Varex Imaging Corporation Aktie

Greetings, and welcome to Varex's Q2 Fiscal Year '26 Earnings Call.

[Operator Instructions]

It is now my pleasure to introduce Chris Belfiore, Director of Investor Relations. Please go ahead.

Good afternoon, and welcome to Varex Imaging's Earnings Conference Call for the Second Quarter fiscal year 2026.

With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website.

To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2026 and to the year are for the fiscal year 2026. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the second quarter of fiscal year 2026 to the second quarter of fiscal year 2025. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated.

Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current information, expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion.

On today's call, we will discuss certain non-GAAP financial measures. Our non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our second quarter earnings call. I'm pleased to say that we delivered a solid second quarter in both Medical and Industrial while strengthening our capital structure and continuing to shift our business towards advanced imaging technologies and higher-growth industrial applications.

Revenue for the quarter came in within the guidance range at $216 million. Non-GAAP gross margin was 34% and non-GAAP EPS was $0.21. I'd also like to highlight that during the quarter, we completed our debt refinancing activities, which resulted in the reduction of outstanding debt and a decrease in our annual interest expense. The resulting capital structure and reduced leverage will give us more financial flexibility to continue to invest in the business.

Let me give you some insights into sales detail by modality in the quarter compared to a 5-quarter average, which we refer to as the sales trend. We saw solid performance in our Medical segment, led by continued momentum in CT and other mid-tier X-ray sources. Sales in the CT and radiography modalities exceeded their sales trend in the quarter. Oncology and mammography modalities were in line with their respective sales trend, while fluoroscopy and dental modalities were below their respective sales trend.

I'm also happy to say that in the Medical segment, our investments in new products are resulting in increased growth in the pipeline of potential new OEM projects. Over the past 12 months, we have continued to see a steady increase in design-in discussions where our new X-ray sources and detectors products can help OEMs and systems integrators accelerate bringing new applications to market. As these project decisions move through the process, they will contribute to our future recurring sales growth.

Our Industrial segment delivered another solid quarter, driven by demand for our tubes, linear accelerators and detectors for nondestructive inspection applications and continued progress with implementation of our cargo security inspection systems. Our Industrial Services also posted another robust quarter with meaningful contribution to gross margin expansion, offsetting some of the inflationary cost increases that we have seen recently with certain input materials. Sales momentum in photon counting technology remained strong in the quarter, primarily driven by robust demand in food inspection services.

We also saw good sales results of industrial flat panel detectors for general nondestructive inspection. Looking ahead, we anticipate that we will see new types of inspection opportunities in different industrial verticals as adoption of our flat panel detectors and photon counting detector technologies continue to demonstrate benefits of speed and high resolution in nondestructive inspection.

We had a busy quarter with implementation of various previously booked orders of cargo inspection systems projects. We also booked multiple new deals in multiple countries, which included mobile inspection systems as well as car scanners, and we are continuing to develop our sales pipeline. We expect the Industrial segment to be an increasingly significant driver of growth and margin expansion for Varex. Our technologies are unlocking capabilities in nondestructive inspection and metrology applications that were previously difficult or impossible to achieve.

In early March, we attended ECR, which is the European Congress of Radiology Trade Show in Vienna, Austria. ECR is one of the largest medical meetings in Europe and the second largest radiology meeting in the world. The week-long event reinforced our view of the direction the imaging industry is headed as well as the strategic role that Varex plays within it. Not surprisingly, AI was a major focus area at ECR. Numerous presentations and demonstrations highlighted how AI was being used to advance productivity and improve clinical outcomes. Varex's technologies remain critical to enable these advances.

In radiology, AI is becoming increasingly embedded within imaging systems, driving both clinical and operational workflows. We believe that the quality, consistency and richness of imaging data is critical for AI to realizing its full potential. What we have seen in adjacent markets such as digital cameras and industrial automation is that as imaging technology matures, image processing moves closer to where the images are generated, which, in our case, would be closer to the image acquisition workstation or even the detector. Varex's tube and smart detectors can enable OEMs to design systems which can produce images that are preprocessed with AI to better enable the Agentic AI applications to direct the diagnostic steps and optimize the enterprise radiology department workflow.

Varex is well positioned to support this shift by combining advanced imaging components with connectivity-enabled solutions that improve productivity while helping address the shortage of radiologists in many emerging markets. For example, in general radiography and certain fluoroscopy applications, Varex's software solutions such as Nexus DR and Nexus DRF integrate our X-ray tubes, detectors and software to enable efficient image acquisition and seamless connectivity to cloud-based platforms for AI-driven analysis. We believe this model can help accelerate adoption of digital imaging systems in emerging markets such as India, South Asia, Africa and Latin America, where there is a significant shortage of radiology professionals.

We're also seeing increasing interest from OEMs in the data capabilities that currently exist in our high-end CT tubes. Operating information captured during imaging by our CT tubes can be used to correlate imaging parameters with image quality, predict life of the X-ray tube and related components and enable service applications to predict downtime and proactively schedule maintenance to increase system availability.

In summary, Varex's X-ray tubes and detectors continue to be well positioned to meet next generation of imaging performance and reduce cost of ownership.

Interest in photon counting continues to grow. In addition to the 2 CT customers, we're actively engaged with 8 different medical imaging OEMs developing systems using our photon counting detectors. We are seeing growing adoption across several modalities with strong OEM engagement. Some of them already have systems in the market, while others are working towards it, supporting both near-term and long-term potential sales growth for Varex. Full-body photon counting CT remains our largest long-term market opportunity with our OEM partners making steady progress towards commercialization.

At RSNA and ECR, we showcased the value of our integrated solutions, combining tubes, detectors, power generators and image processing software designed to work seamlessly together to enhance performance while lowering total cost of ownership. Overall, the trends that we saw at RSNA and ECR reinforce our view that the future of imaging will demand technologies that deliver higher performance, enable deeper clinical value and reduce cost of ownership. With the foundation of a stronger capital structure, growing pipeline of OEM engagements and increasing adoption of our advanced imaging technologies, Varex is well positioned to deliver a more consistent and higher quality growth over time.

With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Turning to results for the second quarter. Stepping back, demand across both the Medical and Industrial segments was solid, reflecting continued customer investment in our technology.

Revenues of $216 million were within our guidance range. Non-GAAP gross margin of 34% was at the high end of the guidance and non-GAAP EPS of $0.21 was in line with expectations.

