What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-18 compared with 2021-11-19 · 95 added, 130 removed, 176 unchanged (56% of the section changed)

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For additional information on our business, see Part I, Item 1.

Impact of COVID-19 and the General Economic Environment

Impact of COVID-19, Inflation and the General Economic Environment

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 the twelve months ended October 1, 2021, demand for many of our products recovered to pre-pandemic levels and our business has continued to grow.

During the twelve months ended September 30, 2022, demand for many of our products recovered to pre-pandemic levels and our 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 that we have seen, we remain cautious as many factors remain unpredictable.

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

While we are encouraged by the recovery that we have seen, we remain cautious as many factors remain unpredictable and recent high rates of inflation have increased our costs and could negatively affect our future profit margins.

The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor, weakening exchange rates and other similar effects.

We continue to experience logistics, supply chain, and manufacturing challenges that we expect will continue into 2023.

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

During the latter half of fiscal year 2021, we have experienced shortages of certain materials and have used more of our inventory on hand than we have used historically.

During the latter half of fiscal year 2021 and throughout fiscal year 2022, we experienced shortages of certain materials and 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 and may continue to cause, delays in manufacturing products for our customers.

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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 into the foreseeable future.

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

We anticipate to make pricing adjustments throughout fiscal year 2022.

During the twelve months ended October 1, 2021, our manufacturing facilities continued to operate with minimal disruption.

In accordance with government guidelines, we have modified 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.

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

Due to the rising cost environment, in addition to ongoing expense management, we began to raise prices on certain products in fiscal year 2022 and anticipate making further pricing adjustments throughout fiscal year 2023.

During the twelve months ended September 30, 2022, our manufacturing facilities continued to operate with minimal disruption.

Notwithstanding the foregoing, local government lockdowns, particularly in China, have impacted, and could continue to impact, our manufacturing operations in affected countries.

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.

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

Fiscal year 2021 was the 52-week period that ended October 1, 2021, fiscal year 2020 was the 53-week period that ended October 2, 2020, and fiscal year 2019 was the 52-week period that ended September 27, 2019.

Fiscal year 2022 was the 52-week period that ended September 30, 2022, fiscal year 2021 was the 52-week period that ended October 1, 2021, and fiscal year 2020 was the 53-week period that ended October 2, 2020.

Set forth below is a discussion of our results of operations for fiscal years 2022, 2021 and 2020.

Results of Operations

Our annual report on Form 10-K for the fiscal year ended October 2, 2020, filed November 30, 2020, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended October 2, 2020 and September 27, 2019 in Item 7 of Part II therein.

Our annual report on Form 10-K for the fiscal year ended October 1, 2021, filed November 19, 2021, includes a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended October 1, 2021

and October 2, 2020 in Item 7 of Part II therein.

Our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 30, 2022 and October 1, 2021 are set forth below.

Comparison of Results of Operations for Fiscal Year 2022 and 2021

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Industrial as a percentage of total revenues 21.5 % 21.3 % 20.8 %

Medical revenues increased $59.3 million primarily due to increased sales of X-ray tubes and digital detectors for oncology, dental, mammography and radiographic applications.

Industrial revenues increased $20.5 million due to increased sales of X-ray tubes for airport security and digital detectors for

inspection applications.

Medical revenues increased $30.9 million in fiscal year 2022 compared to 2021 primarily due to increased sales of X-ray tubes and digital detectors for CT, oncology and dental applications in fiscal year 2022.

Industrial revenues increased $10.4 million due to increased sales of X-ray tubes for airport security and digital detectors for inspection applications in fiscal year 2022.

Revenues by Region

(In millions) 2022 % Change 2021 % Change 2020

$ 268.5 5% $ 255.0 (10)% $ 282.6

276.3 19% 231.5 (14)% 269.0

273.3 9% 251.8 10% 229.0

Americas $ 273.3 2% $ 268.5 5% $ 255.0

EMEA 280.8 2% 276.3 19% 231.5

APAC 305.3 12% 273.3 9% 251.8

Total revenues, net $ 859.4 5% $ 818.1 11% $ 738.3

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APAC as a percentage of total revenues 35.5 % 33.4 % 34.1 %

The Americas revenues increased $13.5 million primarily due to increased sales of X-ray tubes, digital detectors and computer-aided detection software.

EMEA revenues increased $44.8 million primarily due to increased sales of digital detectors, high voltage cables, and X-ray tubes.

