Varex Imaging Corp - Quarter Report: 2024 June (Form 10-Q)

Unrealized loss on available-for-sale securities () Foreign currency translation adjustments()()()()Stockholders' equity:

Preferred stock, $ par value: shares authorized, issued

Common stock, $ par value: shares authorized

Shares issued and outstanding: and at June 28, 2024 and September 29, 2023, respectively

()$ $ $ $ — ()— ()— — )— ()— () $ $ $ $ — — ))— ()— ()()$ $ $ $ — — )— ()— () $ $ $ $ ()— ()— — )— ()— ()()$ $ $ $

See accompanying Notes to the Condensed Consolidated Financial Statements.

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VAREX IMAGING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
(In millions)	June 28, 2024	June 30, 2023
Cash flows from operating activities:
Net income	$	$
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation expense
Depreciation
Amortization of intangible assets
Deferred taxes	()	()
Loss from equity method investments
Amortization of deferred loan costs
Gain on purchase of business	()
Inventory write-down
Other, net
Changes in assets and liabilities:
Accounts receivable
Inventories	()
Prepaid expenses and other assets
Accounts payable		()
Accrued liabilities and other current and long-term liabilities	()	()
Deferred revenues	()
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant, and equipment	()	()
Loss on settlement of cash flow hedge		()
Proceeds from maturities of marketable debt securities
Purchase of marketable debt securities	()	()
Purchase of marketable equity securities	()	()
Settlement of net investment hedge
Acquisitions of businesses, net of cash acquired
Other, net	()	()
Net cash used in investing activities	()	()
Cash flows from financing activities:
Taxes related to net share settlement of equity awards	()	()
Repayments of borrowing under credit agreements	()	()
Payment of debt issuance costs	()
Proceeds from shares issued under employee stock purchase plan
Other, net	()	()
Net cash used in financing activities	()	()
Effects of exchange rate changes on cash and cash equivalents and restricted cash		()
Net increase in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period	$	$
Supplemental cash flow information:
Cash paid for interest	$	$
Income taxes paid, net of refunds
Supplemental non-cash activities:
Purchases of property, plant, and equipment financed through accounts payable	$	$

See accompanying Notes to the Condensed Consolidated Financial Statements.

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VAREX IMAGING CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Except for the change in certain policies upon adoption of the accounting standards 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 2023.

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.

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$ $ $ Restricted cash Total as presented in the Condensed Consolidated Statements of Cash Flows$ $ $ $

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. % %%%

Contract Balances

During the three and nine months ended June 28, 2024, the Company recognized revenue of $ million and $ million, respectively, related to deferred revenues which existed at September 29, 2023. During the three and nine months ended June 30, 2023, the Company recognized revenue of $ million and $ million, respectively, related to deferred revenues that existed at September 30, 2022.

$ Finance lease right-of-use assetsProperty, plant, and equipment, net LiabilitiesOperating lease liabilities (current) Current operating lease liabilities Finance lease liabilities (current) Accrued liabilities and other current liabilities Operating lease liabilities (non-current)Operating lease liabilities Finance lease liabilities (non-current)Other long-term liabilities$ $

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$ $ $ Total finance lease costs$ $ $ $ Operating cash flows from operating leases$ $ $ $ Financing cash flows from finance leases Total cash paid for amounts included in the measurement of lease liabilities$ $ $ $ Noncash operating right-of-use assets obtained in exchange for new lease liabilities$ $ $ $ Noncash finance right-of-use assets obtained in exchange for new lease liabilities Total right-of-use assets obtained in exchange for new lease liabilities$ $ $ $

% ownership interest in dpiX Holding Company LLC (“dpiX Holding”), a holding company that has a % 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 also eliminated. During the three months ended June 28, 2024 and June 30, 2023, the Company recorded a loss on the equity investment in dpiX Holding of $ million and $ million, respectively. During the nine months ended June 28, 2024 and June 30, 2023, the Company recorded (loss) income on the equity investment in dpiX Holding of $() million and $ 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 $ million and $ million at June 28, 2024 and September 29, 2023, respectively.

