Varex Imaging Corp 10-Q

Item 1. Financial Statements VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended (In millions, except per share amounts) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Revenues, net $ 232.2 $ 214.5 $ 666.0 $ 628.0 Cost of revenues 155.9 141.1 453.7 419.0 Gross profit 76.3 73.4 212.3 209.0 Operating expenses: Research and development 20.0 20.2 63.0 56.8 Selling, general and administrative 32.1 30.2 96.5 88.6 Total operating expenses 52.1 50.4 159.5 145.4 Operating income 24.2 23.0 52.8 63.6 Interest income 0.9 0.1 2.1 0.2 Interest expense ( 7.3 ) ( 9.4 ) ( 22.1 ) ( 30.4 ) Other expense, net ( 0.7 ) ( 0.2 ) ( 2.5 ) ( 3.0 ) Interest and other expense, net ( 7.1 ) ( 9.5 ) ( 22.5 ) ( 33.2 ) Income before taxes 17.1 13.5 30.3 30.4 Income tax expense 7.9 5.1 13.6 12.8 Net income 9.2 8.4 16.7 17.6 Less: Net income attributable to noncontrolling interests 0.1 0.2 0.4 0.4 Net income attributable to Varex $ 9.1 $ 8.2 $ 16.3 $ 17.2 Net income per common share attributable to Varex Basic $ 0.23 $ 0.21 $ 0.41 $ 0.43 Diluted $ 0.21 $ 0.20 $ 0.40 $ 0.41 Weighted average common shares outstanding Basic 40.4 39.9 40.2 39.7 Diluted 50.4 40.5 40.6 41.9 See accompanying Notes to the Condensed Consolidated Financial Statements. 2 Table of Contents VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net income $ 9.2 $ 8.4 $ 16.7 $ 17.6 Other comprehensive (loss) income Unrealized loss on forward contracts — ( 0.6 ) — ( 0.6 ) Unrealized loss on available-for-sale securities ( 0.1 ) — — — Foreign currency translation adjustments ( 0.4 ) 0.8 ( 0.4 ) ( 0.9 ) Total comprehensive income 8.7 8.6 16.3 16.1 Less: Comprehensive income attributable to noncontrolling interests 0.1 0.2 0.4 0.4 Comprehensive income attributable to Varex $ 8.6 $ 8.4 $ 15.9 $ 15.7 See accompanying Notes to the Condensed Consolidated Financial Statements. 3 Table of Contents VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In millions, except share and per share amounts) June 30, 2023 September 30, 2022 Assets Current assets: Cash and cash equivalents $ 118.5 $ 89.4 Accounts receivable, net of allowance for credit losses of $ 0.6 million and $ 0.6 million at June 30, 2023 and September 30, 2022, respectively 163.3 173.3 Inventories 297.7 303.2 Prepaid expenses and other current assets 59.0 44.0 Total current assets 638.5 609.9 Property, plant, and equipment, net 142.0 141.3 Goodwill 289.2 284.5 Intangible assets, net 25.5 33.6 Investments in privately-held companies 46.8 46.4 Deferred tax assets 2.8 2.3 Operating lease assets 28.7 23.2 Other assets 38.2 43.2 Total assets $ 1,211.7 $ 1,184.4 Liabilities and stockholders' equity Current liabilities: Accounts payable $ 74.6 $ 78.2 Accrued liabilities and other current liabilities 67.9 81.4 Current operating lease liabilities 3.4 4.0 Current maturities of long-term debt 1.8 2.1 Deferred revenues 10.9 7.4 Total current liabilities 158.6 173.1 Long-term debt, net 441.1 412.3 Deferred tax liabilities — 0.5 Operating lease liabilities 23.4 18.0 Other long-term liabilities 43.7 33.8 Total liabilities 666.8 637.7 Stockholders' equity: Preferred stock, $ .01 par value: 20,000,000 shares authorized, none issued — — Common stock, $ .01 par value: 150,000,000 shares authorized Shares issued and outstanding: 40,387,511 and 40,085,126 at June 30, 2023 and September 30, 2022, respectively 0.4 0.4 Additional paid-in capital 444.9 469.1 Accumulated other comprehensive (loss) income ( 0.3 ) 0.1 Retained earnings 86.5 63.8 Total Varex stockholders' equity 531.5 533.4 Noncontrolling interests 13.4 13.3 Total stockholders' equity 544.9 546.7 Total liabilities and stockholders' equity $ 1,211.7 $ 1,184.4 See accompanying Notes to the Condensed Consolidated Financial Statements. 4 Table of Contents VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) Three Months Ended June 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Varex Equity Noncontrolling Interests Total Stockholders' Equity (In millions) Shares Amount March 31, 2023 40.4 $ 0.4 $ 441.6 $ 0.2 $ 77.4 $ 519.6 $ 13.3 $ 532.9 Net income — — — — 9.1 9.1 0.1 9.2 Share-based compensation — — 3.5 — — 3.5 — 3.5 Unrealized loss on change in fair value of available-for-sale securities — — — ( 0.1 ) — ( 0.1 ) — ( 0.1 ) Foreign currency translation adjustments — — — ( 0.4 ) — ( 0.4 ) — ( 0.4 ) Other — — ( 0.2 ) — — ( 0.2 ) — ( 0.2 ) June 30, 2023 40.4 $ 0.4 $ 444.9 $ ( 0.3 ) $ 86.5 $ 531.5 $ 13.4 $ 544.9 Three Months Ended July 1, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Varex Equity Noncontrolling Interests Total Stockholders' Equity (In millions) Shares Amount April 1, 2022 39.8 $ 0.4 $ 459.9 $ ( 1.7 ) $ 42.5 $ 501.1 $ 13.3 $ 514.4 Net income — — — — 8.2 8.2 0.2 8.4 Common stock issued under employee stock purchase plan 0.1 — 1.9 — — 1.9 — 1.9 Share-based compensation — — 3.4 — — 3.4 — 3.4 Unrealized loss on change in fair value of cash flow hedge — — — ( 0.6 ) — ( 0.6 ) — ( 0.6 ) Foreign currency translation adjustments — — — 0.8 — 0.8 — 0.8 Other — — — — — — ( 0.2 ) ( 0.2 ) July 1, 2022 39.9 $ 0.4 $ 465.2 $ ( 1.5 ) $ 50.7 $ 514.8 $ 13.3 $ 528.1 See accompanying Notes to the Condensed Consolidated Financial Statements. 5 Table of Contents VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) Nine Months Ended June 30, 2023 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Varex Equity Noncontrolling Interests Total Stockholders' Equity (In millions) Shares Amount September 30, 2022 40.1 $ 0.4 $ 469.1 $ 0.1 $ 63.8 $ 533.4 $ 13.3 $ 546.7 Cumulative effect of accounting change — — ( 34.6 ) — 6.5 ( 28.1 ) — ( 28.1 ) Net income — — — — 16.3 16.3 0.4 16.7 Common stock issued upon vesting of restricted shares 0.2 — — — — — — — Shares withheld on vesting of restricted stock ( 0.1 ) — ( 1.4 ) — — ( 1.4 ) — ( 1.4 ) Common stock issued under employee stock purchase plan 0.1 — 2.0 — — 2.0 — 2.0 Share-based compensation — — 10.1 — — 10.1 — 10.1 Foreign currency translation adjustments — — — ( 0.4 ) — ( 0.4 ) — ( 0.4 ) Other 0.1 — ( 0.3 ) — ( 0.1 ) ( 0.4 ) ( 0.3 ) ( 0.7 ) June 30, 2023 40.4 $ 0.4 $ 444.9 $ ( 0.3 ) $ 86.5 $ 531.5 $ 13.4 $ 544.9 Nine Months Ended July 1, 2022 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Varex Equity Noncontrolling Interests Total Stockholders' Equity (In millions) Shares Amount October 1, 2021 39.4 $ 0.4 $ 449.4 $ — $ 33.5 $ 483.3 $ 13.2 $ 496.5 Net income — — — — 17.2 17.2 0.4 17.6 Exercise of stock options 0.1 — 3.8 — — 3.8 — 3.8 Common stock issued upon vesting of restricted shares 0.3 — — — — — — — Shares withheld on vesting of restricted stock ( 0.1 ) — ( 2.1 ) — — ( 2.1 ) — ( 2.1 ) Common stock issued under employee stock purchase plan 0.2 — 3.6 — — 3.6 — 3.6 Share-based compensation — — 10.7 — — 10.7 — 10.7 Unrealized loss on change in fair value of cash flow hedge — — — ( 0.6 ) — ( 0.6 ) — ( 0.6 ) Foreign currency translation adjustments — — — ( 0.9 ) — ( 0.9 ) — ( 0.9 ) Other — — ( 0.2 ) — — ( 0.2 ) ( 0.3 ) ( 0.5 ) July 1, 2022 39.9 $ 0.4 $ 465.2 $ ( 1.5 ) $ 50.7 $ 514.8 $ 13.3 $ 528.1 See accompanying Notes to the Condensed Consolidated Financial Statements. 6 Table of Contents VAREX IMAGING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (In millions) June 30, 2023 July 1, 2022 Cash flows from operating activities: Net income $ 16.7 $ 17.6 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Share-based compensation expense 10.1 10.7 Depreciation 14.2 14.3 Amortization of intangible assets 10.2 11.2 Deferred taxes ( 1.1 ) 1.5 Loss from equity method investments 0.1 1.5 Amortization of deferred loan costs 1.9 8.1 Inventory write-down 3.8 5.3 Loss on operating lease abandonment — 1.9 Other, net 2.2 1.7 Changes in assets and liabilities: Accounts receivable 10.2 ( 1.9 ) Inventories 1.7 ( 81.1 ) Prepaid expenses and other assets 4.0 4.6 Accounts payable ( 3.7 ) 24.8 Accrued liabilities and other current and long-term liabilities ( 12.5 ) ( 22.8 ) Deferred revenues 3.5 2.4 Net cash provided by (used in) operating activities 61.3 ( 0.2 ) Cash flows from investing activities: Purchases of property, plant, and equipment ( 15.3 ) ( 11.5 ) Loss on settlement of cash flow hedge ( 0.2 ) — Proceeds from maturities of marketable debt securities 16.7 — Purchase of marketable debt securities ( 33.6 ) ( 10.4 ) Purchase of marketable equity securities ( 2.7 ) — Settlement of net investment hedge 7.0 — Proceeds from sales of business and assets — 1.7 Investments in and loans to privately-held companies — ( 0.3 ) Other, net ( 2.2 ) ( 0.4 ) Net cash used in investing activities ( 30.3 ) ( 20.9 ) Cash flows from financing activities: Taxes related to net share settlement of equity awards ( 1.4 ) ( 2.1 ) Repayments of borrowing under credit agreements ( 1.7 ) ( 29.0 ) Proceeds from exercise of stock options — 3.8 Proceeds from shares issued under employee stock purchase plan 2.0 3.6 Other, net ( 0.5 ) ( 0.3 ) Net cash used in financing activities ( 1.6 ) ( 24.0 ) Effects of exchange rate changes on cash and cash equivalents and restricted cash ( 0.1 ) ( 0.1 ) Net increase (decrease) in cash and cash equivalents and restricted cash 29.3 ( 45.2 ) Cash and cash equivalents and restricted cash at beginning of period 90.6 146.1 Cash and cash equivalents and restricted cash at end of period $ 119.9 $ 100.9 Supplemental cash flow information: Cash paid for interest $ 27.4 $ 29.5 Income taxes paid, net of (refunds) 9.8 ( 0.6 ) Supplemental non-cash activities: Purchases of property, plant and equipment financed through accounts payable $ 1.3 $ 1.2 See accompanying Notes to the Condensed Consolidated Financial Statements. 