APAC revenues increased $21.5 million primarily due to increased sales of OEM X-ray tubes in China.

The Americas revenues increased $4.8 million in fiscal year 2022 compared to 2021 primarily due to increased sales of digital detectors, high voltage cables, and computer-aided detection software in fiscal year 2022.

EMEA revenues increased $4.5 million primarily due to increased sales of X-ray tubes and security inspection systems and machines.

APAC revenues increased $32.0 million primarily due to increased sales of OEM X-ray tubes and digital detectors in China.

(In millions) 2022 % Change 2021 % Change 2020

$ 203.2 49% $ 136.4 (28)% $ 188.9

68.3 27% 53.8 (21)% 67.8

Medical $ 210.5 4% $ 203.2 49% $ 136.4

Industrial 73.0 7% 68.3 27% 53.8

Total gross profit $ 283.5 4% $ 271.5 43% $ 190.2

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Total gross margin 33.0 % 33.2 % 25.8 %

Gross margin increased for fiscal year 2021 compared to 2020.

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

The medical segment gross margin in 2021 increased primarily due to increased volumes of X-ray tubes and medical detectors, cost reduction actions undertaken in fiscal year 2020, which have resulted in cost savings in fiscal year 2021, and favorable product mix.

The industrial segment gross margin in

2021 increased primarily due to higher volumes of X-ray tubes for security applications and non-destructive testing, favorable product mix, and cost reduction actions undertaken in fiscal year 2020, which have resulted in cost savings in fiscal year 2021.

Gross profit increased $12.0 million in fiscal year 2022 compared to 2021.

The Medical segment gross profit in 2022 increased $7.3 million primarily due to the increased sales of CT X-ray tubes and oncology modalities partially offset by higher freight and material costs.

The Industrial segment gross profit in 2022 increased $4.7 million primarily as a result of increased sales of digital detectors for dynamic imaging applications and non-destructive inspection applications, partially offset by higher freight and material costs.

Operating Expenses

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As a percentage of total revenues 9.0 % 8.8 % 10.7 %

8.8 % 10.7 % 10.0 %

Selling, general and administrative $ 118.3 (6)% $ 125.5 (12)% $ 142.2

As a percentage of total revenues 13.8 % 15.3 % 19.3 %

15.3 % 19.3 % 16.4 %

Impairment of intangible assets

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As a percentage of total revenues — % — % 0.4 %

— % 0.4 % 0.6 %

Operating expenses $ 195.3 (1)% $ 197.4 (12)% $ 223.9

$ 197.4 (12)% $ 223.9 6% $ 211.0

As a percentage of total revenues 22.7 % 24.1 % 30.3 %

24.1 % 30.3 % 27.0 %

Research and Development

Research and development costs for fiscal year 2021 decreased to 8.8% of revenues due to lower engineering related material purchases and cost reduction actions undertaken in fiscal year 2020, which have resulted in cost savings in fiscal year 2021, as well as higher revenues in fiscal year 2021.

Research and development costs for fiscal year 2022 increased to 9.0% of revenues primarily due to increased spending on material costs supporting research and development initiatives and includes $1 million in costs related to a development agreement entered into during the fourth quarter of fiscal year 2022 with a third-party company.

See Note 12, Commitments and Contingencies , included in the accompanying Notes to Consolidated Financial Statements.

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 decreased to 15.3% for fiscal year 2021 from 19.3% for fiscal year 2020 due to lower audit and consulting fees associated with the remediation of internal control deficiencies, cost reduction actions undertaken in fiscal year 2020, which have resulted in cost savings in fiscal year 2021.

Impairment of intangible assets

Impairment of intangible assets decreased for fiscal year 2021 to $0.0 million as compared to $2.8 million for fiscal year 2020.

Goodwill and Intangible Assets , included in the accompanying notes to our consolidated financial statements for further information.

Selling, general and administrative expenses as a percentage of total revenues decreased to 13.8% for fiscal year 2022 from 15.3% for fiscal year 2021 due to lower compensation costs and higher revenue.

Interest and Other Expense, Net

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Interest income $ 0.4 300% $ 0.1 —% $ 0.1

$ 0.1 —% $ 0.1 —% $ 0.1

Interest expense (39.8) (5)% (42.1) 34% (31.4)

(42.1) 34% (31.4) 49% (21.1)

Other expense, net (4.3) 23% (3.5) (54)% (7.6)

Interest and other expenses, net $ (43.7) (4)% $ (45.5) 17% $ (38.9)

Interest and other expense, net increased in fiscal year 2021 compared to fiscal year 2020.