During the three months ended June 28, 2024 and June 30, 2023, the Company purchased glass transistor arrays from dpiX totaling $ million and $ million, respectively. During the nine months ended June 28, 2024 and June 30, 2023, the Company purchased glass transistor arrays from dpiX totaling $ million and $ 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 28, 2024 and September 29, 2023, the Company had accounts payable to dpiX totaling $ million and $ 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 % of dpiX’s total manufacturing capacity. In addition, the Company is required to pay for % of dpiX's fixed costs, as determined at the beginning of each calendar year. In January 2024, the Company's fixed cost commitment was determined and approved by the dpiX board of directors to be $ million for calendar year 2024. As of June 28, 2024, the Company estimated it has fixed cost commitments of $ million related to the amended agreement with dpiX through the remainder of calendar year 2024. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

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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 28, 2024 and June 30, 2023, the Company recorded loss on the equity investment in VEC of $ million and $ million, respectively. During the nine months ended June 28, 2024, and June 30, 2023, the Company recorded a loss on the equity investment in VEC of $ million and $ million, respectively. The Company's investment in VEC was $ million and $ million at June 28, 2024 and September 29, 2023, respectively. As of June 28, 2024 and September 29, 2023, the Company had loans and other receivables outstanding from VEC of $ million, and $ million, respectively, which are recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

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$()Interest expense$ $ Amount of Loss Recognized in OCI on Derivative
Nine Months EndedLocation 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 28, 2024June 30, 2023June 28, 2024June 30, 2023Cross currency swap contracts$()$()Interest expense$ $

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 28, 2024

September 29, 2023

Cross currency swap contracts

Prepaid expenses and other current assets

million and $ million, respectively. As of September 29, 2023, the fair values of the

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million and $ 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.

$ $ $ Corporate notes/bonds Government agencies U.S. Treasury bills

Derivative assets

Deferred compensation plan(1)

Marketable equity securities Total assets measured at fair value$ $ $ $

Liabilities:

Derivative liabilities

$ $ $ $ Total liabilities measured at fair value$ $ $ $

$ $ $ Commercial paper Corporate notes/bonds Government agencies U.S. Treasury bills Derivative assets

Deferred compensation plan(1)

Marketable equity securities Total assets measured at fair value$ $ $ $ Liabilities:Derivative liabilities$ $ $ $

$ Due after one year through five years Total marketable debt securities$ $

During the three and nine months ended June 28, 2024, 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.

$ $ $ $ Marketable securities Other assets Total marketable debt securities$ $ $ $ $

September 29, 2023

(In millions)

Commercial paper

Corporate notes/bonds

Government agencies

Treasury bills

Total

Cash and cash equivalents

Marketable securities

Total marketable debt securities

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$ Work-in-process Finished goods Total inventories$ $

$ $ Foreign currency translation adjustments Balance at June 28, 2024$ $ $

$()$ $ $()$

Patents, licenses and other

() ()

Customer contracts and supplier relationship

() ()

Total intangible assets

$ $()$ $ $()$

Amortization expense for intangible assets was $ million and $ million for the three months ended June 28, 2024 and June 30, 2023, respectively. Amortization expense for intangible assets was $ million and $ million for the nine months ended June 28, 2024 and June 30, 2023, respectively. In connection with the business combination discussed in Note 10. Business Combinations, the Company recorded additional intangible assets of $ million, of which $ million related to customer contracts and supplier relationships and $ million related to acquired existing technology.

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$ Other debt Total current maturities of long-term debt$ $ Non-current maturities of long-term debt:

Convertible Senior Unsecured Notes(1)

$ $ %%Senior Secured Notes %%Other debt Total non-current maturities of long-term debt:$ $ Unamortized issuance costsUnamortized issuance costs - Convertible Notes$()$()Unamortized issuance costs - Senior Secured Notes()()Total()()Total debt outstanding, net$ $

$ $ $ Amortization of debt issuance costs

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12.

