# Varex Imaging Corp (VREX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Varex Imaging Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1681622/000168162223000074/vrex-20230929.htm
Accession: 0001681622-23-000074
Filing date: 2023-11-16
Report date: 2023-09-29
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/VREX/
All MD&A years: /company/VREX/mda/
Previous year: /company/VREX/mda/fy2022/ (FY 2022)
Next year: /company/VREX/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

    The following discussion and analysis contains forward-looking statements relating to future events or our future financial or operating performance that involve risks and uncertainties, as set forth above under "Forward-Looking Statements." Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors described in this Annual Report on Form 10-K.

Our Business

    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, and other image software processing solutions, which are critical components of a variety of X-ray based imaging equipment. 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. For additional information on our business, see Item 1 "Business".

Impact of General Economic Environment

    While there was some improvement in the general economic environment during the year, we remain cautious 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.

    During 2023, we experienced some supply chain, manufacturing, and logistics challenges. Currently, we anticipate such challenges to have less of an impact in fiscal year 2024. Shortages of certain materials have caused, and may continue to cause, delays in manufacturing products for our customers. In some cases, raw material shortages and delivery delays from our suppliers have caused operational and customer order fulfillment challenges. In addition, in late 2023 our Medical business was negatively impacted by the China government initiated anti-corruption measures related to the healthcare industry. We expect these actions to continue into fiscal year 2024, which could impact revenues in our China business.

    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".

Fiscal Year

    Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2023 was the 52-week period that ended September 29, 2023, fiscal year 2022 was the 52-week period that ended September 30, 2022, and fiscal year 2021 was the 52-week period that ended October 1, 2021.

Results of Operations

    For a discussion and analysis of our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 30, 2022 and October 1, 2021 refer to Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on November 18, 2022. Our year-over-year changes, financial condition, and results of operations for the fiscal years ended September 29, 2023 and September 30, 2022 are set forth below.

Comparison of Results of Operations for Fiscal Years 2023 and 2022

Revenues, net

[[GREPCENT_TABLE]]
[["(In millions)","2023","","% Change","","2022","","% Change","","2021"],["Medical","$","673.3","","","\u2014%","","$","674.7","","","5%","","$","643.8"],["Industrial","220.1","","","19%","","184.7","","","6%","","174.3"],["Total revenues, net","$","893.4","","","4%","","$","859.4","","","5%","","$","818.1"],["Medical as a percentage of total revenues","75.4","%","","","","78.5","%","","","","78.7","%"],["Industrial as a percentage of total revenues","24.6","%","","","","21.5","%","","","","21.3","%"]]
[[/GREPCENT_TABLE]]

    Medical revenues decreased $1.4 million in fiscal year 2023 compared to 2022 primarily due to lower sales in our China business, as well as decreased sales of digital detectors for oncology and dental applications partially offset by increased sales in X-ray tubes for CT and mammography applications.

30

Table of Contents

    Industrial revenues increased $35.4 million due to increased sales of security inspection products and digital detectors for inspection applications.

Revenues by Region

[[GREPCENT_TABLE]]
[["(In millions)","2023","","% Change","","2022","","% Change","","2021"],["Americas","$","281.8","","","3%","","$","273.3","","","2%","","$","268.5"],["EMEA","290.7","","","4%","","280.8","","","2%","","276.3"],["APAC","320.9","","","5%","","305.3","","","12%","","273.3"],["Total revenues, net","$","893.4","","","4%","","$","859.4","","","5%","","$","818.1"],["Americas as a percentage of total revenues","31.5","%","","","","31.8","%","","","","32.8","%"],["EMEA as a percentage of total revenues","32.5","%","","","","32.7","%","","","","33.8","%"],["APAC as a percentage of total revenues","35.9","%","","","","35.5","%","","","","33.4","%"]]
[[/GREPCENT_TABLE]]

    The Americas revenues increased $8.5 million in fiscal year 2023 compared to 2022 primarily due to increased sales of security inspection products, digital detectors and X-ray tubes. EMEA revenues increased $9.9 million primarily due to increased sales of security inspection products and X-ray tubes, partially offset by decreased sales in digital detectors for oncology and dental applications. APAC revenues increased $15.6 million primarily due to increased sales of X-ray tubes partially offset by a decrease in sales of digital detectors.