Now turning to revenue details. Compared to the same period in fiscal 2025, total revenues increased 1%, driven by a 2% increase in medical revenue as CT sales remained strong in the quarter. Industrial revenue increased 1% with solid performance in cargo security systems and continued momentum in photon counting. Medical revenues were $156 million and Industrial revenues were $60 million, representing 72% and 28% of total revenues, respectively.

Now analyzing regional performance. Americas grew 13%, driven by the strength in CT and our Industrial segment. EMEA declined 16% and APAC increased 8% year-over-year. Sales volume to China held steady, contributing 15% of total revenues, underscoring the continued resilience of our health care market position there.

Let me now cover our results on a GAAP basis. Second quarter gross margin was 34%, down 240 basis points year-over-year. Operating expenses were $58 million, up $4 million year-over-year. We reported operating income of $14 million, net loss of $8 million and GAAP EPS loss of $0.19 per diluted share based on fully diluted 42 million shares.

Now moving on to non-GAAP results for the quarter. Gross margin in Q2 was 34% at the high end of our expectations, driven by favorable product sales mix. Gross margins were down 240 basis points year-over-year, primarily driven by higher costs incurred during the quarter compared to last year. R&D spending was $22 million, in line with Q2 '25 and representing 10% of revenues. SG&A expense was $32 million, up $2 million from Q2 of 2025 and representing 15% of revenues. The primary driver of the increase in SG&A was related to continued investments in our growth initiatives.

Operating expenses totaled $54 million, an increase of $3 million year-over-year and represented 25% of total revenue. Operating income was $19 million, a decrease of $7 million year-over-year, and operating margin was 9% of revenue compared to 12% in Q2 '25.

In our other income and expense line, we recorded a noncash charge of $1.8 million due to a drop in share price related to our equity investment in publicly traded Micro-X shares. Tax expense was $419,000, down $2 million year-over-year. Q2 tax rate of 5% was low due to discrete items as well as reduced tax rate expectations of 20% for the full fiscal year 2026.

Net earnings were $9 million or $0.21 per diluted share compared to $0.31 in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $42 million.

Now turning to the balance sheet. Accounts receivable increased by $2 million and days sales outstanding decreased by 2 days to 62 days. Inventory increased $19 million to $347 million and days of inventory increased by 6 days to 220 days. Accounts payable increased by $18 million due to timing of payments and days payable increased 10 days to 61 days.

Now moving to debt and cash flow information. Net cash outflow from operations was $2 million in the quarter. We ended the quarter with cash, cash equivalents and marketable securities of $88 million, down $37 million compared to the first quarter of 2026. The decrease in cash was primarily the result of our debt refinancing in March. As Sunny noted earlier, we are excited to have successfully closed the new credit agreement and redeemed our senior secured notes during the quarter, strengthening our balance sheet and improving our cost of capital. The reduced debt and lower interest rates will improve financial flexibility, support improved free cash flow generation and enable continued investment in our core business while prioritizing long-term shareholder value creation. Gross debt outstanding at the end of the quarter was $351 million and debt net of $88 million of cash, cash equivalents and marketable securities was $263 million.

Adjusted EBITDA for the quarter was $27 million or 12% of sales. Our trailing 12-month adjusted EBITDA was $118 million, and our net debt leverage ratio was approximately 2.2x adjusted EBITDA on a trailing 12-month basis.

Now moving on to the business outlook. Before providing guidance for the third quarter, I want to highlight that we are modifying our guidance practice to start providing an annual view. Also, please note that our current guidance excludes the effects from the IEEPA tariff refund. For the second half of fiscal 2026, we expect revenue to be up approximately 3% compared to the same period of fiscal 2025. We expect revenue to benefit from continued strength in CT, momentum in industrial photon counting and progress in implementation of cargo systems. As a result, we expect full fiscal year 2026 revenue to be in the range of $860 million to $880 million and non-GAAP EPS to be in the range of $0.80 to $1.

Going forward, our intention is to provide full year guidance. The other assumptions for the annual guidance are shown in the slide here. Guidance for the third quarter is as follows: revenues are expected between $210 million and $225 million. Non-GAAP earnings per diluted share are expected between $0.15 and $0.30. Our expectations are based on non-GAAP gross margin of 33% to 34%, non-GAAP operating expenses of approximately $54 million, interest and other expense on a net basis in a range of $6 million to $7 million, tax rate of about 23% for the third quarter and non-GAAP diluted share count of about 42 million shares.

I would now like to hand the call back to Sunny for some closing thoughts before beginning our Q&A session.

Thank you, Sam. Overall, we're very pleased with the solid first half of fiscal 2026. Looking ahead, we're encouraged by the depth and quality of engagement with our medical customers, particularly around innovation and integration of our technologies into their next-generation imaging systems. On the industrial side, our close collaboration with customers continues to drive new applications across a diverse set of end markets, including oil and gas, food inspection and security screening.

Across both business segments, this level of engagement reinforces our confidence in the durability of our customer relationships and the long-term opportunities ahead. None of this progress would be possible without the dedication of our employees and partners around the world, and I want to sincerely thank them for their continued commitment. Your efforts are critical to advancing our strategy and strengthening the future of Varex.

With that, we will now open up the call for your questions.

And the first question comes from the line of [ Jacob Malajnik ] with Oppenheimer.

Jacob on for Suraj here. Maybe just to start off with a question on the effect of the current macro environment. Given the Middle East conflict and its subsequent impact on regional logistics and energy costs, combined with the tightening memory supply, I guess, how are you insulating your costs and lead times? And specifically, are you seeing any pricing pressure or constraints for your memory-intensive components?

Jacob, so first on the -- let me address the cost of certain components like memory chips. The only part of our business where we depend on certain memory chips is in our detectors business, and we have been able to procure them, although the costs have gone up. But our consumption of memory chips isn't extraordinarily large. We've been able to procure what we need for now and have a good buffer stock. It has cost us some money, and we've been able to offset that with other areas of business where we've had some favorability, good mix. So that's why we've been able to hold on to gross margins. But it has cost us, and we're just paying attention to it.

Secondly, in terms of other effects of logistics, et cetera, very little of our products flow through the Strait of Hormuz, right? So there hasn't been a direct impact of logistics challenges or issues to us that we've seen. Now our customers may be facing challenges, but so far, it has not directly impacted our ability to ship or our ability to fulfill business for our customers. There are some other parts and products components that are byproducts of petroleum where we've seen cost increases. But then our consumption of those parts and pieces of materials is not that high, such as plastics, epoxy and certain polymers.