7 Table of Contents VAREX IMAGING CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Varex Imaging Corporation (the “Company” or “Varex”) designs, manufactures, sells, and services a broad range of medical products, which include X-ray imaging components including X-ray tubes, digital detectors and accessories, ionization chambers, high voltage connectors, image processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and heat exchangers. The Company sells its products to imaging system original equipment manufacturer (“OEM”) customers for incorporation into new medical diagnostic, radiation therapy, dental, and veterinary equipment, as well as to independent service companies and distributors, and directly to end-users for replacement purposes. The Company also designs, manufactures, sells and services industrial products, which include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, coolers, imaging processing software and image detection products for security and inspection purposes, such as cargo screening at ports and borders and nondestructive examination in a variety of applications. The Company generally sells security and inspection products to OEM customers who incorporate Varex’s products into their inspection or irradiation systems and processes. The Company conducts an active research and development program to focus on new technology and applications in both the medical and industrial X-ray imaging markets. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods. The Company has consolidated all of its majority owned subsidiaries and entities over which it has control. All intercompany balances and transactions have been eliminated as part of the consolidation. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended September 30, 2022 included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on November 18, 2022. The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures. Except for the change in certain policies upon adoption of the accounting standard described below, 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. Reclassification of Prior Period Presentation Certain prior period amounts in the Notes to the Condensed Consolidated Financial Statements have had a change in presentation to conform to current period presentation. This change does not affect previously reported results. Segment Reporting The Company has two reportable operating segments; (i) Medical and (ii) Industrial, which aligns with how its Chief Executive Officer, who is the Company's Chief Operating Decision Maker (“CODM”), reviews the Company’s performance. See Note 15, Segment Information , for further information on the Company’s segments. Fiscal Year 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 2022 was the 52-week period that ended on September 30, 2022. The fiscal quarters ended June 30, 2023 and July 1, 2022 were both 13-week periods. The three fiscal quarters ended June 30, 2023 and July 1, 2022 were both 39-week periods. 8 Table of Contents Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include the valuation of inventories, valuation of goodwill and intangible assets, warranties, refund liabilities, long-lived asset valuations, impairment of investments, valuation of financial instruments, and taxes on income. Actual results could differ from these estimates. Cash and Cash Equivalents The Company considers unrestricted currency on hand, demand deposits, time deposits and all highly-liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash equivalents. Restricted Cash Restricted cash primarily consists of cash collateral related to certain leases and inventory arrangements. Restricted cash is included in other assets on the Company's Condensed Consolidated Balance Sheets. Cash and cash equivalents and restricted cash as reported within the Condensed Consolidated Statements of Cash Flows consisted of the following: Nine Months Ended Nine Months Ended June 30, 2023 July 1, 2022 (In millions) Beginning of Period End of Period Beginning of Period End of Period Cash and cash equivalents $ 89.4 $ 118.5 $ 144.6 $ 99.6 Restricted cash 1.2 1.4 1.5 1.3 Total as presented in the Condensed Consolidated Statements of Cash Flows $ 90.6 $ 119.9 $ 146.1 $ 100.9 Concentration of Risk Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities, certificates of deposit, and trade accounts receivable. Cash held with financial institutions may exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. To date, the Company has not realized any losses on its deposits of cash and cash equivalents. The Company performs ongoing credit evaluations of its customers and, except for government tenders, group purchases, and orders with a letter of credit, its industrial customers often provide a down payment. The Company maintains an allowance for credit losses based upon the expected collectability of all accounts receivable. The Company obtains some of the components in its products from a limited group of suppliers or from a single-source supplier. When these suppliers are unable to meet the Company's supply needs, the Company's production is negatively impacted. Credit is extended to customers based on an evaluation of the customer’s financial condition, and collateral is not required. In certain circumstances, a customer may be required to prepay all or a portion of the contract price prior to transfer of control. During the periods presented, one of the Company's customers accounted for a significant portion of revenues, as set forth below: Three Months Ended Nine Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Canon Medical Systems Corporation 14.8 % 16.6 % 16.0 % 18.0 % Canon Medical Systems Corporation accounted for 12.9 % and 10.3 % of the Company’s accounts receivable as of June 30, 2023 and September 30, 2022, respectively. Equity Method Investments The Company accounts for its equity investments in privately-held companies under the equity method of accounting if the Company has the ability to exercise significant influence, but not control in these investments. The Company records impairment losses on its equity method investments if an impairment exists and is deemed to be other-than-temporary, which is based on various factors, including but not limited to, the length of time the fair value of the investment is below the carrying value, the absence of an ability to recover the carrying amount of the investment, and the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment. There were no impairments recorded during the three and nine months ended June 30, 2023 and July 1, 2022, respectively. 9 Table of Contents Marketable Securities The Company's marketable securities consist primarily of financial instruments such as United States treasury securities, United States agency obligations, corporate bonds, commercial paper, money market funds, and equity securities. Marketable Debt Securities The Company's marketable debt securities are classified as available-for-sale. Classification of marketable debt securities is determined at the time of purchase, and the Company reevaluates such classification as of each balance sheet date. Marketable debt securities are recorded at estimated fair value and included in cash and cash equivalents, prepaid expenses and other current assets, and other assets within the Condensed Consolidated Balance Sheets. Any unrealized gains or losses are included in accumulated other comprehensive (loss) income within the Condensed Consolidated Balance Sheets. When the fair value of a marketable debt security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in the Condensed Consolidated Statements of Operations. When the fair value of a marketable debt security declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in other comprehensive (loss) income, and are recognized in the Condensed Consolidated Statements of Operations only if the Company sells or intends to sell the security before recovery of its cost basis. There were no impairments related to marketable debt securities recorded during the three and nine months ended June 30, 2023 and July 1, 2022. Marketable Equity Securities Marketable equity securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date