Varex Imaging CorpVREX
Varex Imaging Corp Income Taxes Disclosure
TAXES ON INCOME (LOSS)
Income tax expense or benefit is based on reported income or loss before income taxes. Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. Valuation allowances are recognized to reduce deferred tax assets to the amount that is more likely than not to be realized.
The income tax expense (benefit) was as follows:
| Fiscal Years | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Current income tax expense: | |||||||||||||||||
Federal | $ | 4.6 | $ | 9.7 | $ | 9.8 | |||||||||||
State and local | 0.5 | 0.6 | 0.3 | ||||||||||||||
Foreign | 6.3 | 4.6 | 12.6 | ||||||||||||||
Total current | $ | 11.4 | $ | 14.9 | $ | 22.7 | |||||||||||
Deferred income tax (benefit) expense: | |||||||||||||||||
Federal | $ | — | $ | 38.5 | $ | (37.9) | |||||||||||
State and local | (0.2) | (1.1) | (0.2) | ||||||||||||||
Foreign | (0.5) | 1.0 | (1.2) | ||||||||||||||
Total deferred | (0.7) | 38.4 | (39.3) | ||||||||||||||
| Income tax expense (benefit) | $ | 10.7 | $ | 53.3 | $ | (16.6) | |||||||||||
The (loss) income before taxes are generated from the following geographic areas:
| Fiscal Years | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| United States | $ | (25.8) | $ | (15.1) | $ | (6.2) | |||||||||||
| Foreign | (33.4) | 20.1 | 37.5 | ||||||||||||||
| (Loss) income before taxes | $ | (59.2) | $ | 5.0 | $ | 31.3 | |||||||||||
The effective tax rate differs from the U.S. federal statutory tax rate as a result of the following:
| Fiscal Years | |||||||||||||||||
| 2025 | 2024 | 2023 | |||||||||||||||
Federal statutory income tax rate | 21.0 | % | 21.0 | % | 21.0 | % | |||||||||||
State and local taxes, net of federal tax benefit | (0.4) | (7.5) | 0.3 | ||||||||||||||
| Impairment of goodwill | (33.3) | — | — | ||||||||||||||
| Statutory rate change impact on prior year deferreds | — | (0.3) | — | ||||||||||||||
| Return to provision | 1.3 | (30.9) | (4.7) | ||||||||||||||
Research and development credit | 5.0 | (41.9) | (8.4) | ||||||||||||||
| Foreign rate difference | (3.0) | (1.6) | 6.3 | ||||||||||||||
| Share-based compensation | (2.7) | 43.6 | 3.8 | ||||||||||||||
| Change in valuation allowance | (7.1) | 1,101.1 | (65.7) | ||||||||||||||
| U.S. tax reform - international provisions | 2.1 | (32.0) | (9.2) | ||||||||||||||
| Other | (1.0) | 14.5 | 3.6 | ||||||||||||||
Effective tax rate | (18.1) | % | 1,066.0 | % | (53.0) | % | |||||||||||
During fiscal year 2025, the Company's 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 provision, R&D credits, and return to provision adjustments.
The Organization for Economic Cooperation and Development enacted model rules for Pillar Two, which became effective for the Company in fiscal year 2025. However, on June 28, 2025, the G7 released a joint statement that it had reached an understanding with the United States for a side-by-side system based on certain accepted principles, including that U.S.-parented groups, such as ours, would be exempted from certain provisions of Pillar Two. As a result, there remains a great deal of uncertainty
as to the final Pillar Two model rules applicable to our Company and its subsidiaries. The Company has estimated its fiscal year 2025 Pillar Two tax expense, and has included these amounts in the calculation of the fiscal year 2025 tax provision.
On July 4, 2025, the OBBBA was enacted in the U.S. The OBBBA includes significant provisions, such as the permanent extension of certain expiring provisions of the Tax Cuts and Jobs Act, modifications to the international tax framework and the restoration of favorable tax treatment for certain business provisions, including the option to claim 100% accelerated depreciation deductions and qualified property, with retrospective application beginning January 20, 2025. The legislation has multiple effective dates, with the 100% accelerated depreciation deduction starting to be effective during the fiscal year ended October 3, 2025, and others implemented through future years.
During fiscal year 2024, the Company’s 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 provision, R&D credits, and return to provision adjustments.
During fiscal year 2023, the Company’s 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%.