But the war in the Gulf by itself hasn't done a whole -- I mean, it hasn't been much of a significant impact for us. We've been through the -- over the last 18 months, we've done -- on 24 months, we've done a lot to diversify our supply chain to regionalize our suppliers. We have a lot of redundancies. So all that is -- those are big investments we made over the last several years. All that's in a way, helping us.

Got it. Very helpful. And then maybe just one more from my end. On the India manufacturing ramp, could you quantify, I guess, the current capacity utilization at the India facility in terms of detectors? And as shipments begin to scale, how should we think about the margin tailwinds associated with this? And do you expect the facility to reach full production capacity by the end of this fiscal year? Or how do you see that going?

Yes. Thanks, Jacob. This is Sam. Yes, you're right that our detector factory in India has been completed, and we are slowly ramping up production there. Now keep in mind that given the -- given we are producing medical products over there, we need to go through regulatory procedures and get approvals, et cetera, product by product. So the ramp-up is slow, but it is definitely ramping up. At this point, I would say the utilization levels are low, but we are expecting it to pick up. And by the year-end, we are thinking that it should be materially utilized. So currently, the P&L is facing gross margin as well as an OpEx tailwind because of this situation. But I'm hoping that this tailwind becomes -- this headwind becomes a tailwind as we crossover, call it, 60%, 70% utilization by the year-end. So that's the situation there on one factory in India.

And then the other factory, which is related to tubes, we are still into the facilitization, equipment move-in and initial validation runs, et cetera. So that factory would still require some more time. It would begin to ramp towards the beginning of the next year for us.

The next question comes from the line of James Sidoti with Sidoti & Company.

Can you just talk a little bit about what's going on with inventory levels and why they were up in the quarter?

Yes. Hi Jim, this is Sam again. So yes, inventory was up in the quarter. As you know, we are investing in cargo inspection business. So we have a number of units out there at the customer site, and we are working through the acceptance procedures and stuff like that. So that is causing some increase in our inventory. At the same time, we are slowly moving raw materials, et cetera, to India to enable the ramp-up in India, particularly for detectors. So those are 2 reasons.

And then on top of that, there has been tariffs and then a little bit of memory chips. So they are also causing some inflation in inventory. At this time, as we forecast for the remaining 6 months of this fiscal year, we are expecting inventory to come down, and we are targeting about $20 million to $25 million reduction in inventory. This increase in inventory is all -- is there to support the existing customers as well as ramp up in the new business area. So from our perspective, it is a temporary buildup and then bring it down in the next couple of quarters.

And it looks like the business in China was up a couple of million in the quarter. So are we past most of the headwinds there? And should we expect revenue from China to remain about this level for the rest of the year?

Yes. So Jim, the [ meds ] we had a couple of years ago with all the audits and then followed by the confusion around their stimulus programs and then all the supply chain issues as we -- those have, as you know, worked themselves out the way we had forecasted. And what we're seeing now in China that there -- the demand side has returned to, I'd say, more normal secular type of demand as we would expect in most parts of the world. And so we had -- our sales were up 8% year-over-year in Q2, and then we also had in the first half, about 3% in China. So it was along the lines of what we had expected would happen this year.

And with regards to photon counting for the medical business, I think I heard you say that you have 2 OEMs where you relatively fall along with and you're talking to 8 others. Is that correct?

Yes. So let me clarify. So over the last several calls, we've talked about CT, photon counting for CT. Those were the 2 OEMs that I was mentioning. But I wanted to give a color beyond those 2 CT OEMs. By the way, we're seeking out -- as we've said, we need -- we'd love to get a couple of more, and we're working on that. But beyond that, in other modalities, so beyond CT, we're seeing -- there's activity with customers, active who are active, there's 8 customers who are actively engaged with us in various other modalities for different kinds of applications in CBCT applications in DR and breast imaging in a variety of areas. So the applicability of this technology is expanding beyond CT into other areas as well. And we have OEMs that have now brought some -- brought products to market, and there are others that are working actively on it.

Okay. And for the 2 that are working with CT, when do you think we'd start to see those in the field?

Yes. Those customers have not announced their launch plans yet publicly. So I really can't disclose that. All I'll say is at this point, they're still on track in a way that would still put us in line with our goals for 2029 as we had committed. But we still need -- I would love to see a couple more OEMs as well. Let me say it's -- both our OEMs are making very good, solid, steady progress. And they're trying to bring products to market that are not just a me-too of what has been done so far, but where they can position themselves strongly in the market.

And then last one from me, just kind of a general question. When issues like the increased price or cost for chips occur, do you have pricing power? Are you able to pass any of that along to your customer?

We do have pricing power in certain cases, especially what we've observed through previous situations like this, remember when we had the problem with FPGAs a few years ago, the whole industry struggled with it. We did pass on some of those costs to our customers. In this case, we ended up reacting, responding very quickly. There's different kinds of memory chips. We were able to do a couple of things where we bought ahead very quickly a certain type of memory chips that are going out. We also have products that are on the older version that wasn't impacted as severely. So this effect at this time wasn't severe enough.

But answer to your question, if it's unusual and if it's too unusual, it's going to end up costing a lot, we will pass these on. Yes.

I would like to add, Jim, that generally, our pricing and our contracts are running annual. So for the same year, it is a little bit difficult. But when the contract comes for renewal, that will definitely be taken into consideration, and we would be able to pass price increase at that time. And it is not that customer contracts get renewed on a rolling basis. So as and when they come up for renewal, we would have an ability to pass down these cost increases.

The next question comes from the line of Young Li with Jefferies.

I guess to start, last quarter, I think the results as well as the tone on the call was particularly strong, both on end markets and business trends. It seems like this quarter, it's more solid and in line. I appreciate the guidance for the rest of the year. It seems like fiscal 3Q is a little bit above consensus at the midpoint, 4Q a little bit below. Just kind of curious what's changed in the quarter that's making you sounding a bit more cautious?

Yes. I'll get it started, Young. First of all, last quarter, if you remember, before the last quarter, we were carrying -- we were coming off of some pretty messy market dynamics. So from that perspective, we saw the transition, and I was very happy. We were optimistic. And we have not lost that optimism in that sense that the market is -- the demand side is playing out just the way we had anticipated. So that's -- let me just put it that way. So this quarter as well, the same type of buying patterns continued. There was no -- nothing odd about the buying patterns in a way that would have concerned us.