and included in other assets within the Condensed Consolidated Balance Sheets. All unrealized gains and losses on marketable equity securities are recorded as part of other expense, net in the Company's Condensed Consolidated Statements of Operations. See Note 7, Fair Value , for further details. Loss Contingencies From time to time, the Company is involved in legal proceedings, claims and government inspections or investigations, customs and duties audits, and other contingency matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts for probable losses, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision. When a loss contingency is probable but not reasonably estimable the nature of the contingency and the fact that an estimate cannot be made is disclosed. Environmental Obligations Our operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities under certain circumstances. In connection with those laws and certain of our past and present operations and facilities, we are obligated to indemnify Varian for the cleanup liabilities related to prior corporate restructuring activities. We anticipate that we will be obligated to reimburse Varian for 20 % of the liabilities of Varian related to these sites (after adjusting for any insurance proceeds or tax benefits received by Varian). As of September 30, 2022, our estimated liability for these sites was $ 1.1 million, net of expected insurance proceeds. During the second quarter of fiscal year 2023, Varian informed us of an adjustment to their estimate of their liability, which resulted in an increase to our liability of approximately $ 2.9 million, net of expected insurance proceeds. As of June 30, 2023, our estimated environmental liability for these sites is $ 4.2 million, net of expected insurance proceeds. 10 Table of Contents Product Warranty The Company warrants most of its products for a specific period of time, usually 12 to 24 months from delivery or acceptance, against material defects. The Company provides for the estimated future costs of warranty obligations in cost of revenues when the related revenues are recognized. The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company will incur to repair or replace product parts that fail while still under warranty. The amount of the accrued estimated warranty costs obligation for established products is primarily based on historical experience of product failures, adjusted for current information on repair costs. For new products, estimates include the historical experience of similar products, as well as a reasonable allowance for warranty expenses associated with new products. On a quarterly basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends, if required. The following table reflects the changes in the Company’s accrued product warranty: Nine Months Ended (In millions) June 30, 2023 July 1, 2022 Accrued product warranty, at beginning of period $ 7.9 $ 8.5 New accruals charged to cost of revenues 9.3 7.5 Product warranty expenditures ( 9.3 ) ( 8.5 ) Accrued product warranty, at end of period $ 7.9 $ 7.5 Leases The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's operating lease right-of-use ("ROU") assets represent the right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate. The Company recognizes operating leases with lease terms of more than twelve months in operating lease assets, current operating lease liabilities, and operating lease liabilities on its Condensed Consolidated Balance Sheets. The Company recognizes finance leases with lease terms of more than twelve months in property, plant, and equipment, net, accrued liabilities and other current liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheets. For purposes of calculating lease liabilities and the corresponding ROU assets, the Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Revenue Recognition The Company’s revenues are derived primarily from the sale of hardware and services. The Company recognizes its revenues net of any value-added or sales tax and net of sales discounts. The Company sells a high proportion of its X-ray products to a limited number of OEM customers. X-ray imaging components including X-ray tubes, digital detectors and image-processing tools and security and inspection products are generally sold on a stand-alone basis. However, the Company occasionally sells its digital detectors, X-ray tubes and imaging processing tools as a package that is optimized for digital X-ray imaging and sells its Linatron® X-ray linear accelerators together with its image processing software and image detection products to OEM customers that incorporate them into their inspection or irradiation systems and processes. Service contracts are often sold with certain security and inspection products and computer-aided detection products. The Company determines revenue recognition through the following steps: • Identification of the contract, or contracts, with a customer • Identification of the performance obligations in the contract • Determination of the transaction price • Allocation of the transaction price to the performance obligations in the contract • Recognition of revenue when, or as, a performance obligation is satisfied 11 Table of Contents Contracts and Performance Obligations The Company accounts for a contract with a customer when there is an approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the consideration is probable. The Company's performance obligations consist mainly of transferring control of products and services identified in the contracts or purchase orders. For each contract, the Company considers the obligation to transfer products and services to the customer, which are distinct, to be performance obligations. Transaction Price and Allocation to Performance Obligations Transaction prices of products or services are typically based on contracted rates. To the extent that the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the expected value method when there is a large number of transactions with similar characteristics or the most likely amount method when there are two possible outcomes, depending on the circumstances of the transaction, to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information (historical, current, and forecasted) that is reasonably available. The Company allows customers to return specific parts of purchased X-ray tubes for a partial refund credit, which is identified as variable consideration. For sales with a right of return, revenue is reduced and a liability is recorded for expected returns, and an asset is recorded for the right to recover products from customers on settling the liability. The Company recognizes a reduction to revenue and cost of sales at the time of sale and a corresponding refund liability and right of return asset. The Company records this estimate based on the historical volume of product returns and adjusts the estimate on a quarterly basis based on the current quarter sales and current quarter returns. If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation could be sold separately. Recognition of Revenue Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer. Product revenue is generally recognized when the customer obtains control of the Company’s product, which occurs at a point in time, and may be upon shipment or upon delivery based on the contractual shipping terms of a contract. Service revenue is generally recognized over the term of the service contract. Services are expected to be transferred to the customer throughout the term of the contract, and the Company believes recognizing revenue ratably over the term of the contract best depicts the transfer of value to the customer. Disaggregation of Revenue Revenue is disaggregated from contracts between geography and by reportable operating segment, which the Company believes best depicts how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors. Refer to Note 15, Segment Information, included in this report, for the disaggregation of the Company’s revenue based on reportable operating segments and Note 2, Revenue Recognition, for the disaggregation of revenue by geographic region. Contract Balances Contract liabilities are included within the deferred revenues, and other long-term liabilities balances in the Condensed Consolidated Balance Sheets. The Company does not have any material contract assets. Deferred revenue represents the Company's obligation to transfer goods and/or services to its customers for which it has already received consideration (or the amount is due) from the customer. The Company's deferred revenue balance primarily relates to contract advances and billings for warranty contracts. Deferred revenue that is estimated to be recognized during the following twelve-month period is recorded as deferred revenues and the remaining portion is recorded as other long-term liabilities in the Condensed Consolidated Balance Sheets. 