Interest expense increased primarily 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 effective interest rates, as well as the partial extinguishment of the Senior Secured Notes.

Other expense, net decreased in fiscal year 2021 compared to fiscal year 2020.

Other expense, net during fiscal year 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 fiscal year 2021.

Interest and other expense, net decreased in fiscal year 2022 compared to fiscal year 2021.

Interest income increased primarily due to an increase in investments made into marketable debt securities.

Interest expense decreased due to the redemption of $27 million of our Senior Secured Notes in March 2022 and the redemption of $30 million of our Senior Secured Notes in July 2021, as well as reduced fees on the ABL Facility.

Taxes on Income

Effective tax rate 30.8 % 37.4 %

We had an income tax expense of $10.7 million and an income tax benefit of $15.2 million, for effective rates of 37.4% and 20.9%, for fiscal years 2021 and 2020, respectively.

We had an income tax expense of $13.7 million and an income tax expense of $10.7 million, for effective rates of 30.8% and 37.4%, for fiscal years 2022 and 2021, respectively.

During fiscal year 2022, our effective tax rate varied from the U.S.

federal statutory rate of 21% primarily due to the unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21% and also U.S.

deferred tax attributes and losses in certain foreign jurisdictions for which a valuation allowance is provided.

These unfavorable items were partially offset by the favorable impact of U.S.

tax reform regarding international provisions, return to provision adjustments, and R&D tax credits.

During fiscal year 2021, our effective tax rate varied from the U.S.

federal statutory rate of 21% primarily due to the unfavorable impact of U.S.

deferred tax attributes and losses in certain foreign jurisdictions for which no benefit is recognized and a reduction in benefit for U.S.

deferred tax attributes and losses in certain foreign jurisdictions for which no benefit was recognized and a reduction in benefit for U.S.

net operating losses carried back to prior years.

These unfavorable items are partially offset by the favorable impact of R&D tax credits and U.S.

tax reform international provisions.

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.

These unfavorable items were partially offset by the favorable impact of R&D tax credits and U.S.

tax reform regarding international provisions.

We estimated the fiscal year 2022 GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components of U.S.

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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 ABL Facility will be sufficient to allow us to continue to invest in our existing businesses, to manage our capital structure on a short and long-term basis, and to meet our anticipated operating cash needs.

The maximum availability under our ABL Facility was $100.0 million as of October 1, 2021;

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

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

We are currently not aware of any trends or demands, commitments, events, or uncertainties that will result in or that are reasonably likely to result in our liquidity increasing or decreasing in any material way that will impact our capital needs during or beyond the next 12 months.

“Risk Factors” for a further discussion.

At October 1, 2021 we had $431.7 million in long-term debt, net of discounts and deferred issuance costs of $46.1 million.

On July 15, 2021, the Company redeemed $30 million of principal 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 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 consolidated financial statements for more information regarding our indebtedness.

Our consolidated cash and cash equivalents increased from $100.6 million as of October 2, 2020, to $144.6 as of October 1, 2021.

This increase was primarily due to cash inflows from operating activities of $92.6 million, offset by capital expenditures of $15.1 million and debt repayments of $33.1 million.

Cash and Cash Equivalents

The following table summarizes our cash and cash equivalents:

(In millions) October 1, 2021 October 2, 2020 $ Change % Change

The maximum availability under our ABL Facility was $100.0 million as of September 30, 2022;

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

As of September 30, 2022 the amount available under our ABL Facility was $94.5 million, and the ABL Facility remained undrawn.

At September 30, 2022 we had $412.3 million in long-term debt, net of discounts and deferred issuance costs of $35.3 million.

On March 18, 2022, the Company redeemed $27 million of principal of our $270.0 million, 7.875% Senior Secured Notes due 2027 (the "Senior Secured Notes"), in accordance with the terms and conditions of the governing indenture by paying cash of $28.7 million, inclusive of the redemption premium and accrued interest, and recognized a $1.2 million loss related to the redemption premium and the write-off of previously recorded debt issuance costs.

See Note 9, Borrowings, in the accompanying Notes to Consolidated Financial Statements for more information regarding our indebtedness.