Gross Profit

[[GREPCENT_TABLE]]
[["(In millions)","2023","","% Change","","2022","","% Change","","2021"],["Medical","$","205.5","","","(2)%","","$","210.5","","","4%","","$","203.2"],["Industrial","84.8","","","16%","","73.0","","","7%","","68.3"],["Total gross profit","$","290.3","","","2%","","$","283.5","","","4%","","$","271.5"],["Medical gross margin","30.5","%","","","","31.2","%","","","","31.6","%"],["Industrial gross margin","38.5","%","","","","39.5","%","","","","39.2","%"],["Total gross margin","32.5","%","","","","33.0","%","","","","33.2","%"]]
[[/GREPCENT_TABLE]]

    The Medical segment gross profit decreased $5.0 million in fiscal year 2023 compared to 2022 primarily due to an increase in material costs associated with digital detectors.     

    The Industrial segment gross profit increased $11.8 million in fiscal year 2023 compared to 2022 primarily as a result of increased sales of security inspection products and X-ray tubes.

Operating Expenses

[[GREPCENT_TABLE]]
[["(In millions)","2023","","% Change","","2022","","% Change","","2021"],["Research and development","$","84.8","","","10%","","$","77.0","","","7%","","$","71.9"],["As a percentage of total revenues","9.5","%","","","","9.0","%","","","","8.8","%"],["Selling, general and administrative","$","128.4","","","9%","","$","118.3","","","(6)%","","$","125.5"],["As a percentage of total revenues","14.4","%","","","","13.8","%","","","","15.3","%"],["Operating expenses","$","213.2","","","9%","","$","195.3","","","(1)%","","$","197.4"],["As a percentage of total revenues","23.9","%","","","","22.7","%","","","","24.1","%"]]
[[/GREPCENT_TABLE]]

Research and Development

    Research and development costs for fiscal year 2023 increased to 9.5% of revenues primarily due to increased spending on material costs supporting research and development initiatives and includes $2 million in costs related to a development agreement entered into during fiscal year 2022 with a third-party company. See Note 12, Commitments and Contingencies, included in the accompanying Notes to Consolidated Financial Statements. We are committed to investing in research and development efforts to support long-term growth objectives by bringing new and innovative products to market for our customers.

31

Table of Contents

Selling, General and Administrative

    Selling, general and administrative expenses as a percentage of total revenues increased to 14.4% for fiscal year 2023 from 13.8% for fiscal year 2022 primarily due to increased compensation costs, with additional increases in external service and environmental remediation costs.

Interest and Other Expense, Net

    The following table summarizes our interest and other expense, net:

[[GREPCENT_TABLE]]
[["(In millions)","2023","","% Change","","2022","","% Change","","2021"],["Interest income","$","3.7","","","825%","","$","0.4","","","300%","","$","0.1"],["Interest expense","(29.3)","","","(26)%","","(39.8)","","","(5)%","","(42.1)"],["Other expense, net","(20.2)","","","370%","","(4.3)","","","23%","","(3.5)"],["Interest and other expenses, net","$","(45.8)","","","5%","","$","(43.7)","","","(4)%","","$","(45.5)"]]
[[/GREPCENT_TABLE]]

    Interest income increased in fiscal year 2023 compared to fiscal year 2022 primarily due to an increase in investments in marketable debt securities and other bank deposits.

    Interest expense decreased in fiscal year 2023 compared to fiscal year 2022 primarily due to the redemption of $27 million of our Senior Secured Notes in March 2022, reduced fees on the ABL Facility, and reduced interest expense due to the adoption of ASU 2020-06. See Note 1, Summary of Significant Accounting Policies, "Recently Adopted Accounting Pronouncements" for further details concerning the adoption of ASU 2020-06.

    Other expense, net increased in fiscal year 2023 compared to fiscal year 2022 primarily due to the impairment of an equity method investment, partially offset by decreased foreign exchange expense.

Taxes on Income

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["","2023","","2022"],["Effective tax rate","(55.6)","%","","30.8","%"]]
[[/GREPCENT_TABLE]]

    We had an income tax benefit of $17.4 million and an income tax expense of $13.7 million, for effective rates of (55.6)% and 30.8%, for fiscal years 2023 and 2022, respectively.

    During fiscal year 2023, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the favorable impact of the release of the U.S. valuation allowance, U.S. tax reform regarding international provisions, R&D credits, and return to provision adjustments. These favorable items were partially offset by the unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21%.