So if there's any cautiousness, it's about just the general environment, but as you might have noticed, the general environment and the political environment has not impacted the demand side to the extent that -- I mean, we're not seeing that impact. So I still remain optimistic. I think we're just generally cautious about the environment, but we're not -- and the effect of the environment is largely on costs and material availability, lead times, logistics and not on the demand side of our products.

I guess maybe on industrials as well as EMEA. Those 2 segments kind of came in a little bit below expectations. Industrial, it does still sound like the inspection systems are doing pretty well. Does that sort of imply the base business is slowing a little bit? And then for EMEA, I think it's 28% of revs, probably the lowest in multiple years now. Maybe if you can expand on what's going on in that market a little bit more.

Sure. So Young, when it comes to EMEA, the reported numbers for EMEA as well as what you're saying about industrial, they are somewhat connected. One of our large customers for our linear accelerators, they had got a fairly large order last year, and we were supplying linear accelerators for that customer, and this customer is based out of Europe. And so last year, in 2025, we shipped pretty significantly. And we talked about that last year, if you would remember, and we said that we are looking forward to these linear accelerators getting out there in the field installed and then also post-installation service to resume in 18 months or so.

So from that perspective, I would say that the industrial revenue for linear accelerators was fairly strong in '25. This year, the security inspection business or we've been -- we are selling security inspection full systems in that market, and we are doing very well there. We are getting adoption. We are getting customer traction. And so that is that transition. Overall, this business is somewhat lumpy. It just goes into -- it comes and goes in steps. And as I said, last year was fairly strong for that. So that's what you are seeing, and they are somewhat connected.

Now overall industrial, I would say that this year also -- in this quarter also, it grew. Overall, industrial business grew, although not high single digits, but it did grow a couple of percentage points year-over-year. I'm saying Q2 over Q2. But overall, once you aggregate it over multiple quarters or look at it from an annual to annual perspective, that business for us is growing pretty nicely in high single digits, I would say, and we expect it to continue to do so.

Okay. Got it. Very helpful. I guess maybe one more just on the annual guidance that you guys are going to be providing going forward. I think back in fiscal '24, you guys did that for a year, and then you stopped. Now you're resuming again. What's sort of driving this decision? Do you have a different process or a lot more visibility on an annual basis? If you can expand upon that decision, that would be really helpful.

Yes. So Young, it's been always our intention to provide annual guidance. And if you go back early on when Varex became public, we were providing annual guidance. And then COVID hit and then supply chain crisis and then you would remember in the health care sector, there were situations in the China market. So all of those factors were causing quite a bit of volatility in the business and inability to forecast. So that was one of the reasons that we had suspended providing annual guidance a couple of years ago, as you remember -- as you rightly recalled.

So since then, we've been working on improving our forecasting procedures. For example, we've been asking our customers to provide us longer duration forecast, et cetera. So we've strengthened some of our procedures, and we are coming back to start to provide the annual guidance going forward.

Young, the demand side is what our forecast is driven by the demand side. And the demand side is with the supply chain crisis out of the way and all the stuff that we experienced in China out of the way, that side is -- demand side is more stable than it has been in the last few years. I would say macro is somewhat challenging right now. But within that, health care seems to be in a little bit better place. And as we look at the overall macro vis-a-vis the health care positioning and the demand for our products, particularly in X-Ray, we kind of feel the demand is stable and solid. And so we feel that we are in a position where we can go ahead and provide the guidance.

The next question comes from the line of Larry Solow with CJS Securities.

Great. I guess just a couple of follow-ups to the previous questions. I know the growth you're assuming 3%, it was essentially the same as in the first half. And it looks like it was a little -- low single digits, basically 1% medical, high single digits industrial. Obviously, a little bit of volatility quarterly. But roughly, is that kind of what you expect in the back half? It's about the same 3%. But do you expect that kind of that split low single, high single medical versus industrial and similar growth year-over-year. So I'm just curious, has your concern on -- have you become a little bit more concerned on top line? Obviously, we're all a little more concerned on just the world in general, but your macro specifically, has that changed at all?

No. I think, Larry, what you mentioned is correct in the sense that our expectation of second half versus first half and the split between medical and industrial is similar. So there is -- we are not choreographing any message that the split or the rates in the second half versus the first half between the medical and industrial will be very different from each other. So it's pretty much going to follow. We expect to follow a similar pattern.

Okay. And you haven't lost your confidence. Maybe last quarter, you did sound a little more pumped up. So I know you spoke about some of your products, but it doesn't sound like -- okay, that's fair. A couple of questions on the quarter. The noncash charge for the Micro-X shares movement, that's adjusted out in adjusted EPS, correct?

No, it is not adjusted out because part of our policy, we do not adjust that charge out.

Okay. So that's actually -- and that's in the EBITDA number, too then?

Correct. It's in EPS, EBITDA, EBIT, everything.

And how much was that?

$1.8 million, Larry, for this last quarter.

Okay. So that's basically like a mark-to-market essentially on the price, right, is that what you're doing?

That is correct.

Okay. So you don't adjust that -- so that was a couple of cents EPS then, I imagine. It was almost $2 million EBITDA. It was more than a couple of cents, right?

Actually, $0.04.

Okay. That's a big deal. Okay. All right. That's interesting. And then the OpEx was a little bit higher than you expected. It was $54 million, you had guided to $52 million. Anything in there in particular?

Nothing in particular. Larry, we've talked about in the past that we are fully funding a number of our growth initiatives. And so sometimes in R&D and channel -- R&D for medical and then the channel development activities and initiatives that we have for the Industrial segment, sometimes they don't come in exactly as one planned. So there's a little bit of a movement there. But we are investing there. So they came in a little bit sooner. So that's the reason for that, yes.

Okay. So you don't -- I know you didn't give -- you normally were giving margin guidance too, but you're not giving, I guess, anymore. Is that right? Or you didn't give it this quarter at least?

Which margin guidance, Larry?

The Q3 guidance. Did you give OpEx guidance? Did I miss that?

Ye. It is there on the slide, Larry. We did provide.