Our consolidated cash and cash equivalents decreased from $144.6 million as of October 1, 2021, to $89.4 as of September 30, 2022.

This decrease was primarily due to capital expenditures of $21.3 million, debt repayments of $29.4 million, and net purchases of marketable debt securities of $16.7 million and certificates of deposit of $7.2 million, offset by cash inflows from operating activities of $16.9 million and $4.9 million in proceeds from shares issued under employee stock purchase plan.

Cash and Cash Equivalents, Certificates of Deposit, and Marketable Debt Securities

The following table summarizes our cash and cash equivalents, certificates of deposit, and marketable debt securities:

(In millions) September 30, 2022 October 1, 2021 $ Change % Change

Cash and cash equivalents $ 89.4 $ 144.6 $ (55.2) (38.2) %

Marketable debt securities not included in cash and cash equivalents 16.7 — 16.7 100.0 %

Certificates of deposit not included in cash and cash equivalents 7.2 — 7.2 100.0 %

Total $ 113.3 $ 144.6 $ (31.3) (21.6) %

The following table summarizes the changes in our debt outstanding:

(In millions, except for percentages) October 1, 2021 October 2, 2020 $ Change % Change

(In millions, except for percentages) September 30, 2022 October 1, 2021 $ Change % Change

Current maturities of long-term debt

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Effects of exchange rate changes on cash and cash equivalents (0.2) (0.1) 0.9

Net increase (decrease) in cash and cash equivalents $ 44.0 $ 70.8 $ (22.1)

Net (decrease) increase in cash and cash equivalents $ (55.5) $ 44.0 $ 70.8

Net cash provided by operating activities.

Cash from operating activities consists primarily of net income 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 2021, compared to fiscal year 2020, net cash provided by operating activities were as follows:

• Net income of $17.9 million compared to net loss of $57.4 million,

• Non-cash adjustments to net income were $66.5 million compared to $84.5 million,

• Operating assets and liabilities activity:

◦ Accounts receivable increased by $32.9 million compared to a decrease of $17.7 million,

◦ Inventories decreased by $42.8 million compared to an increase of $42.7 million,

◦ Prepaid expenses and other assets increased by $0.9 million compared to $9.3 million,

◦ Accounts payable increased by $13.6 million compared to a decrease of $14.3 million,

◦ Accrued liabilities and other long-term operating liabilities decreased by $12.2 million compared to a decrease of $8.1 million, and

◦ Deferred revenues decreased by $0.6 million compared to an increase of $2.0 million.

Net cash provided by operating activities was $16.9 million and $92.6 million for the fiscal years 2022 and 2021, respectively.

The decrease in cash provided by operating activities was primarily due to increased purchases of inventory during fiscal year 2022.

Net cash used in investing activities .

Cash used in investing activities was $48.4 million and $16.2 million for the fiscal years 2022 and 2021, respectively.

The decrease in cash used in investing activities was primarily due to higher capital spending during the twelve months ended October 2, 2020, related primarily to the building of our facility in the Netherlands.

Net Cash Provided by (Used in) Financing Activities.

We used $32.3 million of cash in financing activities for the twelve months ended October 1, 2021.

Net cash used in financing activity for the twelve months ended October 1, 2021, was primarily due to our early redemption of $30 million of our Senior Secured Notes.

Net cash provided by financing activity for the twelve months ended October 2, 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 the offering of 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 twelve months ended October 2, 2020, we had borrowings under our credit agreement of $91.7 million and repayments of borrowings of $218.0 million.

Additionally, during fiscal year 2020 we issued $300.0 million aggregate principal amount of 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.

The increase in cash used in investing activities was primarily due to the purchase of investments and higher capital spending during the twelve months ended September 30, 2022.

Net cash (used in) provided by financing activities.

Net cash used in financing activity for the twelve months ended September 30, 2022, was $23.8 million and was primarily due to our early redemption of $27 million of our Senior Secured Notes.

Net cash used in financing activities for the twelve months ended October 1, 2021, was $32.3 million and was primarily due to our early redemption of $30 million of our Senior Secured Notes.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 62 days and 66 days at October 1, 2021 and October 2, 2020, respectively.

Trade accounts receivable days sales outstanding (“DSO”) was 68 days and 62 days at September 30, 2022 and October 1, 2021, respectively.