$ $ $

Basic weighted average shares outstanding

Basic net income per share attributable to Varex$ $ $ $ Net income per share - dilutedNet income attributable to Varex$ $ $ $ Interest expense on Convertible Notes, net of tax Diluted net income$ $ $ $ Basic weighted average shares outstanding Dilutive effect of Convertible Notes Dilutive effect of share-based awards and other

Diluted weighted average shares outstanding

Diluted net income per share attributable to Varex$ $ $ $ Anti-dilutive share summary

Share-based awards and other

Convertible notes Warrants Total anti-dilutive shares

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. In connection with the offering of the Convertible Notes, the Company entered into convertible note hedges and warrants (see Note 9, Borrowings). However, the Company's convertible note hedges are not included when calculating potentially dilutive shares since their effect is always anti-dilutive.

13.

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$ $ $ Research and development

Selling, general, and administrative

Total share-based compensation expense$ $ $ $

Stock Option Activity

$ - $

$ $ Canceled, expired or forfeited()

$ - $

Outstanding at June 28, 2024

$ - $

$ $ Exercisable at June 28, 2024

$ - $

$ $

as of June 28, 2024, 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, Performance Stock Units, Restricted Stock Awards, and Deferred Stock Units

In the first quarter of fiscal year 2024, the Company issued performance stock units ("PSUs") to certain officers and key employees in connection with our long-term incentive program. Each PSU represents the right to receive one share of our common stock, provided that the applicable performance and vesting conditions are satisfied. The fair value of certain PSUs are linked to the achievement of performance goals based on Adjusted EBITDA margin. Share-based compensation expense for these PSUs are recognized over the performance period based on the probability of achieving the performance targets. Certain PSUs include a performance objective based on our relative total shareholder return over the performance period compared to a predetermined peer group. The fair value of these awards is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards.

$ Granted Vested() Canceled or expired() Outstanding at June 28, 2024 $

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14.

million on $ million of pre-tax income. For the three months ended June 30, 2023, the Company recognized income tax expense of $ million on $ million of pre-tax income. For the nine months ended June 28, 2024, the Company recognized income tax benefit of $ million on $ million of pre-tax income. For the nine months ended June 30, 2023, the Company recognized income tax expense of $ million on $ 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 jurisdictions.

The Company's tax expense decreased for the three and nine months ended June 28, 2024, primarily due to decreased pre-tax income in certain jurisdictions and favorable impacts of international tax provisions and tax credits in the U.S., partially offset by losses in certain foreign jurisdictions for which no benefit can be recorded.

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.

reportable operating segments: Medical and Industrial, which aligns with how the CODM reviews the Company’s performance. The segments align the Company’s products and service offerings with customer use in medical and industrial markets and are consistent with how the Company’s CEO evaluates the business for the allocation of resources. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on revenues and gross profit. The operating and reportable 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, 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.

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$ $ $ Industrial Total revenues Gross profitMedical Industrial Total gross profit Total operating expenses Interest and other expense, net()()()()Income before taxes Income tax (benefit) expense() () Net income Less: Net income attributable to noncontrolling interests Net income attributable to Varex$ $ $ $

The Company does not disclose total assets by segment as this information is not provided to the CODM.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations 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 29, 2023 ("Annual Report") 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 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 described. Important factors that could cause our actual results and financial condition to differ significantly from those projections or expectations include, among other things, the following:

•reduction in or loss of business of one or more of our limited original equipment manufacturing (“OEM”) customers;

•loss of business to, and an inability to effectively compete with, competitors;

•pricing pressures and other factors that could result in margin erosion and loss of customers;

•failure to meet customers’ needs and demands;

•global, regional, and country-specific economic instability, shifting political environments, changing tax treatment, reactionary import/export regulatory regimes, and other risks associated with international manufacturing, operations, and sales;

•supply chain disruptions resulting in delayed product delivery, and increased costs as a result of reliance on a limited number of suppliers for certain key components;

•inability to maintain or defend our intellectual property rights, and high cost of protecting our intellectual property and defending against infringement claims;

•disruption of critical information systems or material breaches in the security of our systems;

•noncompliance with regulations applicable to marketing, manufacturing, labeling, and distributing our products and delays in obtaining regulatory clearances or approvals;

•limitations imposed by operating and financial restrictions of our debt financing agreements that could harm our long-term interests, limit our ability to make payments on our debt obligations, and impact our ability to maintain sufficient liquidity and/or to refinance our debt obligations; and

•other factors cited in Part I, Item 1A, "Risk Factors" in our Annual Report and in Part II, Item 1A, "Risk Factors" of this Quarterly Report.