12 Table of Contents Costs to Obtain or Fulfill a Customer Contract The Company has certain costs to obtain and fulfill a customer contract, such as commissions and shipping costs. The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. Incremental costs of obtaining contracts that would be recognized over more than one year are not material. The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. These costs are included as a component of cost of revenues. Recently Adopted Accounting Pronouncements In August 2020, the Financial Accounting Standards Board issued Accounting Standard Update ("ASU") 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The standard removed certain separation models in ASC 470-20 for convertible instruments, and, as a result, embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815. These convertible debt instruments are accounted for as a single liability measured at amortized cost. This results in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate. Further, the ASU made amendments to the earnings per share (“EPS”) guidance in Topic 260 for convertible instruments, the most significant impact of which was requiring the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. The Company adopted this ASU on October 1, 2022, using the modified retrospective method. On the date of adoption, the Company recorded an entry to reduce additional paid-in capital by $ 34.6 million, increase long-term debt, net by $ 28.0 million, decrease deferred tax assets by $ 0.1 million, and increase retained earnings by $ 6.5 million for the after-tax impact of previously recognized amortization of the debt discount associated with the Company’s Convertible Notes (as defined herein). The unamortized discount on the Company's Convertible Notes (see Note 10, Borrowings ) was derecognized in the first quarter of fiscal year 2023, which removed the amortization of the debt discount, and brought the effective interest rate closer to the coupon rate of 4.00 %. The impact that the adoption of ASU 2020-06 has on the Company's net income per diluted share will depend on the amount of earnings in each period and the Company's share price and could result in additional dilution. 2. REVENUE RECOGNITION Disaggregation of Revenue Revenue is disaggregated from contracts by geographic region and by reportable operating segment, which the Company believes best depicts how the nature, amount, timing, and uncertainty of revenues and cash flows are affected by economic factors. The following table disaggregates the Company’s revenue by geographic region: Three Months Ended Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Americas $ 73.4 $ 63.9 $ 207.7 $ 192.8 EMEA 77.2 70.2 212.5 207.2 APAC 81.6 80.4 245.8 228.0 $ 232.2 $ 214.5 $ 666.0 $ 628.0 Revenue in the United States was $ 72.1 million and $ 61.7 million for the three months ended June 30, 2023 and July 1, 2022, respectively. Revenue in the United States was $ 203.8 million and $ 186.7 million for the nine months ended June 30, 2023 and July 1, 2022, respectively. Our products are sold in three geographic regions: the Americas, EMEA, and APAC. The Americas includes North America (primarily the United States) and Latin America. EMEA includes Europe, the Middle East, India and Africa. APAC includes Asia (other than India) and Australia. Revenues by region are based on the known final destination of products sold. Refer to Note 15, Segment Information , for the disaggregation of the Company’s revenue based on reportable operating segments. 13 Table of Contents Right of Return Assets and Refund Liabilities Right of return assets are included within the prepaid expenses and other current assets, and other assets balances in the Condensed Consolidated Balance Sheets. Refund liabilities are included within the accrued liabilities and other current liabilities and other long-term liabilities balances in the Condensed Consolidated Balance Sheets. The following table summarizes the changes in the right of return assets and refund liabilities for the nine months ended June 30, 2023 and July 1, 2022: Right of Return Assets Nine Months Ended (In millions) June 30, 2023 July 1, 2022 Balance at beginning of period $ 25.4 $ 24.3 Costs recovered from product returns during the period ( 3.9 ) ( 4.2 ) Right of return assets from shipments of products, subject to return during the period 5.0 5.5 Adjustment for actual vs. reserved product returns ( 0.7 ) ( 0.4 ) Balance at end of period $ 25.8 $ 25.2 Refund Liabilities Nine Months Ended (In millions) June 30, 2023 July 1, 2022 Balance at beginning of period $ 28.2 $ 27.0 Release of refund liability included in beginning of year refund liability ( 4.4 ) ( 4.6 ) Additions to refund liabilities 5.6 6.1 Adjustment for actual vs. reserved product returns ( 0.7 ) ( 0.5 ) Balance at end of period $ 28.7 $ 28.0 Contract Balances During the three and nine months ended June 30, 2023, the Company recognized revenue of $ 0.9 million and $ 5.7 million, respectively, related to deferred revenues which existed at September 30, 2022. During the three and nine months ended July 1, 2022, the Company recognized revenue of $ 0.4 million and $ 6.3 million, respectively, related to deferred revenues that existed at October 1, 2021. 3. LEASES The Company has operating and finance leases for office space, warehouse and manufacturing space, vehicles, and equipment. During the nine months ended July 1, 2022, the Company recorded a loss due to abandonment of $ 1.9 million, which is included in selling, general and administrative in the Condensed Consolidated Statements of Operations. The following table presents supplemental balance sheet information related to the Company's operating and finance leases: (In millions) Balance Sheet Location June 30, 2023 September 30, 2022 Assets Operating lease right-of-use assets Operating lease assets $ 28.7 $ 23.2 Finance lease right-of-use assets Property, plant, and equipment, net 0.2 0.3 Liabilities Operating lease liabilities (current) Current operating lease liabilities 3.4 4.0 Finance lease liabilities (current) Accrued liabilities and other current liabilities 0.1 0.2 Operating lease liabilities (non-current) Operating lease liabilities 23.4 18.0 Finance lease liabilities (non-current) Other long-term liabilities $ 0.1 $ 0.1 14 Table of Contents The following table provides information related to the Company’s operating and finance leases: Three Months Ended Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Total operating lease costs (1) $ 1.4 $ 1.5 $ 4.2 $ 4.9 Total finance lease costs $ 0.1 $ 0.1 $ 0.2 $ 0.2 Operating cash flows from operating leases $ 2.6 $ 1.9 $ 7.7 $ 5.5 Financing cash flows from finance leases 0.1 0.1 0.2 0.2 Total cash paid for amounts included in the measurement of lease liabilities $ 2.7 $ 2.0 $ 7.9 $ 5.7 Noncash operating right-of-use assets obtained in exchange for new lease liabilities $ 6.9 $ 2.3 $ 9.2 $ 5.3 Noncash finance right-of-use assets obtained in exchange for new lease liabilities — 0.1 — 0.1 Total right-of-use assets obtained in exchange for new lease liabilities $ 6.9 $ 2.4 $ 9.2 $ 5.4 (1) Includes variable and short-term lease expense, which were immaterial for the three and nine months ended June 30, 2023 and July 1, 2022. 4. RELATED-PARTY TRANSACTIONS Investments in Privately-Held Companies The Company has a 40 % ownership interest in dpiX Holding LLC (“dpiX Holding”), a holding company that has a 100 % ownership interest in dpiX LLC (“dpiX”), a supplier of amorphous silicon-based thin film transistor arrays for flat panels used in the Company's digital image detectors. In accordance with the dpiX Holding operating agreement, net profits or losses are allocated to the members in accordance with their ownership interests. The investment in dpiX Holding is accounted for under the equity method of accounting. When the Company recognizes its share of net profits or losses of dpiX Holding, profits or losses in inventory purchased from dpiX are eliminated. During the three months ended June 30, 2023 and July 1, 2022, the Company recorded income on the equity investment in dpiX Holding of $ 0.0 million and $ 0.3 million, respectively. During the nine months ended June 30, 2023 and July 1, 2022, the Company recorded income (loss) on the equity investment in dpiX Holding of $ 1.6 million and $( 0.8 ) million, respectively. The income and loss on the equity investment in dpiX Holding are included in other expense, net in the Condensed Consolidated Statements of Operations. The carrying value of the equity investment in dpiX Holding was $ 44.0 million and $ 42.4 million at June 30, 2023 and September 30, 2022, respectively. During the three months ended June 30, 2023 and July 1, 2022, the Company purchased glass transistor arrays from dpiX totaling $ 5.1 million and $ 5.3 million, respectively. During the nine months ended June 30, 2023 and July 1, 2022, the Company purchased glass transistor arrays from dpiX totaling $ 14.6 million and $ 16.0 million, respectively. These purchases of glass transistor arrays are included as a component of inventories on the Condensed Consolidated Balance Sheets or cost of revenues in the Condensed Consolidated Statements of Operations. As of June 30, 2023 and September 30, 2022, the Company had accounts payable to dpiX totaling $ 3.2 million and $ 3.1 million, respectively. In October 2013, the Company entered into an amended agreement with dpiX and other parties that, among other things, provides it with the right to 50 % of dpiX’s total manufacturing capacity. In addition, the Company is required to pay for 50 % of dpiX's fixed costs, as determined at the beginning of each calendar year. In January 2023, the Company's fixed cost commitment was determined and approved by the dpiX board of directors to be $ 13.1 million for calendar year 2023. As of June 30, 2023, the Company estimated it has fixed cost commitments of $ 6.5 million related to the amended agreement with dpiX 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). 