I'm sorry, I just didn't have the slides. That's my issue. Okay. So you're expecting -- this is a little bit of an aberration, but you don't -- as revenue grows even over the next quarter over the next several years, your OpEx, you have some -- you showed some pretty good leverage there, right, on the SG&A line. Is that?

Yes. So as we are funding these initiatives, we are spending through OpEx. But as these initiatives turn into revenue, we are expecting very good operating leverage to drop through, so the headwind should become a tailwind.

Can you just give us any update just on the cargo screening? I think you mentioned it briefly in your prepared remarks, and I don't think you're going to provide bookings anymore on a quarterly basis, but can you just give us an anecdotal update, that would be great.

Yes. So we've been booking deals consistently. And what I'm happy about is that these are well distributed from new prospects, new customers, new geographies, new products. And so we're seeing good traction with closing deals. The pipeline is pretty hefty and it's big. We're getting -- continuing to see deals very, very -- I'd say we feel very good about our visibility to deals. We had called into it. And this is a lumpy business and tender-driven. So it's hard to give any kind of visibility to that in forward-looking. So we're not doing that. But I'm very happy with the progress we're making there. I'm very happy with the way the installations are going. I'm very glad to see our ability to put out many of our new products. I mentioned the Car scanner. We're very happy to see some new Car scanner deals sales in Q2. So it's ramping up the way we had anticipated, and we're ramping up our production implementation delivery the same way as well. So part of the OpEx and part of the inventory is in the fact that we're making these investments in growth.

Ladies and gentlemen, this concludes the question-and-answer session, and I'll hand the floor back over to Chris Belfiore for closing remarks.

Thank you for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of the quarterly conference call will be available through May 21. Thank you, and goodbye.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Greetings, and welcome to the Varex First Quarter Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions].

It's now my pleasure to turn the call over to Christopher Belfiore, Director of Investor Relations. Christopher, please go ahead.

Good afternoon, and welcome to Varex Imaging's earnings conference call for the first quarter of fiscal year 2026. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website.

To simplify our discussion, unless otherwise stated, all references to the quarter are for the first quarter of fiscal year 2026 and to the year are for the fiscal year 2026. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the first quarter of fiscal year 2026 to the first quarter of fiscal year 2025. I would like to remind you that Q1 of 2025 was a 14-week quarter. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated.

Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current information, expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Items 1A, Risk Factors of our quarterly reports on Form 10-Q, and our annual report on Form 10-K. The information in these discussions speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion.

On today's call, we will be discussing certain non-GAAP financial measures. Beginning with the first quarter of fiscal 2026, we changed our non-GAAP policy with regard to equity method investments. We will provide more detail later in the call. A reconciliation of these changes is presented at the back of our earnings release and slide presentation for the quarter. Our non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our first quarter earnings call. I'm very pleased to announce a strong start to the year. First quarter revenue was $210 million, up 5% year-over-year and towards the high end of our guidance. Growth in the quarter was driven by strength in our cargo systems business, which contributed to a 17% year-over-year increase in Industrial segment revenue. Our Medical segment performance was stable year-over-year in what is typically our seasonally light quarter with continued strength in CT and growing engagement around next-generation system designs. Non-GAAP gross margin of 34% in Q1 was at the high end of our guidance, benefiting primarily from a favorable product sales mix in the quarter.

Looking at a year-over-year comparison, total revenue was up 5% with Medical segment flat compared to last year and Industrial segment up 17%. Non-GAAP EBITDA of $29 million was up 12% compared to the same quarter last year. Non-GAAP EPS in the first quarter was $0.19, up $0.09 compared to $0.10 last year.

Let me give you some insights into sales detail by modality in the quarter compared to 5-quarter average, which we refer to as the sales trend. Our Medical segment performed well in the quarter, driven by solid demand for X-ray sources, particularly in high-end CT as well as digital detectors. Customer activity and sales pipeline development around new platforms continued to gain momentum. Mammography modality exceeded its sales trend in the quarter. CT, fluoroscopy and radiography modalities were in line with their respective sales trends, while dental and oncology modalities were below their respective sales trend.

Our Industrial segment delivered another solid growth quarter with broad-based strength across multiple platforms and verticals. Global demand for security screening remains strong, driving growth in both cargo security inspection systems and components. We also continue to see positive momentum in our nondestructive testing and inspection business, supported by strength in our high-energy linear accelerators and X-ray tube products, both of which are used in nondestructive testing applications. In addition, demand for photon counting detectors was solid across several industrial verticals and drove growth in our food inspection products.

Overall, the Industrial segment remains an attractive growth opportunity for the company. We are collaborating closely with customers to address complex inspection problems by using X-ray imaging in real-time manufacturing and finding solutions that were previously difficult or impossible to achieve.

At the beginning of December, we attended RSNA, the Radiological Society of North America's Annual Meeting. This is the world's largest medical imaging division and brings together over 38,000 radiology professionals and medical imaging OEMs from all over the world. RSNA is one of the most important events on our calendar each year because of the deep and broad engagement it enables with our customer base. We use the conference to showcase our newest technologies and more importantly, to work with customers on how these innovations can be designed into their current platforms and future systems.

We held more than 150 customer meetings focused primarily on advancing design win opportunities and opportunities to upgrade their systems to our latest technologies. These meetings underscored increased customer engagement with a meaningful emphasis on innovation-driven discussions across all modalities. We view this increased level of activity as a positive signal for future demand. These engagements are translating into a growing pipeline of new business opportunities, which typically last for multiple product cycles and support durable long-term revenue streams.

We felt a very strong reception to our new technologies, which reinforces our confidence that the investments we've made in innovation are positioning Varex well for sustained growth as customers move from technology evaluation to system development and ultimately commercialization. This year at RSNA, we introduced a more integrated modality-based approach to our value proposition.

Across key modalities, including CT, general radiography, fluoroscopy, mammography, we showcased Varex's offerings, including tubes, detectors, generators, connectors, heat exchangers and software as fully integrated imaging chain assemblies and subsystems rather than as individual components. This modality-based approach represents a meaningful evolution in how we engage with customers. By taking a modality-based approach, we're able to deliver best-in-class performance and attractive total system economics while also enabling potential faster time to market for customers looking to bring new and differentiated imaging applications to market. We believe this approach further strengthens our position as a strategic partner to our customers and enhances our ability to drive long-term recurring revenue through deeper system-level design wins. We are encouraged by the enthusiastic receptivity to our approach, and we will continue these discussions with our customers with the intention of securing new design wins in fiscal '26 and beyond.

