Varex Imaging Corp (VREX) FY 2025 MD&A

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.

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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 image software processing solutions, which are critical components of a variety of X-ray based imaging equipment, and stand-alone X-ray based systems in select application areas. Our success depends, among other things, on our ability to anticipate and respond to changes in our business, the direction of technological innovation, and the demand from our customers. For additional information on our business, see Item 1 "Business".

Impact of Current Economic and Trade Environment

The current economic and trade environment remains dynamic and unpredictable. The uncertain outcome and effect of tariffs and reciprocal actions between the United States and other countries and its impact on the economic and geopolitical environment, supply chain and logistic challenges, and geopolitical tensions and local conflicts have contributed to, and may continue to contribute to, delayed customer purchasing decisions, increased tariff costs, higher inflation, fluctuations in interest rates and capital costs, supply chain disruption, increased costs of labor and materials, exchange rate volatility, increased shipping costs, and other similar effects. Additionally, a sustained United States government shutdown could negatively impact the global economy and in turn our financial condition and results of operations.

During the calendar year 2025, the United States Administration has announced and/or imposed a variety of new tariffs on imports from other countries. In response, a number of those impacted or potentially impacted countries have announced and/or

imposed retaliatory tariffs on United States imports. These actions impacted our results of operations and profitability in fiscal year 2025, particularly the bilateral United States and Chinese tariffs. Absent a de-escalation in the current trade wars, particularly the trade war between the United States and China, these tariffs have and are expected to make our products less competitive with similar product not imported from the United States, which has had and in the future is expected to negatively impact our business and financial results. Additional new tariffs, trade restrictions or other retaliatory actions aimed at specific industries, such as X-ray imaging products, could also materially impact our business. We remain committed to working with our customers to minimize the effects of the tariffs. In this regard, we are actively working to implement a number of options that could reduce the impact, including pursuing commonly utilized mitigation practices and localizing more manufacturing in the region. At this time, however, we do not anticipate these efforts will allow us to fully offset the additional costs or other negative impacts resulting from such tariffs. Considering the mitigation efforts we have in flight at this point, we are not currently planning to do any restructuring in China.

We continue to monitor potential changes in customer procurement decisions resulting from the current trade climate, along with other tariff-related actions, investigations and other activities that might negatively affect our costs or otherwise impact our business and results of operations. Furthermore, if international customers’ negative perceptions of the actions of the United States Administration influence their buying decisions, our business and results of operations could be negatively impacted.

In April 2025, the China Ministry of Commerce initiated two investigations related to medical products imported into China. One investigation relates to the impact of imports of X-ray tubes on the domestic industry and its competitiveness, and another relates to imports into China of certain medical CT X-ray tubes and tube inserts for CT devices (collectively “CT Tubes and Inserts”) originating from the United States and India. We produce CT Tubes and Inserts in the United States and export them to China, but we do not produce CT Tubes and Inserts in India. Total sales of medical X-ray tubes we import into China represented approximately 10% of our total revenue in fiscal year 2025. Both investigations were temporarily suspended in May 2025 and again in August 2025, and then both were indefinitely suspended in November 2025. If recommenced, we anticipate that the MOFCOM Investigations may take approximately one year to resolve. We are committed to complying with all applicable regulations.

In the past, we have experienced supply chain, manufacturing, and logistics challenges but these challenges have largely subsided. However, given the current tariff environment and uncertainty around how it may impact customer purchasing decisions and the timing of those decisions, supply chain and logistics challenges could re-emerge.

For additional information on risks related to tariffs and trade wars, 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 periods ending on the Friday nearest September 30. Fiscal year 2025 was the 53-week period that ended October 3, 2025, fiscal year 2024 was the 52-week period that ended September 27, 2024, and fiscal year 2023 was the 52-week period that ended September 29, 2023.

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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 27, 2024 and September 29, 2023 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 27, 2024, filed with the SEC on November 19, 2024. Our year-over-year changes, financial condition, and results of operations for the fiscal years ended October 3, 2025 and September 27, 2024 are set forth below.