15 Table of Contents The Company has determined that dpiX Holding is a variable interest entity because the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest. Majority votes are required to direct the manufacturing activities, legal operations and other activities that most significantly affect dpiX’s economic performance. The Company does not have majority voting rights and no power to unilaterally direct the activities of dpiX Holding, and therefore, is not the primary beneficiary of dpiX Holding. The Company’s exposure to loss as a result of its involvement with dpiX Holding is limited to the carrying value of the Company’s investment of $ 44.0 million and fixed cost commitments. In November 2018, the Company (through one of its wholly-owned subsidiaries) and CETTEEN GmbH (“CETTEEN”), formed a German limited liability company that governs the affairs and conduct of the business of VEC Imaging GmbH & Co. KG (“VEC”), a joint venture formed to develop technology for use in X-ray imaging components. In accordance with the VEC agreement, net profits or losses are allocated to the members in accordance with their ownership interest. The Company's investment in VEC is accounted for under the equity method of accounting. The Company has determined that VEC is a variable interest entity. During the three months ended June 30, 2023 and July 1, 2022, the Company recorded a loss on the equity investment in VEC of $ 0.3 million and $ 0.4 million, respectively. During the nine months ended June 30, 2023, and July 1, 2022, the Company recorded a loss on the equity investment in VEC of $ 0.7 million and $ 1.0 million, respectively. The Company's investment in VEC was $ 1.8 million and $ 2.5 million at June 30, 2023 and September 30, 2022, respectively. As of June 30, 2023 and September 30, 2022, the Company had loans and other receivables outstanding from VEC of $ 1.0 million, and $ 0.9 million, respectively, which are recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. 5. RESTRUCTURING In July 2018, the Company committed to relocate the production of amorphous silicon glass for digital detectors from its Santa Clara facility to the dpiX fabrication facility in Colorado. In July 2019, the Company committed to close its Santa Clara facility and to relocate the remaining production to its other existing facilities. The Company ceased all operations at the Santa Clara facility as of October 2, 2020, and all activities related to the closure of the facility were completed by the end of December 2020. Cash outflows associated with these restructuring charges are limited to employee termination expenses, facility closure and equipment sales and disposals. Below is a detail of restructuring charges incurred during the three and nine months ended June 30, 2023 and July 1, 2022, respectively, which predominantly relate to the Company's Medical segment: Three Months Ended Nine Months Ended (In millions) Location in Statements of Operations June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Other assets impairment charges Selling, general and administrative $ — $ — $ — $ 1.8 6. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES As part of the Company’s overall risk management practices, the Company enters into financial derivatives to manage its financial exposures to foreign currency exchange rates and interest rates. The Company records all derivatives on the Condensed Consolidated Balance Sheets at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. A qualitative assessment of hedge effectiveness is performed on a quarterly basis, unless facts and circumstances indicate the hedge may no longer be highly effective, in which case the Company would test for effectiveness on a more frequent basis. The changes in fair value for all trades that are not designated for hedge accounting are recognized in current period income. The Company does not offset fair value amounts recognized for derivative instruments in its Condensed Consolidated Balance Sheets for presentation purposes. Credit risk related to derivative transactions reflects the risk that a party to the transaction could fail to meet its obligation under the derivative contracts. Therefore, the Company’s exposure to the counterparty’s credit risk is generally limited to the amounts, if any, by which the counterparty’s obligations to the Company exceed the Company’s obligations to the counterparty. The Company’s policy is to enter into contracts only with financial institutions that meet certain minimum credit ratings to help mitigate counterparty credit risk. 16 Table of Contents Derivatives Designated as Hedging Instruments - Net Investment Hedges The Company uses cross currency swap contracts as net investment hedges to manage its risk of variability in foreign currency-denominated net investments in wholly-owned international operations. All changes in fair value of the derivatives designated as net investment hedges are reported in accumulated other comprehensive (loss) income along with the foreign currency translation adjustments on those investments. During the first quarter of fiscal year 2023, the Company terminated all three of its previously outstanding cross currency swap contracts which resulted in cash received upon settlement of $ 7.3 million. The gain on the cross currency swap contracts was recorded in accumulated other comprehensive (loss) income where it will remain until such time that substantial liquidation of the international operations should occur. Concurrent with the termination of the previous cross currency swap contracts, the Company entered into two new cross currency swap contracts which have been designated as net investment hedges. As of June 30, 2023, the Company had the following outstanding derivatives designated as net investment hedging instruments: (In millions, except number of instruments) Number of Instruments Notional Value Cross currency swap contracts 2 $ 58.7 The following table summarizes the amount of pre-tax income recognized from derivative instruments for the periods indicated and the line items in the accompanying statements of operations where the results are recorded for net investment hedges: Amount of (Loss) Gain Recognized in OCI on Derivative Three Months Ended Location of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Three Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Cross currency swap contracts $ ( 0.6 ) $ 3.9 Interest expense $ 0.3 $ 0.3 Amount of (Loss) Gain Recognized in OCI on Derivative Nine Months Ended Location of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Amount of Gain Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing) Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Cross currency swap contracts $ ( 5.6 ) $ 5.0 Interest expense $ 0.7 $ 0.9 These derivative instruments are subject to master netting agreements giving effect to rights of offset with each counterparty. None of the balances were eligible for netting. The following table summarizes the gross fair values of derivative instruments as of the periods indicated and the line items in the accompanying Condensed Consolidated Balance Sheets where the instruments are recorded: (In millions) Derivative Assets and Liabilities Derivatives Designated as Net Investment Hedges Balance Sheet Location June 30, 2023 September 30, 2022 Cross currency swap contracts Prepaid expenses and other current assets $ 1.1 $ 1.2 Cross currency swap contracts Other assets — 6.3 Cross currency swap contracts Other long-term liabilities $ 6.4 $ — Balance Sheet Hedges The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency-denominated monetary assets and liabilities, primarily cash, lease contracts, third-party accounts receivable and payable, and intercompany accounts receivable and payables. These forward contracts are generally entered into at the end of one fiscal period and expire by the end of the next fiscal period. These forward contracts are not designated for hedge accounting treatment; therefore, the change in fair value of these derivatives is recorded as a component of other expense, net in the Condensed Consolidated Statements of Operations and offsets the change in fair value of the foreign currency-denominated assets and liabilities, which are also recorded as a component of other expense, net. The Company has not and does not intend to use derivative financial instruments for speculative or trading purposes. 