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Item 2. Management’s Discussion and Analysis

2023-01-31 compared with 2022-08-03 · 114 added, 139 removed, 161 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results should be read together with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the fiscal year ended October 1, 2021 and our other filings, including the Current Reports on Form 8-K, that have been filed with the SEC through the date of this report.

The following discussion and analysis of the financial condition and results should be read together with the unaudited condensed consolidated financial statements and notes thereto that are contained in this Quarterly Report on Form 10-Q (this "Quarterly Report") as well as our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 and our other filings, including the Current Reports on Form 8-K, that have been filed with the Securities and Exchange Commission (" SEC") through the date of this report.

In this Quarterly Report, unless otherwise specified or the context otherwise requires, the "Company," "Varex," "we," "us," and "our" refer to Varex Imaging Corporation.

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by, and information currently available to the management of Varex Imaging Corporation (“we,” “our,” “us,” the “Company,” “Varex,” or “Varex Imaging”).

This Quarterly Report contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by, and information currently available to the management of Varex.

Actual results and the outcome or timing of certain events described in these forward-looking statements are subject to risk and uncertainties and may differ significantly from those projected in these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ significantly from those projections or expectations include, among other things, the risks described in the Summary of Principal Risk Factors below and further described in the Risk Factors listed in Part II, Item 1A - Risk Factors of this Quarterly Report.

Important factors that could cause our actual results and financial condition to differ significantly from those projections or expectations include, among other things, the risks outlined in the Summary of Principal Risk Factors and further described in the Risk Factors listed in Part II, Item 1A –"Risk Factors" of this Quarterly Report.

Statements concerning:

supply chain and logistics challenges;

cost increases;

the continuing impact of the ongoing COVID-19 pandemic on the global economy or the Company;

logistics, supply chain and manufacturing challenges;

the effects of inflation;

industry or market segment outlook;

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

Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including tubes, digital detectors, linear accelerators, image software processing solutions and stand-alone X-ray based systems in select application areas.

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 2,200 full-time equivalent employees, located at manufacturing and service center sites in North America, Europe, and Asia.

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

Varex has approximately 2,300 full-time equivalent employees, located at engineering, manufacturing and service center sites in North America, Europe, and Asia.

Our products are sold in three geographic regions:

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EMEA includes Europe, Russia, the Middle East, India and Africa.

APAC includes Asia and Australia.

APAC includes Asia (other than India) and Australia.

Revenues by region are based on the known final destination of products sold.

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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

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 fiscal year 2021, demand for many of our products recovered to pre-pandemic levels and business has continued to grow during fiscal year 2022.

During fiscal year 2022, demand for many of our products recovered to pre-pandemic levels and our business grew.

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 logistics, supply chain, and manufacturing challenges that we expect will continue throughout calendar year 2022.

The supply chain challenges related to certain components have become more pronounced, and shortages in raw materials have become more widespread, since the beginning of this calendar year.

We continue to experience shortages of certain materials and have used more of our inventory on hand of those materials than we have used historically.

In addition, we are purchasing more materials that are critical to our processes, often at higher costs.

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 and materials, weakening exchange rates and other similar effects.

We continue to experience supply chain, manufacturing, and logistics 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 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.

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.

During fiscal year 2021, inventory levels declined and in fiscal year 2022 it has continued to be difficult to replenish certain components of 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.

In connection with these supply chain disruptions, we have experienced inflationary increases of certain raw materials, as well as increases in logistics, transportation and labor costs.

Increased freight charges and shipping delays became more common during the pandemic and subsequent periods, 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.

While we expect to make pricing adjustments throughout fiscal year 2022, our margins could be impacted by rising costs.

During the three months ended July 1, 2022, our manufacturing facilities continued to operate without significant disruption due to employee absences.

While we have from time to time taken significant precautions to maintain employee safety, such as implementing mask requirements, encouraging vaccination, and periodically asking non-production related employees to work from home when possible, we have experienced and may in the future experience, COVID-19 related employee absences that make it more difficult to manufacture our products.

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.

While we are dedicating significant resources to manage, mitigate, and resolve these issues, we currently expect supply chain, manufacturing, and logistics 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 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 three months ended December 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, manufacturing and logistics 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 we believe are in the best interest of the Company and our stockholders, which may include altering our business operations or other actions to benefit or protect our employees, customers or suppliers.

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

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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.

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

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

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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.

We are one of the largest global manufacturers of X-ray imaging components and each year we produce over 28,000 X-ray tubes and 20,000 X-ray detectors.