Comparison of Results of Operations for Fiscal Years 2025 and 2024

Revenues, net

Medical revenues increased $10.9 million in fiscal year 2025 compared to fiscal year 2024, primarily due to increased sales of CT, oncology, and mammography of $24.6 million, partially offset by decreased sales in radiography, veterinary, and dental modalities of $13.7 million.

Industrial revenues increased $22.7 million in fiscal year 2025 compared to fiscal year 2024, primarily due to increased sales of security inspection products and X-ray tubes of $15.3 million, digital detectors of $6.0 million and other components of $1.4 million.

Revenues, net by Region

Overall revenue during fiscal year 2025 increased as compared to fiscal year 2024. During fiscal year 2025, Americas revenues increased $10.0 million due to increased security inspection products sales of $13.3 million, increased X-ray tubes sales of $4.7 million, increased other product sales of $0.7 million, partially offset by decreased veterinary sales of $4.7 million, digital detector sales of $2.2 million, and software sales of $1.8 million. EMEA revenues increased $4.5 million primarily due to increased digital detector sales of $4.3 million, other product sales of $2.4 million, and security inspection product sales of $0.9 million, partially offset by decreased veterinary sales of $1.8 million, software sales of $0.7 million, and X-ray tubes sales of $0.5 million. APAC revenues increased $19.1 million primarily due to increased X-ray tubes sales of $14.7 million, security inspection products sales of $3.2 million, digital detector sales of $1.8 million, and software sales of $0.6 million, partially offset by decreased other product sales of $1.3 million.

See Note 2, Revenue, of the Notes to the Consolidated Financial Statements for information regarding disaggregated revenue by country.

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Gross Profit

Medical segment gross profit increased $23.4 million in fiscal year 2025 compared to fiscal year 2024 primarily due to increased sales volume, increased favorable product mix, and lower material costs of $13.3 million and improved productivity of $10.1 million.

Industrial segment gross profit increased $10.2 million in fiscal year 2025 compared to fiscal year 2024, primarily due to improved sales volume and favorable product mix of $20.1 million, partially offset by decreased productivity and increased material costs of $9.9 million.

Operating Expenses

Research and Development

Research and development costs for fiscal year 2025 remained relatively unchanged at 10.8% of total revenue when compared to fiscal year 2024.

Selling, General, and Administrative

Selling, general, and administrative expenses for fiscal year 2025 decreased primarily due to a decrease in fixed cost commitments to a supplier of $3.5 million and amortization of intangibles of $3.0 million, partially offset by an increase in depreciation costs of $1.2 million.

Impairment of Goodwill

During the third quarter of fiscal year 2025, we recognized a goodwill impairment charge of $93.9 million, following a determination that the fair value of the Medical reporting unit was below its carrying value. See Note 5, Goodwill and Intangible Assets, of the Notes to the Consolidated Financial Statements of this report for further details.

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Interest and Other Expense, Net

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

Interest income increased primarily due to an increase in the average cash and cash equivalents balance being held in interest bearing deposit accounts during fiscal year 2025 as compared to fiscal year 2024.

Interest expense increased primarily due to higher interest costs in connection with the additional Senior Secured Notes issued during the first quarter of fiscal year 2025 to partially refinance our convertible senior unsecured notes that matured in June 2025 and the Revolving Credit Facility established during the final week of the second quarter of fiscal year 2024.

Other expense, net remained relatively unchanged during fiscal year 2025 as compared to fiscal year 2024.

Taxes on Income (Loss)

We had an income tax expense of $10.7 million and an income tax expense of $53.3 million, resulting in effective rates of (18.1)% and 1,066.0%, for fiscal years 2025 and 2024, respectively.