Our Lumen family of radiographic detectors, combined with our Nexus software was a significant topic of discussions at RSNA. Customers and prospects were very interested in our regional manufacturing strategy, particularly with our factories in India, which they see as critical for their future growth in the region. We also had numerous conversations about our cutting-edge photon counting technologies and the progress that we are making there. For the past few years, our customers have been busy dealing with the fallout from COVID, chip shortages, followed by supply chain crisis and had to deploy R&D and growth capital towards taking care of maintenance problems. During the 2025 RSNA, we felt that our customers were returning to new product planning mode. And at this RSNA, we felt even more so that our customers were actively engaged in new product development and were in commercialization mode.

In summary, RSNA was very positive for us and gave us a good feel for our customers' vision and where they were headed. While these design-in opportunities typically convert over time, several of the discussions we had at RSNA are tied to platforms that are currently already under development, particularly in general radiography modality. We are confident that some of these opportunities will convert this fiscal year with the revenue opportunities as early as fiscal '27.

Moving to our Industrial segment. Our cargo security systems business continues to be a bright spot with multiple installations during the quarter in various countries. In addition, during the quarter, we received multiple orders for different products, including repeat orders from an existing customer. Our customer base has long considered our linear accelerator technology as best-in-class, and we view repeat orders like this as a testament to our success of deployment and performance of our new systems. We remain engaged on many tender offers and look forward to continued sales success in our cargo systems business in fiscal '26 and beyond.

With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Turning to results for the first quarter. Our performance exceeded expectations. Revenues of $210 million were toward the high end of our guidance. Non-GAAP gross margin of 34% and non-GAAP EPS of $0.19 were also at the high end of expectations. Compared to the same period in fiscal 2025, total revenues increased 5%, driven by a 17% increase in Industrial, primarily from cargo system shipments. Medical revenue was stable compared to last year. Medical revenues were $145 million, and Industrial revenues were $65 million, representing 69% and 31% of total revenues, respectively.

Analyzing regional performance. Americas grew 17%, driven by the strength in our Industrial segment related to the cargo systems business, EMEA rose 7% and APAC decreased 7% year-over-year. Sales volume to China remained steady, contributing 17% of total revenues, underscoring the continued resilience of our health care market position.

Let me now cover our results on a GAAP basis. First quarter gross margin was 33%, down 100 basis points year-over-year. Operating expenses were $54 million, down $3 million year-over-year. We reported operating income of $15 million, net income of $2 million and GAAP EPS of $0.05 per diluted share based on fully diluted 42 million shares.

Before I discuss Q1 non-GAAP results, I want to highlight a recent change to our non-GAAP policy. We review our non-GAAP policy annually to determine whether any changes should be made. As a result of this review, we've modified our non-GAAP policy to exclude gains and losses from our equity method investments. In making this decision, we considered a strategic shift at one of our equity method investees and also the fact that we do not control operations of our equity method investments. We determined that including the results of these businesses in our non-GAAP financials no longer provides information helpful to evaluate our ongoing operations. Going forward, this is our approach to report non-GAAP results as well as guidance for future quarters. Reconciliations for each quarter and full fiscal year 2025 can be found in the back of this presentation and earnings press release.

Now moving on to non-GAAP results for the quarter. Gross margin in Q1 was 34% at the high end of our expectations, driven by favorable product sales mix. Gross margins were down 90 basis points year-over-year, primarily due to 130 basis points favorable impact from refunds of German customs duties and taxes in Q1 of '25. R&D spending was $22 million, a decrease of $1 million year-over-year and representing 10% of revenues. Please note, Q1 '25 included the final payment of $1 million for the transfer of technology from Micro-X.

SG&A expense was $30 million, down $1 million from Q1 '25 and representing 14% of revenues. Operating expenses totaled $52 million, a decrease of $3 million year-over-year and represented 25% of revenues. Operating income was $19 million, an increase of $5 million year-over-year, and operating margin was 9% of revenue, up from 7% in Q1 '25. Tax expense was $3 million, flat year-over-year. Q1 tax rate of 27% was higher than our expectations due to income distribution across entities. We continue to expect full fiscal year 2026 tax rate to be around 23%. Net earnings were $8 million or $0.19 per diluted share, up 90% from $0.10 in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were 42 million.

Now turning to the balance sheet. Accounts receivable decreased by $10 million and days sales outstanding increased by 2 days to 64 days. Inventory increased $29 million to $328 million and days of inventory increased by 34 days to 214 days. The increase in inventory during the quarter will support anticipated demand across Industrial segment, including new product ramps and cargo system deliveries. As those programs progress, our aim is to normalize our inventories. Accounts payable increased by $9 million, driven by increase in inventory and days payable increased 9 days to 51 days.

Now moving to debt and cash flow information. Net cash outflow from operations was $16 million in the quarter, primarily driven by the increase in inventory. We ended the quarter with cash, cash equivalents and marketable securities of $126 million, down $30 million compared to the fourth quarter of 2025. Gross debt outstanding at the end of the quarter was $370 million and debt net of $126 million of cash, cash equivalents and marketable securities was $244 million. Adjusted EBITDA for the quarter was $29 million or 14% of sales. Our trailing 12 months adjusted EBITDA was $127 million [Audio Gap] to outlook for the second quarter.

Guidance for the second quarter is as follows: revenues are expected between $210 million and $225 million. Non-GAAP earnings per diluted share are expected between $0.15 and $0.25. Our expectations are based on non-GAAP gross margin of 33% to 34%, non-GAAP operating expenses of approximately $52 million, interest and other expense net in the range of $7 million to $8 million, tax rate of about 23% for the second quarter and non-GAAP diluted share count of about 42 million shares.

I would now like to hand the call back to Sunny for some closing thoughts before beginning our Q&A.

Thank you, Sam. We are very pleased with the solid start to fiscal '26. Looking ahead, we're encouraged by the depth and quality of the ongoing dialogue that we're having with our Medical customers, particularly around innovation and integration of our technologies into their next-generation imaging systems. On the Industrial side, our close collaboration with customers continues to drive new applications for products across a broad range of verticals, including oil and gas, food inspection and security screening. Across both segments, this engagement reinforces our confidence in the durability of our customer relationships and the long-term opportunities ahead.