Statements concerning supply chain and logistics challenges; cost increases and expense management; changes in U.S. and worldwide economic conditions, such as the impact of inflation, and fluctuations in foreign currency exchange rates; geopolitical tensions; including concerns and uncertainty surrounding the outcome of the elections in the United States in 2024 and possible legislative, tariffs, and policy reforms resulting therefrom; industry or market segment outlook; market acceptance of or transition to new products or technologies such as advanced X-ray tube and digital flat panel detector products; growth drivers; future orders, revenues, market share, backlog, earnings or other financial results; and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “may,” “intend,” “potential,” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management’s current expectations.

Any forward-looking statement made in this Quarterly Report (including in any exhibits or documents incorporated by reference) is based only on information currently available to Varex and its management and speaks only as of the date on which it is made. 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.

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Overview

Varex Imaging Corporation is a leading innovator, designer and manufacturer of X-ray imaging components including X-ray tubes, flat panel and photon counting detectors and accessories, 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 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: 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.

Our success depends, among other things, on our ability to anticipate and respond to changes in our markets, the direction of technological innovation, and the demand from our customers. We continually invest in research and development and employ approximately 350 individuals in product development related activities. Our focus on innovation and product performance along with strong and long-term customer relationships allows us to collaborate with our customers to bring industry-leading products to the X-ray imaging market. We continue to work to improve the life and quality of our imaging components and leverage our scale as one of the largest independent X-ray imaging component suppliers to provide cost-effective solutions for our customers.

Impact of General Economic Environment

We remain cautious about the general economic environment as many factors remain dynamic and unpredictable. The uncertain economic environment, supply chain and logistic challenges, and geopolitical tensions have contributed to, and may continue to contribute to, inflation, higher interest rates and capital costs, increased shipping costs, supply shortages, increased costs of labor and materials, exchange rate volatility, and other similar effects.

We have experienced fewer supply chain, manufacturing, and logistics challenges in fiscal year 2024 than in fiscal year 2023. However, shortages of certain materials and delivery delays from some suppliers have caused, and may in the future cause, delays in manufacturing products, as well as operational and customer order fulfillment challenges. In addition, since late 2023 our Medical business has been negatively impacted by the China government initiated anti-corruption campaign related to the healthcare industry and more recently we have experienced cautious purchasing behaviors by our customers. We expect these trends to continue through the remainder of fiscal year 2024.

For additional information on risks related to supply chain and logistics challenges, cost increases, changes in U.S. and worldwide economic conditions, geopolitical tensions, and other risks that could impact our results, see Item 1A “Risk Factors”.

Operating Segments and Products

We have two reportable operating segments: Medical and Industrial. The segments align our products and services offerings with customer use in medical and industrial markets.

Medical

In our Medical segment, we design, manufacture, sell and service X-ray imaging components, including X-ray tubes, flat panel and photon counting detectors and accessories, high voltage connectors, image-processing software and workstations, 3D reconstruction software, computer-aided diagnostic software, collimators, automatic exposure control devices, generators, and coolers. These components are used in a range of medical imaging applications including CT, mammography, oncology, cardiac, surgery, dental, fluoroscopy, and other diagnostic radiography uses.

Our X-ray imaging components are primarily sold to OEM customers. These OEM customers then design-in our products to their X-ray imaging systems for a variety of medical modalities. A substantial majority of medical X-ray imaging OEMs globally are our customers, and many of these have been our customers for over 35 years. We believe one of the reasons for customer loyalty is that our hardware and software products are tightly integrated with our customers' systems. We work very closely with our customers to create custom built components for their systems based on technology platforms that we have developed. Because our products are often customized for our customers' specific equipment, it can be costly and complex for our customers to switch to another provider. Once our components are designed into our customers' equipment, our customers will typically continue to buy from us for any replacement components and for service and support for that equipment. Some of our products are also included in product registrations for our customers' equipment that require regulatory approval to change. In addition to sales to OEM customers, we sell our products to independent service companies and distributors as well as directly to end-users for replacement purposes.