During fiscal year 2025, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the goodwill impairment that took place in the third quarter of fiscal year 2025, the unfavorable impact of U.S. deferred tax attributes and losses in certain foreign jurisdictions for which a valuation allowance is provided as well as profit in foreign jurisdictions with statutory tax rates greater than 21%. These unfavorable items were partially offset by the favorable impact of U.S. tax reform regarding international provisions, R&D credits, and return to provision adjustments.

During fiscal year 2024, our effective tax rate varied from the U.S. federal statutory rate of 21% primarily due to the unfavorable impact of U.S. deferred tax attributes and losses in certain foreign jurisdictions for which a valuation allowance is provided as well as profit in foreign jurisdictions with statutory tax rates greater than 21%. These unfavorable items were partially offset by the favorable impact of U.S. tax reform regarding international provisions, R&D credits, and return to provision adjustments.

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 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 the next 12 months. Beyond the next 12 months, our Senior Secured Notes mature in October 2027. As of October 3, 2025, the availability under our Revolving Credit Facility was $154.8 million, and we had total debt of $367.5 million, net of deferred issuance costs of $2.4 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:

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Borrowings

The following table summarizes the changes in our debt outstanding:

(1) This amount was excluded from current liabilities as it was supported by the Revolving Credit Facility and restricted cash from the proceeds of the Senior Secured Notes Add On (as defined in Note 6, Borrowings), which were expected to, and did, remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date.

Cash Flows

Net cash provided by operating activities. Cash provided by operating activities was $41.7 million and $47.3 million for fiscal years 2025 and 2024, respectively. Net cash provided by operating activities decreased $5.6 million for fiscal year 2025 compared to fiscal year 2024. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

•Net loss was $69.9 million for fiscal year 2025 compared to a net loss of $48.3 million for fiscal year 2024. The increase in net loss was primarily due to a goodwill impairment charge of $93.9 million in fiscal year 2025 and $5.3 million of higher interest expense in fiscal year 2025 compared to fiscal year 2024, partially offset by $33.6 million of higher sales compared to fiscal year 2024.

•Non-cash adjustments to reconcile net loss to net cash provided by operating activities increased $49.4 million in fiscal year 2025 compared to fiscal year 2024. The increase was primarily due to the add back related to the goodwill impairment charge of $93.9 million, partially offset by a $38.6 million reduction in deferred taxes add back in fiscal year 2025, compared to fiscal year 2024 as a result of the increase in a valuation allowance during the fiscal year 2024.

•Cash used for inventories was $46.5 million higher in fiscal year 2025, compared to the fiscal year 2024, primarily due to an increase in quantity of inventory for anticipated future demand.

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•Cash provided by accrued liabilities and other current and other long-term liabilities increased by $9.2 million in fiscal year 2025, compared to fiscal year 2024, primarily due to an increase of $16.2 million related to the timing of and estimation of certain compensation costs, partially offset by $5.5 million related to the reduction of warranty accruals.

Net cash provided by (used in) investing activities. Cash provided by (used in) investing activities was $10.3 million and $(27.5) million for fiscal years 2025 and 2024, respectively. The increase in cash provided by investing activities was primarily due to the implementation of an investment strategy to increase the Company’s cash balance to pay down the outstanding Convertible Notes that matured and were repaid in full during the third quarter of fiscal year 2025. This strategy resulted in lower purchases of short-term marketable securities and CDs of $30.4 million, increased proceeds from maturities and sales of marketable debt securities of $4.8 million, and lower purchases of property, plant, and equipment of $4.0 million.

Net cash used in financing activities. Net cash used in financing activities was $75.9 million and $3.3 million for fiscal years 2025 and 2024, respectively. The increase in cash used in financing activities was primarily due to the repayment in full of the Convertible Notes of $200.0 million, partially offset by the issuance of the Senior Secured Notes Add On of $126.9 million during the first quarter of fiscal year 2025.