17 Table of Contents The following table shows the notional amounts of outstanding foreign currency contracts as of June 30, 2023: Notional Value of Derivatives not Designated as Hedging Instruments: (In millions of equivalent USD) Sell contracts Australian Dollar $ 4.0 Chinese Renminbi 9.8 Euro 7.0 India Rupee 6.5 $ 27.3 7. FAIR VALUE Assets and Liabilities Measured at Fair Value on a Recurring Basis The fair values of certain of the Company’s financial instruments, including bank deposits included in cash and cash equivalents, accounts receivable, net and accounts payable, approximate their fair values due to their short maturities. As of June 30, 2023, the fair values of the Company’s Convertible Notes and Senior Secured Notes, as defined in Note 10, Borrowings and measured using Level 1 inputs, were $ 253.6 million and $ 242.7 million, respectively. As of September 30, 2022, the fair values of the Company’s Convertible Notes and Senior Secured Notes, measured using Level 1 inputs, were $ 250.2 million and $ 241.3 million, respectively. The Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date. Fair Value at June 30, 2023 (In millions) Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds $ — $ 30.4 $ — $ 30.4 Commercial paper — 2.5 — 2.5 Corporate notes/bonds — 3.7 — 3.7 Government agencies — 11.3 — 11.3 U.S. Treasury bills — 21.4 — 21.4 Derivative assets — 1.1 — 1.1 Deferred compensation plan (1) 6.6 — — 6.6 Marketable equity securities 4.0 — — 4.0 Total assets measured at fair value $ 10.6 $ 70.4 $ — $ 81.0 Liabilities: Derivative liabilities $ — $ 6.4 $ — $ 6.4 Total liabilities measured at fair value $ — $ 6.4 $ — $ 6.4 (1) The assets held under the Company’s deferred compensation plan are classified in Level 1, as they relate primarily to publicly traded mutual funds for which there are observable market prices in active markets. 18 Table of Contents Fair Value at September 30, 2022 (In millions) Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Assets: Money market funds $ — $ 36.6 $ — $ 36.6 Commercial paper — 5.9 — 5.9 Corporate notes/bonds — 3.6 — 3.6 Government agencies — 0.3 — 0.3 U.S. Treasury bills — 10.2 — 10.2 Derivative assets — 7.5 — 7.5 Deferred compensation plan (1) 5.4 — — 5.4 Marketable equity securities 2.5 — — 2.5 Total assets measured at fair value $ 7.9 $ 64.1 $ — $ 72.0 Liabilities: Derivative liabilities $ — $ 0.3 $ — $ 0.3 Total liabilities measured at fair value $ — $ 0.3 $ — $ 0.3 (1) The assets held under the Company’s deferred compensation plan are classified in Level 1 as they relate primarily to publicly traded mutual funds for which there are observable market prices in active markets. Marketable Debt Securities The following tables summarize the Company’s marketable debt securities: June 30, 2023 (In millions) Amortized Costs Unrealized Losses Fair Value Commercial paper $ 2.5 $ — $ 2.5 Corporate notes/bonds 3.7 — 3.7 U.S. Treasury bills 21.5 ( 0.1 ) 21.4 Government agencies 11.3 — 11.3 Total marketable debt securities $ 39.0 $ ( 0.1 ) $ 38.9 September 30, 2022 (In millions) Amortized Costs Unrealized Losses Fair Value Commercial paper $ 5.9 $ — $ 5.9 Corporate notes/bonds 3.7 ( 0.1 ) 3.6 U.S. Treasury bills 10.2 — 10.2 Government agencies 0.3 — 0.3 Total marketable debt securities $ 20.1 $ ( 0.1 ) $ 20.0 The contractual maturities of marketable debt securities as of June 30, 2023, are shown in the table below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations. 19 Table of Contents June 30, 2023 (In millions) Amortized Costs Fair Value Contractual maturities: Due within one year $ 38.5 $ 38.4 Due after one year through five years 0.5 0.5 Total marketable debt securities $ 39.0 $ 38.9 During the three and nine months ended June 30, 2023, there were no gross realized gains or losses from the sale of certain marketable debt securities that were reclassified out of accumulated other comprehensive (loss) income. The following tables summarize the balance sheet locations for marketable debt securities: June 30, 2023 (In millions) Commercial paper Corporate notes/bonds Government agencies Treasury bills Total Cash and cash equivalents $ 2.0 $ — $ 2.0 $ 0.9 $ 4.9 Prepaid expenses and other current assets 0.5 3.7 9.3 20.0 33.5 Other assets — — — 0.5 0.5 Total marketable debt securities $ 2.5 $ 3.7 $ 11.3 $ 21.4 $ 38.9 September 30, 2022 (In millions) Commercial paper Corporate notes/bonds Government agencies Treasury bills Total Cash and cash equivalents $ — $ — $ — $ 3.3 $ 3.3 Prepaid expenses and other current assets 5.9 1.9 0.3 6.4 14.5 Other assets — 1.7 — 0.5 2.2 Total marketable debt securities $ 5.9 $ 3.6 $ 0.3 $ 10.2 $ 20.0 8. INVENTORIES The following table summarizes the Company’s inventories: (In millions) June 30, 2023 September 30, 2022 Raw materials and parts $ 235.0 $ 240.3 Work-in-process 21.0 23.2 Finished goods 41.7 39.7 Total inventories $ 297.7 $ 303.2 9. GOODWILL AND INTANGIBLE ASSETS The following table reflects goodwill by reportable operating segment: (In millions) Medical Industrial Total Balance at September 30, 2022 $ 169.4 $ 115.1 $ 284.5 Foreign currency translation adjustments 2.8 1.9 4.7 Balance at June 30, 2023 $ 172.2 $ 117.0 $ 289.2 20 Table of Contents The following table reflects the gross carrying amount and accumulated amortization of the Company’s finite-lived intangible assets included in other assets in the Condensed Consolidated Balance Sheets: June 30, 2023 September 30, 2022 (In millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Acquired existing technology $ 72.0 $ ( 56.0 ) $ 16.0 $ 70.0 $ ( 49.9 ) $ 20.1 Patents, licenses and other 12.6 ( 12.2 ) 0.4 12.3 ( 11.6 ) 0.7 Customer contracts and supplier relationship 50.5 ( 41.4 ) 9.1 49.6 ( 36.8 ) 12.8 Total intangible assets $ 135.1 $ ( 109.6 ) $ 25.5 $ 131.9 $ ( 98.3 ) $ 33.6 Amortization expense for intangible assets was $ 3.4 million and $ 3.7 million for the three months ended June 30, 2023 and July 1, 2022, respectively. Amortization expense for intangible assets was $ 10.2 million and $ 11.2 million for the nine months ended June 30, 2023 and July 1, 2022, respectively. 10. BORROWINGS The following table summarizes the Company’s short-term and long-term debt: June 30, 2023 September 30, 2022 (In millions, except for percentages) Amount Amount Contractual Interest Rate Effective Interest Rate Current maturities of long-term debt Other debt $ 1.8 $ 2.1 Non-current maturities of long-term debt: Convertible Senior Unsecured Notes $ 200.0 $ 200.0 4.0 % 4.8 % Senior Secured Notes 243.0 243.0 7.9 % 8.2 % Other debt 3.9 4.6 Total non-current maturities of long-term debt: $ 446.9 $ 447.6 Unamortized issuance costs and debt discounts Unamortized discount - Convertible Notes (1) $ — $ ( 28.7 ) Unamortized issuance costs - Convertible Notes (1) ( 2.8 ) ( 3.1 ) Unamortized issuance costs - Senior Secured Notes ( 3.0 ) ( 3.5 ) Total $ ( 5.8 ) $ ( 35.3 ) Total debt outstanding, net $ 442.9 $ 414.4 Equity component of Convertible Senior Unsecured Notes (1)(2) $ — $ 49.7 (1) In connection with the adoption of ASU 2020-06, the unamortized discount and equity component related to the Convertible Notes were 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. (2) Included in additional paid-in capital on the Condensed Consolidated Balance Sheets. 