We estimate that our world-wide installed base of products includes more than 160,000 X-ray tubes, 170,000 X-ray detectors, 600,000 connect and control components and 16,000 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 depending upon usage and other factors.

For example, CT X-ray tubes generally need to be replaced every 2 to 6 years, in comparison to a general radiography tube which can last up to 10 years, depending on utilization.

In China, the replacement cycle for CT X-ray tubes currently can be as frequent as every 10 to 20 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 or more, but can require more frequent 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 and includes maintenance revenue for software licenses.

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

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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 has not been 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 at least for the remainder of calendar year 2022.

We have experienced growth in demand for our products as health systems globally have continued to address healthcare services gaps.

However, we have not been 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 at least through the fiscal year 2023.

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

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manufactured products into China has become more difficult and expensive.

Recently the governments of both the United States and China have granted tariff exclusions which temporarily eliminate the additional duties payable for specific commodities, providing partial relief.

However, U.S.

exclusions possess a calendar year-end expiration and Chinese exclusions must be solicited and approved on a shipment-by-shipment basis.

While the governments of both the United States and China have granted tariff exclusions that temporarily eliminate the additional duties payable for specific commodities, providing partial relief, these exclusions are temporary and/or must be solicited and approved on a shipment-by-shipment basis.

There is no guarantee that such exclusions will be granted or extended by either government.

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.

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

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 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.

Our mitigation efforts could prove less effective than anticipated if rising tensions between China and Taiwan lead to worsening trade relations between China and the United States.

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 baggage screening at airports, and nondestructive testing, irradiation 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, high voltage connectors and coolers.

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.

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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 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.

However, we have seen improved conditions in this market, which continued during the three months ended July 1, 2022.

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

However, we have seen improved conditions in these markets, which continued during the three months ended December 30, 2022.

Critical Accounting Policies and Estimates

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We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate.

Refer to our Annual Report on Form 10-K for the fiscal year ended October 1, 2021 filed with the SEC on November 19, 2021 and Note 1, Summary of Significant Accounting Policies, of the notes to the condensed consolidated financial statements of this report for further details.

Refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed with the SEC on November 18, 2022 and Note 1, Summary of Significant Accounting Policies, of the Notes to the Condensed Consolidated Financial Statements of this report for further details.

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.

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.

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.

Except for the change in certain policies upon adoption of the accounting standard described in Note 1, Summary of Significant Accounting Policies of the Notes to the Condensed Consolidated Financial Statements of this report, there have been no material changes to the Company's significant accounting policies, compared to the accounting policies described in Note 1, Summary of Significant Accounting Policies , in the Company’s Annual Report on Form 10-K for fiscal year 2022.

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

Fiscal year 2023 is the 52-week period ending September 29, 2023.

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

The fiscal quarters ended July 1, 2022 and July 2, 2021 were both 13-week periods.

The three fiscal quarters ended July 1, 2022 and July 2, 2021 were both 39-week periods.

Discussion of Results of Operations for the Three Months Ended July 1, 2022 Compared to the Three Months Ended July 2, 2021

Fiscal year 2022 was the 52-week period that ended on September 30, 2022.

The fiscal quarters ended December 30, 2022 and December 31, 2021 were both 13-week periods.

Discussion of Results of Operations for the Three Months Ended December 30, 2022 Compared to the Three Months Ended December 31, 2021

Revenues, net

Three Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

(In millions) December 30, 2022 December 31, 2021 $ Change % Change

Medical $ 160.1 $ 155.7 $ 4.4 2.8 %

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Industrial as a percentage of total revenues 22.1 % 21.7 %

Medical revenues decreased $0.2 million, primarily due to decreased sales of digital detectors for dynamic imaging applications partially offset by higher sales of CT X-ray tubes.

Medical sales were particularly strong in CT, oncology, and dental modalities.

Industrial revenues increased $3.5 million, primarily due to increased sales of digital detectors for dynamic imaging applications and non-destructive inspection applications.

Medical revenues increased $4.4 million, primarily due to increased sales of digital detectors for dental, radiographic, and fluoroscopic modalities, partially offset by lower oncology sales.

Industrial revenues increased $2.4 million, primarily due to increased sales of digital detectors for dynamic imaging applications, partially offset by lower sales of security inspection products.

Three Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

(In millions) December 30, 2022 December 31, 2021 $ Change % Change

Medical $ 46.3 $ 46.0 $ 0.3 0.7 %

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Total gross margin 30.8 % 32.6 %

The decrease in Medical gross profit was primarily due to the decreased sales of digital detectors for dynamic imaging applications, higher freight, and increased material costs.