    During fiscal year 2022, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the unfavorable impact of profit in foreign jurisdictions with statutory tax rates greater than 21% and also U.S. deferred tax attributes and losses in certain foreign jurisdictions for which a valuation allowance is provided. These unfavorable items were partially offset by the favorable impact of U.S. tax reform regarding international provisions, return to provision adjustments, and R&D tax credits.

    We estimated the fiscal year 2023 GILTI (global intangible low-taxed income), BEAT (base-erosion anti-abuse tax), FDII (foreign-derived intangible income), limitations on interest expense deductions, and other components of U.S. tax reform, and have included these amounts in the calculation of the fiscal year 2023 tax provision. We made an accounting policy election, as allowed by the SEC and FASB, to recognize the impact of GILTI as a period cost if and when incurred.

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 and availability under our ABL Facility are sufficient to meet our anticipated operating cash needs for at least the next 12 months and will be sufficient to allow us to continue to invest in our existing businesses, consummate strategic acquisitions and manage our capital structure on a short and long-term basis. We are currently not aware of any trends or demands, commitments, events, or uncertainties that will result in or that are reasonably likely to result in a material change to our liquidity needs during or beyond the next 12 months. See Item 1A. “Risk Factors” for a further discussion. The maximum availability under our ABL Facility was $100.0 million as of September 29, 2023; however, the

32

Table of Contents

borrowing base under the ABL Facility fluctuates from month-to-month depending primarily on the amount of eligible accounts receivable, inventory, and real estate. As of September 29, 2023 the amount available under our ABL Facility was $88.7 million, and the ABL Facility remains undrawn. At September 29, 2023 we had total debt of $442.6 million, net of discounts and deferred issuance costs of $5.4 million.

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

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

[[GREPCENT_TABLE]]
[["(In millions)","September 29, 2023","","September 30, 2022","","$ Change","","% Change"],["Cash and cash equivalents","$","152.6","","","$","89.4","","","$","63.2","","","70.7","%"],["Certificates of deposit not included in cash and cash equivalents","1.0","","","7.2","","","(6.2)","","","(86.1)","%"],["Marketable debt securities not included in cash and cash equivalents","41.3","","","16.7","","","24.6","","","147.3","%"],["Total","$","194.9","","","$","113.3","","","$","81.6","","","72.0","%"]]
[[/GREPCENT_TABLE]]

Borrowings

    The following table summarizes the changes in our debt outstanding:

[[GREPCENT_TABLE]]
[["(In millions, except for percentages)","September 29, 2023","","September 30, 2022","","$ Change","","% Change"],["Current maturities of long-term debt"],["Current portion of other debt","$","1.5","","","$","2.1","","","$","(0.6)","","","(28.6)","%"],["Non-current maturities of long-term debt:"],["Convertible Senior Unsecured Notes","$","200.0","","","$","200.0","","","$","\u2014","","","\u2014","%"],["Senior Secured Notes","243.0","","","243.0","","","\u2014","","","\u2014","%"],["Other debt","3.5","","","4.6","","","(1.1)","","","(23.9)","%"],["Total non-current maturities of long-term debt:","$","446.5","","","$","447.6","","","$","(1.1)","","","(0.2)","%"],["Unamortized issuance costs and debt discounts"],["Unamortized discount - Convertible Notes(1)","$","\u2014","","","$","(28.7)","","","$","28.7","","","(100.0)","%"],["Unamortized issuance costs - Convertible Notes(1)","(2.5)","","","(3.1)","","","0.6","","","(19.4)","%"],["Debt issuance costs - Senior Secured Notes","(2.9)","","","(3.5)","","","0.6","","","(17.1)","%"],["Total","$","(5.4)","","","$","(35.3)","","","$","29.9","","","(84.7)","%"],["Total debt outstanding, net","$","442.6","","","$","414.4","","","$","28.2","","","6.8","%"]]
[[/GREPCENT_TABLE]]

(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.

Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal Years"],["(In millions)","2023","","2022","","2021"],["Net cash flow provided by (used in):"],["Operating activities","$","108.4","","","$","16.9","","","$","92.6"],["Investing activities","(44.9)","","","(48.4)","","","(16.2)"],["Financing activities","(0.2)","","","(23.8)","","","(32.3)"],["Effects of exchange rate changes on cash and cash equivalents and restricted cash","0.1","","","(0.2)","","","(0.1)"],["Net increase (decrease) in cash and cash equivalents and restricted cash","$","63.4","","","$","(55.5)","","","$","44.0"]]
[[/GREPCENT_TABLE]]

    Net cash provided by operating activities. Net cash provided by operating activities was $108.4 million and $16.9 million for the fiscal years 2023 and 2022, respectively. The increase in cash provided by operating activities was primarily due to a reduction in

33

Table of Contents

cash outflows for inventory and an increased collections from accounts receivable, partially offset by increased payments for accounts payable during fiscal year 2023.