The significant components of deferred tax assets and liabilities are as follows:
| (In millions) | October 3, 2025 | September 27, 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Inventory adjustments | $ | 4.4 | $ | 4.7 | |||||||
| Share-based compensation | 6.8 | 6.3 | |||||||||
| Product warranty | 1.6 | 2.0 | |||||||||
| Unrealized exchange gain | 3.7 | 3.0 | |||||||||
| Deferred compensation | 2.0 | 1.7 | |||||||||
| Net operating loss carryforwards | 18.6 | 18.9 | |||||||||
| Accrued vacation | 0.6 | 0.6 | |||||||||
| Accrued incentives | 0.9 | 0.3 | |||||||||
| Credit carryforwards | 4.2 | 3.6 | |||||||||
| Deferred financing fees | 0.1 | 2.5 | |||||||||
| Interest expense limitation | 1.1 | — | |||||||||
| Capitalized interest | 1.0 | 1.1 | |||||||||
| Lease liabilities | 6.4 | 7.5 | |||||||||
| Investments in privately held companies | 4.2 | 4.0 | |||||||||
| Royalty advance | 1.5 | 6.6 | |||||||||
| Research and experimentation capitalization | 37.8 | 30.8 | |||||||||
| Other DTA | 5.2 | 3.9 | |||||||||
| $ | 100.1 | $ | 97.5 | ||||||||
| Less: Valuation allowance | (79.4) | (74.7) | |||||||||
| Total deferred tax assets | $ | 20.7 | $ | 22.8 | |||||||
| Deferred tax liabilities: | |||||||||||
| Acquired intangibles | $ | (3.4) | $ | (3.9) | |||||||
| Property, plant and equipment | (5.7) | (7.1) | |||||||||
| Goodwill amortization | — | (6.0) | |||||||||
| Operating lease assets | (6.1) | (7.3) | |||||||||
| Other DTL | (8.1) | (1.2) | |||||||||
| Total deferred tax liabilities | (23.3) | (25.5) | |||||||||
| Net deferred tax liabilities | $ | (2.6) | $ | (2.7) | |||||||
| Reported As: | |||||||||||
| Deferred tax assets | $ | 20.7 | $ | 22.8 | |||||||
| Deferred tax liabilities | (23.3) | (25.5) | |||||||||
| Net deferred tax liabilities | $ | (2.6) | $ | (2.7) | |||||||
The Company is maintaining its reinvestment assertion with respect to foreign earnings for the year ended October 3, 2025, which is that all earnings prior to fiscal year 2018 are permanently reinvested for all countries, and that all earnings for Varex Imaging Sweden and Oy Varex Imaging Finland, are also indefinitely reinvested in those countries, but post fiscal year 2017 earnings in all other countries are not permanently reinvested. Due to the level of earnings available for repatriation, the treaty benefits applicable to jurisdictions in which those earnings are located, and the now favorable U.S. tax treatment of repatriated foreign earnings, the amount of deferred tax liability recorded related to the potential repatriation is approximately $0.1 million. This estimated liability is for U.S. state income taxes and foreign withholding taxes that would apply if the foreign earnings were repatriated in the form of a dividend.
As of October 3, 2025, the Company had foreign net operating loss carryforwards ("NOL") of approximately $89.6 million carried forward indefinitely.
A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. Also, net operating loss carryforwards in jurisdictions with current losses provide uncertainty for realization. As of October 3, 2025,
based on the Company’s assessment of the realizability of net deferred tax assets, it reached the conclusion that it was more likely than not that one of its Indian subsidiaries' deferred tax assets are not realizable. As a result, a valuation allowance was placed against the subsidiaries' Indian deferred tax assets. The Company also maintains full valuation allowances against the net deferred tax assets in Sweden, the United Kingdom, the United States, and Saudi Arabia, due to recent historical losses and/or the uncertainty of future taxable income to realize those net operating losses. The valuation allowance increased by $4.7 million during fiscal year 2025 and increased by $56.0 million during fiscal year 2024.
The changes in the Company's valuation allowance for deferred tax assets were as follows:
| Fiscal Years | |||||||||||||||||
| (In millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Valuation allowance balance–beginning of fiscal year | $ | 74.7 | $ | 18.7 | $ | 32.2 | |||||||||||
| Other increases | 4.7 | 56.0 | — | ||||||||||||||
| Other decreases | — | — | (13.5) | ||||||||||||||
| Valuation allowance balance—end of fiscal year | $ | 79.4 | $ | 74.7 | $ | 18.7 | |||||||||||
The Company accounts for uncertainty in income taxes following a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining whether the weight of available evidence indicates that it is more likely than not that, based on the technical merits, the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
The changes in the Company’s unrecognized tax benefits were as follows:
| Fiscal Years | |||||||||||
| (In millions) | 2025 | 2024 | |||||||||
| Unrecognized tax benefits balance–beginning of fiscal year | $ | 1.6 | $ | 1.4 | |||||||
| Additions based on tax positions related to the current year | 0.2 | 0.2 | |||||||||
| Reductions resulting from the expiration of the applicable statute of limitations | (0.5) | — | |||||||||
| Unrecognized tax benefits balance—end of fiscal year | $ | 1.3 | $ | 1.6 | |||||||
As of October 3, 2025 and September 27, 2024, the total amount of gross unrecognized tax benefits was $1.3 million and $1.6 million, respectively, all of which would affect the effective tax rate if recognized.
The Company includes interest and penalties related to income taxes within income tax expense (benefit) on the Consolidated Statements of Operations. Interest and penalties of $0.1 million, $0.2 million, and $0.2 million were included for the fiscal periods ended October 3, 2025, September 27, 2024, and September 29, 2023, respectively.
The Company files U.S. federal and state income tax returns and non-U.S. income tax returns in various jurisdictions. All of these returns are subject to examination by their respective taxing jurisdictions from the date of filing through each applicable statute of limitation period. Other periods for entities acquired are still open and subject to examination. Generally, periods prior to 2015 are no longer subject to examination.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.