The Industrial segment gross profit increased 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.

The increase in Medical segment gross profit was primarily due to the increased sales of digital detectors for dental, radiographic, and fluoroscopic modalities, partially offset by increased material costs.

The Industrial segment gross profit decreased primarily as a result of increased material costs, lower service revenue, and an unfavorable shift in product sales mix.

During the first quarter of fiscal year 2023, we experienced a more balanced operating environment driven by good demand for certain products, an improved supply chain, and our internal supply chain initiatives.

Our product sales mix for both segments, however, shifted during the quarter and we experienced a decrease in sales of higher margin, higher-end CT tubes and certain medical detectors, coupled with lower service revenue from Industrial, which typically also carries a higher margin profile.

We believe this shift was a result of our customers being cautious in response to an uncertain economic environment and difficulty in fulfilling backlog due to ongoing supply chain challenges they face for certain components.

These factors contributed to our lower total gross margin during the quarter.

Operating Expenses

Three Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

(In millions) December 30, 2022 December 31, 2021 $ Change % Change

Research and development $ 20.0 $ 17.7 $ 2.3 13.0 %

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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 increased to 9.4% of revenues for the third quarter of 2022, primarily due to increased spending on material costs supporting research and development initiatives.

Research and development costs increased to 9.7% of revenues for the first quarter of fiscal year 2023, primarily due to increased spending on labor and material costs supporting research and development initiatives.

Selling, General and Administrative

Selling, general and administrative expenses for the third quarter of 2022 increased $1.0 million and increased to 14.1% of total revenues, primarily due to increased legal costs compared to the prior year.

Selling, general and administrative expenses for the first quarter of fiscal year 2023 decreased $2.8 million and decreased to 14.7% of total revenues, primarily due to decreased restructuring costs and incentive compensation compared to the prior year.

Interest and Other Expense, Net

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Three Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change

Interest income $ 0.1 $ — $ 0.1

Interest expense (9.4) (10.6) 1.2

Other (expense) income, net (0.2) 0.2 (0.4)

Interest and other expense, net $ (9.5) $ (10.4) $ 0.9

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 2022, as well as reduced fees on the ABL agreement.

Other (expense) income, net increased due to losses in certain investments in privately-held companies being higher for the three months ended July 1, 2022, compared to the three months ended July 2, 2021, partially offset by reduced foreign exchange expense during the three months ended July 1, 2022 compared to the three months ended July 2, 2021.

Taxes on Income (Loss)

For the three months ended July 1, 2022, we recognized income tax expense of $5.1 million on $13.5 million of pre-tax income.

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

Our tax expense for the three months ended July 1, 2022 increased primarily due to increased pre-tax income in certain jurisdictions, valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Discussion of Results of Operations for the Nine Months Ended July 1, 2022 Compared to the Nine Months Ended July 2, 2021

Nine Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

Medical $ 493.2 $ 463.1 $ 30.1 6.5 %

Industrial 134.8 128.7 6.1 4.7 %

Total revenues $ 628.0 $ 591.8 $ 36.2 6.1 %

Medical as a percentage of total revenues 78.5 % 78.3 %

Industrial as a percentage of total revenues 21.5 % 21.7 %

Medical revenues increased $30.1 million, primarily due to increased sales of CT X-ray tubes.

The increase in medical sales was particularly strong in CT and oncology modalities.

Industrial revenues increased $6.1 million, primarily due to increased sales of X-ray tubes, digital detectors for dynamic imaging applications, and non-destructive inspection applications.

Nine Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

Medical $ 153.7 $ 146.3 $ 7.4 5.1 %

Industrial 55.3 49.6 5.7 11.5 %

Total gross profit $ 209.0 $ 195.9 $ 13.1 6.7 %

Medical gross margin % 31.2 % 31.6 %

Industrial gross margin % 41.0 % 38.5 %

Total gross margin % 33.3 % 33.1 %

The increase in Medical gross profit was primarily due to higher CT X-ray application volumes compared to the prior year nine-month period partially offset by increased freight and raw materials costs.

The Industrial gross profit increased primarily due to increased sales of X-ray tubes and digital detectors for dynamic imaging applications, partially offset by higher freight and material costs.

Operating Expenses

Nine Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change % Change

Research and development $ 56.8 $ 54.1 $ 2.7 5.0 %

As a percentage of total revenues 9.0 % 9.1 %

Selling, general and administrative $ 88.6 $ 94.2 $ (5.6) (5.9) %

As a percentage of total revenues 14.1 % 15.9 %

Operating expenses $ 145.4 $ 148.3 $ (2.9) (2.0) %

As a percentage of total revenues 23.2 % 25.1 %

Research and Development

Research and development costs remained at 9.0% of total revenues due to the relative increase in revenue as compared to the increase in research and development costs.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended July 1, 2022, decreased to 14.1% of sales primarily due to lower compensation costs, reduced external audit fees and higher revenue.