Days Sales Outstanding

Trade accounts receivable days sales outstanding (“DSO”) was 62 days and 70 days at October 3, 2025 and September 27, 2024, 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 October 3, 2025, the total amount of future payments due in various future periods:

We lease office space under non-cancelable operating leases. For further information on our operating leases, see Note 8, Leases, included in the accompanying Notes to the Consolidated Financial Statements.

For further discussion regarding our borrowings, see Note 6, Borrowings, included in the accompanying Notes to the 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 and approved by the dpiX board of directors at the beginning of each calendar year. In January 2025, the Company's fixed cost commitment was determined to be $13.7 million for calendar year 2025. For the remainder of calendar year 2025, we estimate that we have fixed cost commitments of $3.4 million related to this amended agreement. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).

In August 2015, pursuant to a Domination and Profit and Loss Transfer Agreement (the “DPLTA”), we committed to pay the noncontrolling shareholders of MeVis Medical an annual recurring net compensation of €0.95 per MeVis Medical share. The annual net payment will continue for the life of the DPLTA, which we anticipate will continue for as long as we remain as the controlling shareholder of MeVis Medical. As of October 3, 2025, noncontrolling shareholders together held approximately 0.5 million shares of MeVis Medical, representing 26.3% of the outstanding shares.

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. As of October 3, 2025, our non-cancellable supplier purchase obligations totaled $3.0 million.

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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 October 3, 2025, our estimated environmental liability for these sites is $3.2 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 the 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 October 3, 2025 and September 27, 2024. Legal expenses are expensed as incurred.

See Item 3 "Legal Proceedings" of this Annual Report for additional information regarding legal proceedings and Note 16, Commitments and Contingencies, in the Notes to the 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 the Consolidated Financial Statements, Item 8. "Financial Statements and Supplementary Data" describe 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 businesses. 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 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

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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 2024 and 2023, 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).

In fiscal year 2025, changes in facts and circumstances related to a sustained decrease in our stock price, a decrease in our market capitalization, and downward revisions in our longer term forecast, which included the impact of tariffs and the MOFCOM initiating two investigations related to medical products imported into China resulted in our management determining that an indicator of possible impairment existed within our reporting units. Accordingly, we performed a quantitative impairment analysis to determine the fair values of those reporting units, using both an income approach utilizing the discounted cash flow method and a market approach utilizing the public company market multiple method. Based on the output of the analysis, we determined that the carrying amount of our Medical reporting unit exceeded its fair value. Accordingly, we recorded a $93.9 million impairment charge to our Medical reporting unit within impairment of goodwill in the Consolidated Statements of Operations during the fiscal quarter ended July 4, 2025. Refer to Note 5, Goodwill and Intangible Assets, of our Consolidated Financial Statements for additional information. 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 $1.3 million and $1.6 million as of October 3, 2025, and September 27, 2024, respectively. We believe the resolution of these matters will not materially affect our consolidated financial statements. Income taxes are described further in Note 12, Taxes on Income (Loss), in our Notes to the 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 business conditions, governmental legislative actions or events, could have a material effect on our ability to utilize deferred tax assets. The valuation allowance balances were $79.4 million and $74.7 million as of October 3, 2025 and September 27, 2024, respectively. Refer to Note 12, Taxes on Income (Loss), of our Consolidated Financial Statements for additional information on the composition of valuation allowances.

Compensation Recovery Analysis

As disclosed in more detail in “Revision to Prior Period Financial Statements” in Note 1, Summary of Significant Accounting Policies, of the accompanying Notes to the Consolidated Financial Statements, the Consolidated Financial Statements include the correction of an error to previously issued financial statements that required a recovery analysis of incentive-based compensation received by our executive officers under the Varex Imaging Corporation Compensation Recovery Policy filed as Exhibit 97 to this Annual Report. We have determined that no recovery of incentive-based compensation is required as the correction resulted in no changes to the performance metrics used to determine incentive-based compensation for executive officers during any of the applicable completed fiscal years.

Recent Accounting Standards or Updates Not Yet Effective

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

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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 October 3, 2025 was approximately $262 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.