None of our progress would be possible without the dedication of our employees and partners around the world, and I want to thank them sincerely for their continued efforts. Together, we are advancing our strategy and strengthening the future of our business. Your commitment and passion continues to make a meaningful difference to Varex.

In closing, the combination of a solid execution in the quarter, strong customer engagement around new platforms and increasing modality-based subsystem collaboration gives us confidence that we are well positioned as we move forward through fiscal '26 and beyond.

With that, we will now open up the call for your questions.

[Operator Instructions] Our first question is coming from Larry Solow from CJS.

I guess, Sunny, maybe first question for you, just kind of high level. You sound pretty optimistic, I guess, certainly, the pipeline stuff sounds great. Maybe you can give us a little more color just on the current environment, where we stand today? I know you only give guidance out for 1 quarter, but you sound pretty just optimistic in general on both sides of the business. So maybe you can give us a little more at least qualitative outlook for the rest of the year.

Larry, yes, so let me start with Medical, right? First of all, in Medical, we feel like the headwinds that we faced in '24 and where we had signaled that in the second half of '25, that we would have those behind us. They're truly behind -- they feel behind us, and they continue to -- our customers continue to show orders activity. So we feel good that the problems of the past are -- we're past them. That's number one.

So in general, Medical is stable. But within that, we continue to see strength in CT. There's no real -- anything that I can call out as weakness in CT and its strength globally. And we continue to look at Medical markets, CT markets and adoption rates of CT globally. All of that projects a positive indication for us, and our relationships with our OEM customers continue to be strong. That's Medical. All other modalities in Medical -- so that said, China is stable for us. China is stable, CT is strong, and all other modalities, we see normal cyclical patterns, nothing that alarms us or anything that I can call out as extraordinary or remarkable. So from that perspective, we feel good about Medical for the rest of the year.

Same way as I look at Industrial, the order pipeline, the order activity, the engagement of our customers is very strong. We saw very strong orders for photon counting in Industrial, particularly in the food inspection space, and NDT, nondestructive testing, pipeline and activity remains strong.

And then security, of course, we've talked ad nauseam about our traction there. We're very happy with how we're seeing the security orders pipeline funnel growing there. So this is the background for me feeling good about where we are. And then to top it off, look at RSNA, the customer interactions were very different. Two years ago, in 2024, there wasn't a single R&D conversation. It was all about one problem after another after another that our customers were facing, and that tone has shifted pretty dramatically.

And so as I look at the engagement of the customers and I look at the type of design-in opportunities we're looking at, we're looking at opportunities that are not only long range. We're not just talking about photon counting, nanotubes and forward-looking technologies. We're talking about products that we currently have in the mid-tier, in the value-tier CT systems and what our customers need in emerging markets where they're going today, tomorrow. So that's why my comment was that we're expecting to close some of those in fiscal '26 with hope that we can get engaged with customers, particularly with radiographic, to ship them products in fiscal '27, '28. So this is what's going on, which makes me excited.

No, I can feel that enthusiasm. And you mentioned the India opportunity. I was going to ask you just about India, how it's progressing. I imagine it's still a little bit of a headwind to your business, but it sounds like it won't be for long, and it sounds like it's also creating a lot of opportunities for you. Maybe you can elaborate on that.

I'll let Sam comment on add-on. Let me just start by saying the India factory, as you know, for detectors is open. We're shipping detectors from there globally. These are radiographic detectors, and it is tracking with what we had intended for that site in Vizag. Pune construction is coming along very well, but we're also shipping quite a few tubes that are marked made in India to all over the world. So the activity is going on. The new factory for tubes, factory will still take a little bit of time to come online, but there's progress being made, and I feel we're on track. And it's resonating with our customers. There's not a conversation that I have with customers where India doesn't come up. And the story is the same. Hey, we want to do business in India. We're expanding to India. India is favoring systems that have local content, domestic content, made in India. So we want you to supply us from India, and that becomes a differentiator for them. So this is exactly what we had planned for, and we're seeing that start to materialize. Sam?

Yes. So like Sunny said, there's a lot of excitement from the customer side on our India operations and ability to provide the product from there, not just for India consumption, but also for global consumption. And in terms of the bricks and mortar development in India, essentially, one factory is already producing detectors, and we are in the process of ramping up that factory. And the second one, the tubes factory, before we begin to ship tubes from there, it's still another 12 months. Building is largely complete. We are now moving in the equipment. So as we move in the equipment, then it will be followed by the qualification cycle of the equipment, followed by the qualification cycle of tubes that would be produced from there, and then we would be able to export tubes from there or ship to customers in India.

So in terms of actual progress, it is tremendous in India at this time. From a P&L perspective, it is a burden in the sense we are ramping up some inventory, we are ramping up some costs on the P&L. So the P&L is seeing the burden right now, but it is truly an investment. And so that's what you're seeing right now.

Great. Sam, can I just squeeze one more in. Just on the guidance on the quarter. I know you like to give yourself a little room or just allow for a wider range. But the low end of your -- essentially, all your components, from sales down to margin, down to tax rate are actually kind of in line with this quarter, which was basically $0.20 or $0.19. So why would the low end of the EPS be $0.15 and not $0.20? What am I missing there?

Yes. So you would notice that we have reduced the range for the EPS as well as revenue. So that is one factor to play over there. Other than that, there isn't anything else there. So maybe I didn't capture your question? Or is that what you wanted to know?

Yes. No, I was just saying like you did $210 million this quarter. If I point that $210 million and like what you did this quarter, basically, it's actually above what you did in Q1. Now essentially, the low end of all your target ranges are essentially exactly what you did this quarter, and you did $0.19. So what would drive that down to $0.15, if you know what I'm saying?

Yes. So this last quarter, we produced about north of 33.5%, so 33.6% gross margin. But on the low end, we are baking it with 33% gross. So the guidance is 33% to 34%, that's why.

Next question is coming from Young Li from Jefferies.

I guess to start, can I ask about the Industrial segment a little bit. Are there any incremental disclosures on the cargo orders that you can provide? Good to hear about the wins during the quarter and the repeat order. I think last year, quarterly orders ranged from like $14 million to $25 million-ish. Is fiscal 1Q orders still in that range? And just given the recent strong performance in that business, is it possible that industrials can grow double digits for this year?