Interest and Other Expense, Net

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

Nine Months Ended

(In millions) July 1, 2022 July 2, 2021 $ Change

(In millions) December 30, 2022 December 31, 2021 $ Change

Interest income $ 0.5 $ — $ 0.5

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Interest and other expense, net $ (7.6) $ (10.7) $ 3.1

Interest and other expense, net decreased during the nine months ended July 1, 2022 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 agreement.

Other expense, net increased during the nine months ended July 1, 2022 as compared to the nine months ended July 2, 2021, primarily due to losses related to foreign exchange impacts.

Taxes on Income (Loss)

For the nine months ended July 1, 2022, we recognized an income tax expense of $12.8 million on $30.4 million of pre-tax income.

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

Our tax expense for the nine months ended July 1, 2022 increased, compared to the prior year, primarily due to pre-tax income in certain jurisdictions, valuation allowances in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Interest and other expense, net decreased in the first quarter of fiscal year 2023 compared to the first quarter of 2022.

Interest expense decreased due to the redemption of $27 million of our Senior Secured Notes in March 2022, reduced fees on the ABL Facility agreement, and reduced interest expense due to the adoption of ASU 2020-06.

See Note 1, Summary of Significant Accounting Policies , "Recently Adopted Accounting Pronouncements" for further details concerning the adoption of ASU 2020-06.

Other expense, net decreased due to increased income in certain investments in privately-held companies and equity investments, partially offset by increased foreign exchange expense.

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

Taxes on Income

For the three months ended December 30, 2022 we recognized income tax expense of $2.2 million on $5.4 million of 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.

Our tax expense for the three months ended December 30, 2022 increased primarily due to increased pre-tax income in certain jurisdictions, valuation allowance positions in the United States on deferred tax attributes, and losses in certain foreign jurisdictions for which no benefit can be recorded.

Liquidity and Capital Resources

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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 1, 2022 the amount available under our ABL Facility was $97 million, and the ABL Facility remains undrawn.

See Part II, Item 1A.

“Risk Factors” for a further discussion.

At July 1, 2022 we had total debt of $412.6 million net of discounts and deferred issuance costs of $38.0 million.

Cash and Cash Equivalents and Marketable Securities

The following table summarizes our cash and cash equivalents and marketable securities:

(In millions) July 1, 2022 October 1, 2021 $ Change

As of December 30, 2022 the amount available under our ABL Facility was $92.0 million, and the ABL Facility remains undrawn.

See Part II, Item 1A – “Risk Factors” for a further discussion.

At December 30, 2022 we had total debt of $442.9 million net of discounts and deferred issuance costs of $6.8 million.

Cash and Cash Equivalents, Certificates of Deposit and Marketable Securities

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

(In millions) December 30, 2022 September 30, 2022 $ Change

Cash and cash equivalents $ 81.5 $ 89.4 $ (7.9)

Certificates of deposit not included in cash and cash equivalents

7.1 7.2 (0.1)

Marketable securities not included in cash and cash equivalents

19.1 16.7 2.4

$ 107.7 $ 113.3 $ (5.6)

The following table summarizes the changes in our debt outstanding:

July 1, 2022 October 1, 2021

December 30, 2022 September 30, 2022

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

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Other debt $ 2.1 $ 2.1 $ —

Total current maturities of long-term debt $ 2.5 $ 2.8 $ (0.3)

Non-current maturities of long-term debt:

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Unamortized discount - Convertible Notes (1)

$ — $ (28.7) $ 28.7

Unamortized issuance costs - Convertible Notes (1)

(3.5) (3.1) (0.4)

Unamortized issuance costs - Senior Secured Notes (3.3) (3.5) 0.2

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Total debt outstanding, net $ 442.9 $ 414.4 $ 28.5

Nine Months Ended

(In millions) July 1, 2022 July 2, 2021

Net cash flow provided by (used in):

(1) In connection with the adoption of ASU 2020-06, the unamortized discount related to the Convertible Notes was derecognized and the carrying value of the issuance costs was adjusted in the first quarter of fiscal year 2023.

Refer to Note 1, Summary of Significant Accounting Policies for further details.

Three Months Ended

(In millions) December 30, 2022 December 31, 2021

Net cash flow (used in) provided by:

Operating activities $ (3.7) $ 10.8

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Net cash (used in) provided by operating activities.