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We are one of the largest independent global manufacturers of X-ray imaging components, and each year, we produce over 27,000 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 16,500 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.

In China, the government is broadening the availability of healthcare services. As a result, the number of diagnostic X-ray imaging systems, including CT, has grown significantly. We are developing CT X-ray tubes and related subsystems for Chinese OEMs as they introduce new systems in China. Over the long-term, our objective is to become the partner of choice both for OEMs and in the replacement market as CT systems become more widely adopted throughout the Chinese market.

In recent years, our business in China has been impacted by the trade war with the United States in three principal ways: (1) importing raw materials from China to the United States has become more expensive, (2) importing raw materials and sub-assemblies from the United States to China has become more expensive, and (3) importing finished United States manufactured products into China has become more difficult and expensive. 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, and the U.S. tariff exclusions are set to expire on May 31, 2025, unless extended. 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 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. Our mitigation efforts could prove less effective than anticipated if tensions between China and Taiwan lead to worsening trade relations between China and the United States.

Industrial

In our Industrial segment, we design, develop, manufacture, sell, and service X-ray imaging products for use in a number of markets, including security applications for cargo screening at ports and borders, 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, flat panel and photon counting detectors, computed radiography scanners, 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. Our Industrial business benefits from the research and development investment and manufacturing economies of scale on the Medical side of our business, as we continue to find new applications for our technology. Along with more favorable pricing dynamics, this allows us to generally achieve higher gross profit for Industrial products relative to our Medical business. In addition, our Industrial business benefits from our long-term service agreements for our Linatron® products.

The security market primarily consists of cargo security for the screening of trucks, trains, and cargo containers at ports and borders as well as airport security for checked baggage and palletized cargo. The end customers for border protection systems are typically government agencies, many of which are in oil-based economies and war zones where there can be significant variation in buying patterns.

Non-destructive testing and inspection verticals utilize X-ray imaging to scan items for inspection of manufacturing defects and product integrity in a wide range of industries including aerospace, automotive, electronics, oil and gas, food packaging, metal castings, and additive manufacturing. In addition, new applications for X-ray sources are being developed, such as sterilization of food and its packaging. We provide X-ray sources, digital detectors, high voltage connectors, and image processing software to OEM customers, system integrators, and manufacturers in a variety of these verticals. We believe that the non-destructive testing market represents a significant growth opportunity for our business, and we are actively pursuing new potential applications for our products.

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Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates.

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 September 29, 2023 filed with the SEC on November 16, 2023 and Note 1, Summary of Significant Accounting Policies, of the Notes to the 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. Except for the changes 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 2023.

Fiscal Year

The fiscal years of the Company as reported are the 52 or 53-week periods ending on the Friday nearest September 30. Fiscal year 2024 is the 52-week period ending September 27, 2024. Fiscal year 2023 was the 52-week period that ended on September 29, 2023. The fiscal quarters ended June 28, 2024 and June 30, 2023 were both 13-week periods. The nine-month fiscal periods ended June 28, 2024 and June 30, 2023 were both 39-week periods.

Discussion of Results of Operations for the Three Months Ended June 28, 2024 Compared to the Three Months Ended June 30, 2023

Revenues, net


	Three Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Medical	$	148.6		$	175.4		$	(26.8)	(15.3)	%
Industrial	60.5			56.8			3.7		6.5	%
Total revenues	$	209.1		$	232.2		$	(23.1)	(9.9)	%
Medical as a percentage of total revenues	71.1		%	75.5		%
Industrial as a percentage of total revenues	28.9		%	24.5		%

Medical revenues decreased $26.8 million, primarily due to decreased sales of dental, mammography, oncology, and fluoroscopic, partially offset by increased sales in CT and radiographic.

Industrial revenues increased $3.7 million, primarily due to increased sales of security inspection products, partially offset by decreased sales of digital detectors.