    Net cash used in investing activities. Cash used in investing activities was $44.9 million and $48.4 million for the fiscal years 2023 and 2022, respectively. The decrease in cash used in investing activities was primarily due to cash receipts related to the settlement of net investment hedges and decreased purchases of property, plant, and equipment, partially offset by increased purchasing of marketable equity and debt securities.

    Net cash used in financing activities. Net cash used in financing activities was $0.2 million and $23.8 million for the fiscal years 2023 and 2022, respectively. The decrease in cash used in financing activities was primarily due to the partial redemption of our Senior Secured Notes during the fiscal year 2022.

Days Sales Outstanding

    Trade accounts receivable days sales outstanding (“DSO”) was 65 days and 68 days at September 29, 2023 and September 30, 2022, respectively. Our accounts receivable and DSO are impacted by a number of factors, including the timing of product shipments, collections performance, payment terms, the mix of revenues from different regions, and the effects of economic instability.

Material Contractual Obligations

    The following table summarizes, as of September 29, 2023, the total amount of future payments due in various future periods:

[[GREPCENT_TABLE]]
[["","Payments Due by Period"],["(In millions)","Total","","Fiscal Year 2024","","Fiscal Years 2025-2026","","Fiscal Years 2027-2028","","Beyond"],["Lease obligations","$","38.0","","","$","5.7","","","$","10.1","","","$","7.5","","","$","14.7"],["Principal payments on borrowings","448.0","","","1.5","","","202.8","","","243.7","","","\u2014"],["dpiX fixed cost commitment","3.3","","","3.3","","","\u2014","","","\u2014","","","\u2014"],["Dividends to MeVis noncontrolling interest","2.5","","","0.5","","","1.0","","","1.0","","","\u2014"],["Development and share purchase commitments","2.0","","","2.0","","","\u2014","","","\u2014","","","\u2014"],["Non-cancellable supplier purchase obligations","7.3","","","4.3","","","3.0","","","\u2014","","","\u2014"],["Total","$","501.1","","","$","17.3","","","$","216.9","","","$","252.2","","","$","14.7"]]
[[/GREPCENT_TABLE]]

    We lease office space under non-cancelable operating leases. For further information on our operating leases, see Note 3, Leases, included in the accompanying Notes to Consolidated Financial Statements.

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

    In October 2013, we entered into an amended agreement with dpiX and other parties that, among other things, provides us with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires us to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. For the remainder of calendar year 2023, we estimate that we have fixed cost commitments of $3.3 million related to this amended agreement. The fixed cost commitment for future periods will be determined and approved by the dpiX board of directors at the beginning of each calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

    In October 2015, pursuant to a Domination and Profit and Loss Transfer Agreement (the “MeVis Agreement”), we committed to grant the noncontrolling shareholders of MeVis: (1) an annual recurring net compensation of €0.95 per MeVis share; and, (2) a put right for their MeVis shares at €19.77 per MeVis share. The annual net payment will continue for the life of the MeVis Agreement, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis. As of September 29, 2023, noncontrolling shareholders together held approximately 0.5 million shares of MeVis, representing 26.3% of the outstanding shares.

    In the fourth quarter of fiscal year 2022, we entered into a development agreement and a share purchase agreement with a third-party company. For more information about these agreements, see Note 12, Commitments and Contingencies, included in the accompanying Notes to Consolidated Financial Statements.

34

Table of Contents

    The Company enters into purchase agreements with its suppliers in the ordinary course of its business for the purchase of goods and services. Some of these purchase agreements are non-cancellable and thus contractually obligate us to future cash payments.

    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. As of September 29, 2023, our estimated environmental liability for these sites is $2.8 million, net of expected insurance proceeds. For further discussion regarding our environmental obligation, see Note 1, Summary of Significant Accounting Policies, included in the accompanying Notes to Consolidated Financial Statements.