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

Contractual Obligations

The following table summarizes, as of October 1, 2021, the total amount of future payments due in various future periods:

The following table summarizes, as of September 30, 2022, the total amount of future payments due in various future periods:

Payments Due by Period

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Supplier equipment acquisition 2.5 2.5 — — —

Development and share purchase commitments 6.6 6.6 — — —

Total $ 492.1 $ 20.3 $ 212.8 $ 251.6 $ 7.4

We lease office space under non-cancelable operating leases.

For further information on our operating leases, see Note 3 .

Leases , included in the accompanying notes to our consolidated financial statements.

For further discussion regarding our borrowings, see Note 10.

Borrowings, included in the accompanying notes to our consolidated financial statements.

For further information on our operating leases, see Note 3, Leases , included in the accompanying Notes to Consolidated Financial Statements.

For further discussion regarding our borrowings, see Note 9, Borrowings, included in the accompanying Notes to 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.

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and, (2) a put right for their MeVis shares at €19.77 per MeVis share.

The annual net payment will continue for the life of the MeVis

Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis.

As of October 1, 2021, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

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

As of September 30, 2022, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

Varex entered into a purchase agreement with a supplier to acquire certain equipment and intellectual property from the supplier that is utilized to manufacture X-ray cables utilized in Varex's products.

For more information about our supplier equipment acquisition, see Note 13.

Commitments and Contingencies , included in the accompanying notes to our consolidated financial statements.

For more information about our supplier equipment acquisition, see Note 12, Commitments and Contingencies , included in the accompanying Notes to Consolidated Financial Statements.

In the fourth quarter of fiscal year 2022, the Company entered into a development agreement and a share purchase agreement with a third-party company.

For more information about these agreements, see Note 12, Commitments and Contingencies , included in the accompanying Notes to Consolidated Financial Statements.

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.

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).

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

We accrue amounts for probable losses, to the extent they can be reasonably estimated, that we believe are adequate to address any liabilities related to legal proceedings as well as other loss contingencies that we believe will result in a probable loss (including, among other things, probable settlement value).

A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision.

The Company did not have any material contingent liabilities as of October 1, 2021 and October 2, 2020.

We did not have any material contingent liabilities as of September 30, 2022 and October 1, 2021.

Legal expenses are expensed as incurred.

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 1, 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.

See Part 1, Item 3 of this Annual Report for additional information regarding legal proceedings and Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements for further information regarding certain of our contractual obligations and contingencies, which discussion is incorporated herein by reference.

Critical Accounting Policies and Estimates

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Our critical accounting policies that are affected by accounting estimates include valuation of inventories, assessment of recoverability of goodwill and intangible assets, and income taxes.

Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements.

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.

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“Risk Factors.”

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.

Inventories, net

Inventory is valued at the lower of cost or net realizable value.

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

We 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.

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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.

If we determine that a quantitative analysis is necessary, we perform a quantitative analysis that consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.

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

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tax reform introduced a limitation of business interest deduction under IRC Section 163(j), which may be difficult to utilize without significant taxable income.

Also, net operating loss carryforwards in jurisdictions with

current losses provide uncertainty for realization.

Also, net operating loss carryforwards in jurisdictions with current losses provide uncertainty for realization.

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.

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Interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.

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 net operating loss ("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.

During fiscal year 2021, we filed NOL carryback claims for U.S.

losses incurred in fiscal year 2020 and anticipates cash tax refunds on those claims.

During fiscal year 2022, the Company received cash tax refunds related to net operating loss carryback claims for U.S.

losses incurred in fiscal year 2020.

On August 16, 2022, the Inflation Reduction Act was enacted in response to rising inflation.

The Company does not meet financial statement thresholds for the minimum tax applicability and does not anticipate other provisions will have a material impact.

The 2017 Tax Cuts and Jobs Act included a provision requiring research and development expenditures to be capitalized for tax years beginning after December 31, 2021, which is effective for the Company starting in fiscal year 2023.

The Company has a significant amount of research and development expenditures and expects increased cash taxes in the early effective years related to this provision.

Recent Accounting Standards or Updates Not Yet Effective

Summary of Significant Accounting Policies, of the notes to the consolidated financial statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated financial statements.

See Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated financial statements.

Backlog is the accumulation of all orders for which revenues have not been recognized and are still considered valid.

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

Our estimated total backlog at October 1, 2021 was approximately $327 million.

Our estimated total backlog at September 30, 2022 was approximately $425 million.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis