nine months ended July 3, 2020.

Net Cash (Used in) Provided by Financing Activities.

We used $1.3 million of cash in financing activities for the nine months ended July 2, 2021.

Net cash provided by financing activity for the nine months ended July 3, 2020, was primarily due to our 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 (collectively, the “Hedge Transactions”).

The Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of our common stock that initially underlay the Convertible Notes.

We also entered into warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby we sold warrants at a higher strike price relating to the same number of shares of our common stock that initially underlay the Convertible Notes, subject to customary anti-dilution adjustments.

We used $11.2 million of the net proceeds from the issuance of the Convertible Notes to pay the cost of the Call Spread Transactions.

Additionally, during the nine months ended July 3, 2020, we had borrowings under our credit agreement of $91.7 million and repayments of borrowings of $218.0 million.

Net cash used in investing activities was $2.6 million and $4.4 million for the three months ended December 31, 2021 and January 1, 2021, respectively.

The decrease in cash used in investing activities was primarily due to proceeds received from sales of business and assets during the three months ended December 31, 2021.

Net cash provided by financing activities.

Net cash provided by financing activities was $5.0 million and $2.2 million for the three months ended December 31, 2021 and January 1, 2021, respectively.

The increase in cash provided by financing activities was primarily due to proceeds received from the exercise of stock options.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 64 days at July 2, 2021 and 66 days at October 2, 2020.

Trade accounts receivable days sales outstanding (“DSO”) was 58 days at December 31, 2021 and 62 days at October 1, 2021.

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

2 unchanged sentences

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.

In January 2021, the total fixed cost commitment was $11.6 million for calendar year 2021.

As of July 2, 2021, we estimate that we have fixed cost commitments of $5.8 million related to this amended agreement through the remainder of calendar year 2021.

As of December 31, 2021, we estimate that we have fixed cost commitments of $13.2 million related to this amended agreement through the remainder of calendar year 2022.

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

1 unchanged sentence

The annual net payment will continue for the life of the MeVis Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis.

As of July 2, 2021, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

As of December 31, 2021, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

During the third quarter of fiscal year 2020, we 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 our products.

As of July 2, 2021, there has been no transfer of control of the underlying equipment.

As of December 31, 2021, there has been no transfer of control of the underlying equipment.

This acquisition is expected to be completed during the 2022 fiscal year and the total consideration to be paid by us for the acquired assets is expected to be ¥1,084.7 million or approximately $9.4 million.

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 duty audits, other contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise.

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

The Company did not have any material contingent liabilities as of July 2, 2021 and October 2, 2020.

The Company did not have any material contingent liabilities as of December 31, 2021 and October 1, 2021.

Legal expenses are expensed as incurred.

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 July 2, 2021, 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.

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.

Recent Accounting Standards or Updates Not Yet Effective

2 unchanged sentences

Backlog also includes a small portion of billed service contracts that are included in deferred revenue.

Our estimated total backlog at July 2, 2021 was approximately $259 million.

The Company expects to recognize this backlog as revenue over the next 12 months;

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

Our estimated total backlog at December 31, 2021 was approximately $289 million.

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

Consequently, it is difficult to predict with certainty the amount of backlog that will result in revenues.

We perform a quarterly review to verify that outstanding orders in the backlog remain valid.

Aged orders that are not expected to be converted to revenues are deemed dormant and are reflected as a reduction in the backlog amounts in the period identified.

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.

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-Q

Item 2. Management’s Discussion and Analysis