Contingencies

    From time to time, we are a party to or otherwise involved in legal proceedings, government inspections, investigations, customs and duty audits, and other claims and contingency matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. We accrue amounts for probable losses, to the extent they can be reasonably estimated, that we believe are adequate to address any liabilities related to legal proceedings as well as other loss contingencies that we believe will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision. We did not have any material contingent liabilities as of September 29, 2023 and September 30, 2022. Legal expenses are expensed as incurred.

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

Critical Accounting Estimates

    The preparation of our 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. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. Our critical accounting policies that are affected by accounting estimates include valuation of inventories, assessment of recoverability of goodwill and intangible assets, and income taxes. Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, Item 8 "Financial Statements and Supplementary Data" describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. For a discussion of how these estimates and other factors may affect our business, see Item 1A. “Risk Factors.”

Inventories, net

    Inventory is valued at the lower of cost or net realizable value. Costs include materials, labor, external service and manufacturing overhead and is computed using standard cost, which approximates actual cost, on a first-in-first-out basis. We review inventory quantities on hand and record provisions for estimated excess, slow moving, and obsolete inventory. The evaluation of the carrying value of our inventories takes into consideration such factors as historical and anticipated future sales compared to quantities on hand and the prices we expect to obtain for products in our various markets. We adjust excess and obsolete inventories to net realizable value, and write-downs of excess and obsolete inventories are recorded as a component of cost of revenues. See Note 1, Summary of Significant Accounting Policies, "Inventories, net" for further details.

Goodwill and Intangible Assets

    Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to these intangibles or to goodwill if indicators of impairment

35

Table of Contents

exist. The allocation of the purchase price from business acquisitions to goodwill and intangible assets could have a material impact on our future operating results. In addition, the allocation of the purchase price of the acquired businesses to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for those cash flows. Should conditions differ from management’s estimates at the time of the acquisition, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our operating results.

    We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The evaluation includes consideration of qualitative factors including industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. If we determine that a quantitative analysis is necessary, we perform a quantitative analysis that consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit.

    In fiscal years 2023, 2022 and 2021, we performed the annual goodwill qualitative impairment test for our two reporting units and determined that, at those times, it was not more likely than not that the fair values of the reporting units were less than their carrying amounts and accordingly recorded no impairment. We performed the annual goodwill analysis as of the first day of the fourth quarter of each fiscal year (using balances as of the end of the third quarter of that fiscal year). Significant changes in our projections of our operating results or other factors could cause us to make interim assessments of impairment in any quarter that could result in some or all of the goodwill being impaired. A future impairment charge for goodwill could have a material effect on the Company's consolidated financial position and results of operations.

Taxes on Income

    We calculate income taxes based on the tax statutes, regulations, and case law of the various jurisdictions in which we operate. Significant judgment is required in determining the timing and amounts of deductible and creditable items. The benefits of uncertain tax positions are recorded in our financial statements only after determining it is more likely than not that the uncertain tax positions would withstand challenge by taxing authorities. We periodically reassess our positions and record any changes in the financial statements as appropriate. Gross uncertain tax positions, exclusive of interest and penalties, were $1.4 million and $1.2 million as of September 29, 2023, and September 30, 2022, respectively. We believe the resolution of these matters will not materially affect our consolidated financial statements. Income taxes are described further in Note 15, Taxes on Income, of our consolidated financial statements.

    The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for the valuation of deferred tax assets represents our best estimate of future events. Changes in our current estimates, due to unanticipated market conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets. Refer to Note 15, Taxes on Income, of our consolidated financial statements for additional information on the composition of valuation allowances.

Recent Accounting Standards or Updates Not Yet Effective

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

Backlog

    Backlog is the accumulation of all orders for which revenues have not been recognized and are still considered valid. Backlog also includes a small portion of billed service contracts that are included in deferred revenue. Our estimated total backlog at September 29, 2023 was approximately $335 million.

    Orders may be revised or canceled, either according to their terms or as customers' needs change. Consequently, it is difficult to predict with certainty the amount of backlog that will result in revenues. We perform a quarterly review to verify that outstanding orders in the backlog remain valid. Aged orders that are not expected to be converted to revenues are deemed dormant and are reflected as a reduction in the backlog amounts in the period identified.

    In addition to orders for which revenues have not been recognized and are still considered valid, we have pricing agreements with many of our established customers that span multi-year periods. These pricing agreements include volume ranges under which orders are placed.

36

Table of Contents