Net cash (used in) provided by operating activities was $(0.2) million and $42.0 million for the nine months ended July 1, 2022 and July 2, 2021, respectively.

The decrease in cash provided by operating activities was primarily due to increased purchases of inventory, partially offset by an increase in accounts payable.

Net cash (used in) provided by operating activities was $(3.7) million and $10.8 million for the three months ended December 30, 2022 and December 31, 2021, respectively.

The decrease in cash provided by operating activities was primarily due to reduced collections from accounts receivable in the quarter and reduced payments for accounts payable, partially offset by decreased purchases of inventory when compared to the three months ended December 31, 2021.

Net cash used in investing activities.

Net cash used in investing activities was $20.9 million and $12.9 million for the nine months ended July 1, 2022 and July 2, 2021, respectively.

The increase in cash used in investing activities was primarily due to the purchase of marketable securities during the nine months ended July 1, 2022.

Net cash used in financing activities.

Net cash used in financing activities was $24.0 million and $1.3 million for the nine months ended July 1, 2022 and July 2, 2021, respectively.

The increase in cash used in financing activities was primarily due to the redemption of $27 million of the Senior Secured Notes during the nine months ended July 1, 2022.

Net cash used in investing activities was $3.7 million and $2.6 million for the three months ended December 30, 2022 and December 31, 2021, respectively.

The increase in cash used in investing activities was primarily due to the purchase of marketable equity and debt securities during the three months ended December 30, 2022, partially offset by the settlement of net investment hedges.

Net cash (used in) provided by financing activities.

Net cash (used in) provided by financing activities was $(0.4) million and $5.0 million for the three months ended December 30, 2022 and December 31, 2021, respectively.

The increase in cash used in financing activities was primarily due to no proceeds from the exercise of stock options during the three months ended December 30, 2022 when compared to the three months ended December 31, 2021.

Contractual Obligations

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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.

As of July 1, 2022, we estimate that we have fixed cost commitments of $6.6 million related to this amended agreement through the remainder of calendar year 2022.

In January 2023, the fixed cost commitment was determined to be $13.1 million through the remainder of calendar year 2023.

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

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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 1, 2022, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

As of December 30, 2022, 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 1, 2022, 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 $8.0 million, subject to potential decreases for costs incurred by the Company.

The total consideration to be paid by us for the acquired assets is expected to be ¥1,084.7 million, subject to potential decreases for costs incurred by the Company.

On April 14, 2022, we entered into a foreign currency hedge related to this Japanese Yen payment, which is expected to fix the purchase price of these assets at approximately $7.9 million.

As of December 30, 2022, the Company has made payments totaling $6.4 million and estimates that our remaining cash payments to be made total $1.5 million.

In fiscal year 2022, the Company entered into several agreements with a third-party company, whose stock is publicly traded on a foreign exchange.

Under these agreements, the Company will make certain milestone payments of up to $5.0 million upon achievement of specified milestones.

During fiscal year 2022, the first of these milestones was achieved and the Company paid $1.0 million to the third-party company, which was recorded in research and development in the Condensed Consolidated Statements of Operations.

The remaining milestones are expected to be achieved in fiscal year 2023.

In addition, the Company agreed to acquire, through two separate purchases, a fixed number of shares for approximately $5.0 million, representing 9.9% of the shares of the third-party company outstanding on the date the agreements were signed.

The Company completed the acquisition of the first tranche of shares during fiscal year 2022 for approximately $2.4 million and the second tranche of shares during the first quarter of fiscal year 2023 for approximately $2.7 million.

The Company has recorded this investment as marketable equity securities, which is included in other assets on the Condensed Consolidated Balance Sheets.

Contingencies

From time to time, the 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 and other loss contingencies that we believe 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 our 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.

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

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

Legal expenses are expensed as incurred.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 67 days at July 1, 2022 and 62 days at October 1, 2021.

Trade accounts receivable days sales outstanding (“DSO”) was 70 days at December 30, 2022 and 68 days at September 30, 2022.

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.

Recent Accounting Standards or Updates Not Yet Effective

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

See Note 1, Summary of Significant Accounting Policies , of the accompanying Notes to the Condensed Consolidated Financial Statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our condensed 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 July 1, 2022 was approximately $456 million.

Our estimated total backlog at December 30, 2022 was approximately $405 million.

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

In addition, our ability to convert backlog into revenue may be impacted by on-going supply chain related interruptions and uncertainties.

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

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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-Q

Item 2. Management’s Discussion and Analysis