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Gross Profit


	Three Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Medical	$	46.2		$	54.7		$	(8.5)	(15.5)	%
Industrial	20.7			21.6			(0.9)		(4.2)	%
Total gross profit	$	66.9		$	76.3		$	(9.4)	(12.3)	%
Medical gross margin	31.1		%	31.2		%
Industrial gross margin	34.2		%	38.0		%
Total gross margin	32.0		%	32.9		%

The decrease in Medical segment gross profit was primarily due to decreased sales volume and an unfavorable shift in product sales mix.

The Industrial segment gross profit decreased, even though Industrial revenues increased by 6.5%, primarily due to an unfavorable shift in product sales mix.

Operating Expenses


	Three Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Research and development	$	22.0		$	20.0		$	2.0	10.0	%
As a percentage of total revenues	10.5		%	8.6		%
Selling, general, and administrative	$	35.6		$	32.1		$	3.5	10.9	%
As a percentage of total revenues	17.0		%	13.8		%

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

Interest expense was flat in the third quarter of fiscal year 2024 compared to the third quarter of 2023.

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

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Taxes on Income

For the three months ended June 28, 2024, we recognized income tax benefit of $0.7 million on $0.8 million of pre-tax income. For the three months ended June 30, 2023, we recognized income tax expense of $7.9 million on $17.1 million of pre-tax income. Our tax expense decreased for the three months ended June 28, 2024, primarily due to decreased pre-tax income in certain jurisdictions and favorable impacts of international tax provisions and tax credits in the U.S., partially offset by losses in certain foreign jurisdictions for which no benefit can be recorded.

Discussion of Results of Operations for the Nine Months Ended June 28, 2024 Compared to the Nine Months Ended June 30, 2023

Revenues


	Nine Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Medical	$	437.3		$	509.6		$	(72.3)	(14.2)	%
Industrial	168.0			156.4			11.6		7.4	%
Total revenues	$	605.3		$	666.0		$	(60.7)	(9.1)	%
Medical as a percentage of total revenues	72.2		%	76.5		%
Industrial as a percentage of total revenues	27.8		%	23.5		%

Medical revenues decreased $72.3 million, primarily due to decreased sales of dental, fluoroscopic, oncology, and CT, partially offset by increased sales in mammography.

Industrial revenues increased $11.6 million, primarily due to increased sales of security inspection products and x-ray tubes, partially offset by decreased sales of digital detectors.

Gross Profit


	Nine Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Medical	$	129.8		$	152.7		$	(22.9)	(15.0)	%
Industrial	60.0			59.6			0.4		0.7	%
Total gross profit	$	189.8		$	212.3		$	(22.5)	(10.6)	%
Medical gross margin %	29.7		%	30.0		%
Industrial gross margin %	35.7		%	38.1		%
Total gross margin %	31.4		%	31.9		%

The decrease in Medical segment gross profit was primarily due to decreased sales volume and an unfavorable shift in product sales mix.

The Industrial gross profit increased primarily due to increased Industrial revenue, partially offset by an unfavorable shift in product sales mix.

Operating Expenses


	Nine Months Ended
(In millions)	June 28, 2024			June 30, 2023			$ Change		% Change
Research and development	$	65.1		$	63.0		$	2.1	3.3	%
As a percentage of total revenues	10.8		%	9.5		%
Selling, general, and administrative	$	103.5		$	96.5		$	7.0	7.3	%
As a percentage of total revenues	17.1		%	14.5		%

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

Interest expense increased during the nine months ended June 28, 2024 primarily due to the termination of the ABL facility which resulted in the recognition of $0.6 million of the remaining unamortized deferred issuance costs.

During the nine months ended June 28, 2024, we realized Other expense, net of $1.6 million compared to Other expense, net of $2.5 million during the nine months ended June 30, 2023, primarily due to a gain on business acquisition and decreased losses in certain investments in privately-held companies and equity investments, partially offset by increased foreign exchange expense.