21 Table of Contents The following table summarizes the Company’s interest expense: Three Months Ended Nine Months Ended June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Contractual interest coupon and other $ 6.7 $ 6.7 $ 20.2 $ 21.1 Amortization of debt issuance costs 0.6 0.5 1.9 2.8 Amortization of debt discounts — 2.2 — 6.5 Total interest expense $ 7.3 $ 9.4 $ 22.1 $ 30.4 Convertible Senior Unsecured Notes On June 9, 2020, Varex issued $ 200.0 million in aggregate principal amount of 4.00 % Convertible Senior Unsecured Notes due 2025 (“Convertible Notes”). The net proceeds from the issuance of the Convertible Notes, after deducting transaction fees and offering expense payable by the Company, were approximately $ 193.1 million. The Convertible Notes bear interest at the annual rate of 4.00 %, payable semiannually on June 1 and December 1 of each year, beginning on December 1, 2020, and will mature on June 1, 2025, unless earlier converted or repurchased by Varex. The Convertible Notes are convertible into cash, shares of Varex common stock or a combination thereof, at Varex’s election, at an initial conversion rate of 48.048 shares of common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $ 20.81 per share, subject to adjustment pursuant to the terms of the indenture governing the Convertible Notes. The Convertible Notes may be converted at any time after, and including, December 15, 2024, until the close of business on the second scheduled trading day immediately before the maturity date. The maximum number of shares issuable upon conversion of the Convertible Notes is 9.6 million. Call Spread On June 4, 2020 and June 5, 2020, in connection with the offering of the Convertible Notes, Varex entered into privately negotiated convertible note hedge transactions (collectively, the “Hedge Transactions”). The Hedge Transactions cover, subject to customary anti-dilution adjustments, the number of shares of Varex common stock that were initially covered by the Convertible Notes. The Hedge Transactions are expected generally to reduce the potential dilution and/or offset any cash payments Varex is required to make in excess of the principal amount due upon conversion of the Convertible Notes in the event that the market price of Varex common stock is greater than the strike price of the Hedge Transactions, which was initially $ 20.81 per share (subject to adjustment under the terms of the Hedge Transactions). The strike price of $ 20.81 corresponds to the initial conversion price of the Convertible Notes. The number of shares underlying the Hedge Transactions is 9.6 million. On June 4, 2020 and June 5, 2020, Varex also entered into privately negotiated warrant transactions (collectively, the “Warrant Transactions” and, together with the Hedge Transactions, the “Call Spread Transactions”), whereby the Company sold warrants at a higher strike price relating to the same number of shares of Varex common stock that were initially covered by the Convertible Notes, subject to customary anti-dilution adjustments. The initial strike price of the warrants is $ 24.975 per share (subject to adjustment under the terms of the Warrant Transactions), which was 50 % above the last reported sale price of Varex common stock on June 4, 2020. The Warrant Transactions could have a dilutive effect to the Company's stockholders to the extent that the market price per share of Varex common stock, as measured under the terms of the Warrant Transactions, exceeds the applicable strike price of the warrants. The number of shares underlying the Warrant Transactions is 9.6 million. The number of warrants outstanding as of June 30, 2023 was 9.6 million. Senior Secured Notes Varex issued $ 300.0 million aggregate principal amount of 7.875 % Senior Secured Notes due 2027 (the "Senior Secured Notes") pursuant to an indenture dated September 30, 2020. Interest payments are paid semiannually on April 15 and October 15 of each year, beginning on April 15, 2021. The Senior Secured Notes will mature on October 15, 2027, unless earlier redeemed or repurchased by Varex. On July 15, 2021, we redeemed $ 30.0 million, and on March 18, 2022, we redeemed $ 27.0 million of the Senior Secured Notes. As of June 30, 2023, the aggregate principal amount of the outstanding Senior Secured Notes was $ 243.0 million. 22 Table of Contents The Senior Secured Notes are secured by a first priority lien on substantially all of the assets of Varex and the assets and capital stock of its subsidiary guarantors (subject to exceptions), except for assets for which a first priority security interest is pledged for the ABL Facility (defined below), in which the Senior Secured Notes will have a second lien security interest. The Senior Secured Notes include negative covenants, subject to certain exceptions, restricting or limiting Varex's ability and the ability of its restricted subsidiaries to, among other things, incur liens on collateral; sell certain assets; incur additional indebtedness; pay dividends; issue preferred shares; consolidate, merge, or sell all or substantially all of its assets; and enter into certain transactions with their affiliates. Asset-Based Loan On September 30, 2020, the Company entered into a revolving credit agreement consisting of a $ 100.0 million asset-based loan revolving credit facility (the “Asset-Based Loan” or "ABL Facility"). Borrowings under the Asset-Based Loan bear interest at floating rates based on the Secured Overnight Financing Rate ("SOFR"), or a comparable rate, or a base rate, and an applicable margin based on Average Daily Excess Availability (as defined in the Asset-Based Loan Agreement). In addition, the Company is required to pay a quarterly commitment fee of 0.25 % annualized, based on the aggregate unused commitments under the Asset-Based Loan. The ABL Facility matures on the earlier of September 30, 2025 or 91 days prior to the maturity of the Convertible Notes, at which time all outstanding amounts under the ABL Facility will be due and payable. The maximum availability under the ABL Facility is $ 100.0 million; 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 June 30, 2023, the amount available under the ABL Facility was $ 87.8 million and the ABL Facility remains undrawn. The ABL Facility includes various restrictive covenants that limit the Company's ability to engage in certain transactions, including the incurrence of debt, payment of dividends and other restrictive payments, existence of restrictions affecting subsidiaries, sales of stock and assets, certain affiliate transactions, modifications of debt documents and organizational documents, changes to line of business and fiscal year, incurrence of liens, making fundamental changes, prepayments of junior indebtedness, and certain other transactions. 11. NONCONTROLLING INTERESTS In September 2018, the Company entered into a partnership in Saudi Arabia. The Company has majority voting rights with an approximate 75 % interest. Accordingly, the Company has consolidated the operations of the Saudi Arabia partnership in its Condensed Consolidated Financial Statements and recorded the noncontrolling interests. The noncontrolling interest related to the partner’s 25 % interest is included in noncontrolling interests in the equity section of the Company’s Condensed Consolidated Balance Sheets. Income representing the noncontrolling partner's share of income from operations is included in the Company's Condensed Consolidated Statements of Operations. In April 2015, the Company acquired 73.5 % of the then outstanding shares of MeVis Medical Solutions AG (“MeVis”) , a publicly traded company based in Bremen, Germany that provides image processing software and services for cancer screening. In August 2015, the Company, through one of its German subsidiaries, entered into a Domination and Profit and Loss Transfer Agreement (the “DPLTA”) with MeVis. In fiscal years 2017 and 2018, the Company purchased an additional 0.2 % of outstanding shares such that the Company now owns 73.7 % of the outstanding shares of common stock of MeVis. Under the DPLTA, MeVis subordinates its management to the Company and undertakes to transfer all its annual profits and losses to the Company. In return, the DPLTA grants the noncontrolling shareholders of MeVis, an annual recurring net compensation of € 0.95 per MeVis share. At June 30, 2023, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3 % of the outstanding shares. Changes in noncontrolling interests were as follows: Nine Months Ended (In millions) June 30, 2023 July 1, 2022 Noncontrolling interests, at beginning of period $ 13.3 $ 13.2 Net income attributable to noncontrolling interests 0.4 0.4 Other ( 0.3 ) ( 0.3 ) Noncontrolling interests, at end of period $ 13.4 $ 13.3 23 Table of Contents 12. NET INCOME PER SHARE Basic net income per common share is computed by dividing the net income for the period by the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per common share reflects the effects of potentially dilutive securities, which is computed by dividing the sum of net income and any adjustments to net income by the sum of the weighted average number of common shares outstanding and dilutive common shares. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per common share is as follows: Three Months Ended Nine Months Ended (In millions, except per share amounts) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Net income per share - basic Net income attributable to Varex $ 9.1 $ 8.2 $ 16.3 $ 17.2 Basic weighted average shares outstanding 40.4 39.9 40.2 39.7 Basic net income per share attributable to Varex $ 0.23 $ 0.21 $ 0.41 $ 0.43 Net income per share - diluted Net income attributable to Varex $ 9.1 $ 8.2 $ 16.3 $ 17.2 Interest expense on Convertible Notes, net of tax 1.4 — — — Diluted net income $ 10.5 $ 8.2 $ 16.3 $ 17.2 Basic weighted average shares outstanding 40.4 39.9 40.2 39.7 Dilutive effect of Convertible Notes 9.6 0.2 — 1.6 Dilutive effect of share-based awards and other 0.4 0.4 0.4 0.6 Diluted weighted average shares outstanding 50.4 40.5 40.6 41.9 Diluted net income per share attributable to Varex $ 0.21 $ 0.20 $ 0.40 $ 0.41 Anti-dilutive share summary Share-based awards and other 2.7 3.2 2.9 3.0 Convertible notes — — 9.6 — Warrants 9.6 — 9.6 — Total anti-dilutive shares 12.3 3.2 22.1 3.0 Potentially dilutive shares, which are based on the weighted-average shares of common stock underlying stock options, unvested stock awards, purchase rights granted under the employee stock purchase plan, warrants, and Convertible Notes using the treasury stock method or the if-converted method, as applicable, are included when calculating diluted net income per share attributable to Varex when their effect is dilutive. As of October 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method. The standard requires the Company to apply the if-converted method in relation to the Convertible Notes, which requires the Company to assume that the Convertible Notes would have been converted using only share settlement at the beginning of the period, resulting in an additional 9.6 million shares outstanding. Using this method, the numerator is affected by adding back the after-tax interest expense and the denominator is affected by including the effect of potential share settlement, if the effect is dilutive. Prior to the adoption of ASU 2020-06, the Convertible Notes were accounted for using the treasury stock method for purposes of net income per share. See Note 1, Summary of Significant Accounting Policies, "Recently Adopted Accounting Pronouncements" for further details concerning the adoption of ASU 2020-06. Furthermore, in connection with the offering of the Convertible Notes, the Company entered into convertible note hedges and warrants (see Note 10, Borrowings ). However, the Company's convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive. 24 Table of Contents 13. EMPLOYEE STOCK PLANS Share-Based Compensation Expense Share-based compensation expense recognized in the Condensed Consolidated Statements of Operations is based on awards ultimately expected to vest. Share-based compensation expense includes expenses related to the Company’s direct employees. The table below summarizes the effect of recording share-based compensation expense and the option value of the employee stock purchase plan shares: Three Months Ended Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Cost of revenues $ 0.5 $ 0.4 $ 1.3 $ 1.2 Research and development 0.8 0.8 2.5 2.4 Selling, general and administrative 2.3 2.2 6.3 7.1 Total share-based compensation expense $ 3.6 $ 3.4 $ 10.1 $ 10.7 Stock Option Activity The following table summarizes the activity for stock options under Varex’s employee incentive plans for the Company's employees: (In thousands, except per share amounts and the remaining term) Options Price Range Weighted Average Exercise Price Weighted Average Remaining Term (in years) Aggregate Intrinsic Value (1) Outstanding at September 30, 2022 2,902 $ 13.61 - $ 37.60 $ 28.97 4.5 $ 1,361.4 Granted 415 $ 22.13 - $ 24.55 22.31 Canceled, expired or forfeited ( 442 ) $ 22.13 - $ 37.10 28.92 Outstanding at June 30, 2023 2,875 $ 13.61 - $ 37.60 $ 28.01 5.1 $ 2,329.4 Exercisable at June 30, 2023 2,015 $ 13.61 - $ 37.60 $ 29.49 3.6 $ 1,240.9 (1) The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of Varex common stock of $ 23.57 as of June 30, 2023, the last trading date of the Company's third quarter, and which represents the amount that would have been received by the option holders had all option holders exercised their in-the-money options and sold the shares received upon exercise as of that date. Restricted Stock Units, Restricted Stock Awards and Deferred Stock Units The following table summarizes the activity for restricted stock units, restricted stock awards and deferred stock units under Varex’s 2020 Omnibus Stock Plan and 2017 Omnibus Stock Plan: (In thousands, except per share amounts) Number of Shares Weighted Average Grant-Date Fair Value Outstanding at September 30, 2022 1,045 $ 24.35 Granted 565 20.15 Vested ( 253 ) 24.69 Canceled or expired ( 66 ) 24.03 Outstanding at June 30, 2023 1,291 $ 22.43 25 Table of Contents 14. TAXES ON INCOME For the three months ended June 30, 2023, the Company recognized income tax expense of $ 7.9 million on $ 17.1 million of pre-tax income. For the three months ended July 1, 2022, the Company recognized income tax expense of $ 5.1 million on $ 13.5 million of pre-tax income. For the nine months ended June 30, 2023, the Company recognized income tax expense of $ 13.6 million on $ 30.3 million of pre-tax income. For the nine months ended July 1, 2022, the Company recognized income tax expense of $ 12.8 million on $ 30.4 million of pre-tax income. The Company is unable to recognize a tax benefit for pre-tax book losses in certain foreign jurisdictions but has recognized tax expense for profitable foreign jurisdictions. The Company's tax expense for the three and nine months ended June 30, 2023 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. The Company is maintaining its reinvestment assertion with respect to foreign earnings for the three months ended June 30, 2023, which is that all earnings prior to fiscal year 2018 are permanently reinvested for all countries, and that all earnings for Direct Conversion, one of our consolidated entities, which is located primarily in Sweden and Finland, are also indefinitely reinvested in those countries, but post fiscal year 2017 earnings in all other countries are not permanently reinvested. Due to the level of earnings available for repatriation, the treaty benefits applicable to jurisdictions in which those earnings are located, and the now favorable United States tax treatment of repatriated foreign earnings, the amount of deferred tax liability recorded related to the potential repatriation is approximately $ 0.1 million. This estimated liability is for United States state income taxes and foreign withholding taxes that would apply if the foreign earnings were repatriated in the form of a dividend. 15. SEGMENT INFORMATION The Company has two reportable operating segments: Medical and Industrial, which aligns with how the CODM reviews the Company’s performance and evaluates the business for the allocation of resources. The segments align the Company’s products and service offerings with customer use in medical and industrial markets. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross profit. The reportable operating segment structure provides alignment between business strategies and operating results. Description of Segments The Medical segment designs, manufactures, sells and services X-ray imaging components, including X-ray tubes, digital detectors and accessories, ionization chambers, 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. The Industrial segment designs, develops, manufactures, sells and services X-ray imaging products for use in a number of markets, including security applications for cargo screening at ports and borders and baggage screening at airports, and nondestructive testing, irradiation, and inspection applications used in a number of other vertical markets. The Company's industrial products include Linatron® X-ray linear accelerators, X-ray tubes, digital detectors, high voltage connectors, and coolers. In addition, the Company licenses proprietary image-processing and detection software designed to work with other Varex products to provide packaged sub-assembly solutions to industrial customers. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but it may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies may not be meaningful. 26 Table of Contents Information related to the Company’s segments is as follows: Three Months Ended Nine Months Ended (In millions) June 30, 2023 July 1, 2022 June 30, 2023 July 1, 2022 Revenues, net Medical $ 175.4 $ 167.1 $ 509.6 $ 493.2 Industrial 56.8 47.4 156.4 134.8 Total revenues 232.2 214.5 666.0 628.0 Gross profit Medical 54.7 54.3 152.7 153.7 Industrial 21.6 19.1 59.6 55.3 Total gross profit 76.3 73.4 212.3 209.0 Total operating expenses 52.1 50.4 159.5 145.4 Interest and other expense, net ( 7.1 ) ( 9.5 ) ( 22.5 ) ( 33.2 ) Income before taxes 17.1 13.5 30.3 30.4 Income tax expense 7.9 5.1 13.6 12.8 Net income 9.2 8.4 16.7 17.6 Less: Net income attributable to noncontrolling interests 0.1 0.2 0.4 0.4 Net income attributable to Varex $ 9.1 $ 8.2 $ 16.3 $ 17.2 The Company does not disclose total assets by segment as this information is not provided to the CODM. 27 Table of Contents