Taxes on Income

For the nine months ended June 28, 2024, we recognized an income tax benefit of $0.2 million on $2.5 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. Our tax expense decreased for the nine months ended June 28, 2024, primarily due to decreased pre-tax income in certain jurisdictions and favorable impacts of international tax provisions and tax credits in the U.S., partially offset by losses in certain foreign jurisdictions for which no benefit can be recorded.

Liquidity and Capital Resources

We assess our liquidity in terms of our ability to generate cash to fund our operations, including working capital and investing activities. We believe that our operating cash flow, cash on our balance sheet, availability under our Revolving Credit Facility and Equipment Credit Facility, and our ability to access the credit and capital markets are sufficient to meet our anticipated operating activities and cash commitments for at least the next 12 months and will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions, and manage our capital structure on a short-term and long-term basis. We are currently not aware of any trends or demands, commitments, events, or uncertainties that will result in or that are reasonably likely to result in a material change to our liquidity needs during or beyond the next 12 months, except our Convertible Notes that become due in June 2025 that we currently anticipate refinancing using some combination of future borrowings under our Revolving Credit Facility and cash. The availability under our Revolving Credit Facility and Equipment Credit Facility is $155.0 million and $20.0 million, respectively. As of June 28, 2024, our Revolving Credit Facility and Equipment Credit Facility remain undrawn. At June 28, 2024, we had total debt of $443.1 million, net of deferred issuance costs of $3.7 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)	June 28, 2024		September 29, 2023		$ Change
Cash and cash equivalents	$	156.4	$	152.6	$	3.8
Certificates of deposit	0.5		1.0		(0.5)
Marketable securities not included in cash and cash equivalents	34.6		41.3		(6.7)
Total	$	191.5	$	194.9	$	(3.4)

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Borrowings

The following table summarizes the changes in our debt outstanding:


	June 28, 2024		September 29, 2023
(In millions, except for percentages)	Amount		Amount		$ Change
Current maturities of long-term debt
Convertible Senior Unsecured Notes	$	45.0	$	—	$	45.0
Other debt	1.5		1.5		—
Total current maturities of long-term debt	$	46.5	$	1.5	$	45.0

Non-current maturities of long-term debt:

Convertible Senior Unsecured Notes	$	155.0	$	200.0	$	(45.0)
Senior Secured Notes	243.0		243.0		—
Other debt	2.3		3.5		(1.2)
Total non-current maturities of long-term debt:	$	400.3	$	446.5	$	(46.2)

Unamortized issuance costs

Unamortized issuance costs - Convertible Notes	$	(1.4)	$	(2.5)	$	1.1
Unamortized issuance costs - Senior Secured Notes	(2.3)		(2.9)		0.6
Total	(3.7)		(5.4)		1.7
Total debt outstanding, net	$	443.1	$	442.6	$	0.5

3.1

Amended and Restated Certificate of Incorporation, dated January 27, 2017 (as corrected December 11, 2017) (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed November 27, 2018).

3.2

Amended and Restated Bylaws of the Company, as amended February 11, 2021 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed February 16, 2021).

10.1*

Equipment Credit Agreement, dated as of April 26, 2024, by and among the Company, Varex Imaging West, LLC, certain guarantors party thereto and Zions Bancorporation, N.A. DBA Zions Credit Corporation. (incorporated by reference to Exhibit 10.2 to the Compan y 's Quarterly Report on Form 10-Q filed M a y 2, 2024)

31.1*

Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act

31.2*

Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act

32.1**

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**

Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document101.SCH*Inline XBRL Taxonomy Extension Schema Document101.CAL*Inline XBRL Taxonomy Extension Calculation Linkbase Document101.DEF*Inline XBRL Taxonomy Extension Definition Linkbase Document101.LAB*Inline XBRL Taxonomy Extension Label Linkbase Document101.PRE*Inline XBRL Taxonomy Extension Presentation Linkbase Document104*Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)*Filed herewith.**Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			VAREX IMAGING CORPORATION


Date:	August 1, 2024	By:	/s/ SHUBHAM MAHESHWARI
			Shubham Maheshwari
			Chief Financial Officer
			(Duly Authorized Officer and Principal Financial Officer)

Varex Imaging Corp - Quarter Report: 2024 June (Form 10-Q)

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