Sure. So Young, last year, in FY '25, we announced more than $55 million of cargo business that we booked. And when we announced that, we were very early in the market, and we wanted to say that we are seeing good traction in that market. Going forward, our approach towards cargo systems and orders would be that we would not be announcing on every single purchase order that we received. We just wanted to say that this last quarter, we got business from multiple customers, multiple countries, multiple units. So the traction is pretty strong.

In terms of overall number, what really matters is when we ship the product to the customer. So through revenue process, obviously, we would be talking about it in terms of our Industrial segment. So what I'm trying to say here is that you would not be seeing press release for every single purchase order from us unless it is material and then we need to disclose that specifically. So that's on the order side and how we are approaching.

And then I do want to say that this business is tender-driven, and it is also somewhat episodic in the sense some quarters we win, we can win large amounts and then there may not be any tender that may close in the next quarter, for example. So the business is somewhat lumpy. However, our goal would be to smooth the revenue as much as we can. Of course, we have to keep the customer requirements and objectives first and foremost.

And then your last question in terms of Industrial business growing double digit. Yes, the potential is certainly there. It can grow. We need to not just win cargo systems orders in a significant manner, but then also our customers would need to want to get that product before our fiscal year end. So those will be some of the puts and takes for our ability to grow double digit in Industrial this year.

Okay. Great. That's very helpful color. And then one on China. So 17% of rev, that's around $35.6 million. It's one of the bigger quarters in 2.5 years. I think you previously were expecting flattish to slight growth in fiscal '26. I guess if you just annualize the growth, it's like 10% growth or something like that. Can you maybe update us on your latest thinking on how much China can contribute in fiscal '26?

Yes. So Young, China quarterly revenues on a year-on-year basis, they were flattish, like we had said in the last earnings call. And we are expecting China to remain stable, flattish to maybe slight growth, but mostly, I would characterize it as flattish year-over-year. But keep in mind, the China dynamic in terms of quarterly seasonality, because of Chinese New Year, is always somewhat different than the rest of the business. China, typically, we've seen stronger in our fiscal Q1. And then because of Chinese New Year, our fiscal Q2, which is the March quarter, China generally is somewhat light. That is the typical pattern out of China revenues. So I would not do Q1 x4 for China. I would again say that from a full fiscal '26 China revenues perspective, we are looking at flattish to minor growth, something like that.

[Operator Instructions] Our next question is coming from Suraj Kalia from Oppenheimer.

Sunny, Sam, Chris, congrats on a nice start to the year. So gentlemen, let me start out first. Sunny, if I got your comments right, at the RSNA, you said there was a lot of discussions about general radiography. Maybe if you could parse it a little more for us, Sunny. What do you think customers are gravitating towards, more price-sensitive products or higher-end products? I guess what I'm just trying to sift through is, use this as a proxy of what the macro level conditions are and where your consumer sentiment is.

Yes. So Suraj, over the years, we had lost share in radiography. So for us, introduction of new products is a way for us to gain share back. And as you know, we created these low-cost products that are very functionally rich and very, very good products, solid products and priced very attractively with very good cost structure, also made in India. All of these things combined is what has been attracting our customers. These products, these radiographic detectors are best-in-class, absolutely best-in-class. They'll go toe-to-toe with any high-end products that we've made and some are even better.

So with that in mind, there's a lot of interest in this segment, particularly because these are very, very lightweight detectors. And we're targeting segments of the market that can take on these products quickly both as stand-alone detectors, but also combined with our software package. We have a product line called Nexus, which is an acquisition workstation, which is ideal for someone trying to bring on a new application to market. If someone wants to bring a new mobile cart to market, the combination of our tube detector, high-voltage connector and the software gives them an imaging chain that pretty much drops in, so to say. And so there was a lot of interest from customers who are looking at markets like South Asia, India, Indonesia, Latin America that look at this as part of their analog to digital conversion of their installed base, and it's a very attractive proposition for them. So there are many conversations with those types of prospects.

There are also conversations with customers who are our current customers, who are looking to expand their radiography portfolio. During COVID, there was an intense amount of purchases of mobile carts and other radiographic just regular DR systems. And then the industry went through a bit of a digestion in '21, '22, '23. And now we feel like the sort of the markets come back to being vibrant on radiographic as well. And the conversations weren't just about detectors. They were about detectors and tubes both. And the question kept coming up, when can we receive these from India? When can Made in India be ready? And so there was a lot of interest from our customers for the global markets.

Got it. And I'll pose my couple of questions together. One for you, Sam, one for you, Sunny. Sam, Med Device segment flattish. We understand the seasonality. Maybe I missed your comments about the composition within Medical Devices and the impact on gross margins. If you could just give us some color there would be great.

And Sunny, for you, obviously, the analyst prior to me also asked about China. How do you plan for China just given the daily, my word, drama that we see on a macro level. What gives you the confidence really? And any additional color if you could give us on status of photon counting sort of from a market perspective. Gentlemen, congrats again.

Thanks. Sam, do you want to go first? So Suraj, let me start with China. So we'd go crazy if we changed our plans for China based on what you see here on news every day. We look at China in 2 different ways. Think about China as a geography, right; Japan as a geography; India as a geography, and what does the end market there look like, end user demand? And we look at it from that perspective and see how we're doing, sending -- creating products and shipping products to all our OEMs who then sell into China. That's how we look at it and say, are we doing the right things, are we competitively playing the right way, are these the right products, et cetera, et cetera. And we stay focused on that as one consideration from a product management perspective.

Second, keep in mind, every Chinese OEM, and I call them Chinese OEMs, they happen to be global OEMs who happen to be based in China, they're all selling their products globally. So our traditional OEMs that we refer to as Chinese OEMs, they're not just selling in China, they're selling elsewhere. So we are heads down with them figuring out how to get our newer solutions, everything designed in for them to win in those global markets. And guess what, those OEMs are winning in global markets. They are capturing share bit by bit in global markets. And I'm talking about particularly with CT in my frame of reference right now, just as an example, is CT. These OEMs are winning CT business globally.

So I treat our OEMs that are based in Shanghai and Shenzhen and Suzhou and wherever they are, no different from our OEMs that are in Japan and the U.S. and other parts of the world. So we're really excited to continue to work with them. That has a longer horizon and a longer, I'd say, a different type of a view through the windshield versus the China demand as an end market and what's going on in there. So that's how we see China, okay? So I see Chinese OEMs as critical to our success in India. I see them as critical to our success in Latin America, South Asia, Africa, lots of places. And we look at the value-tier segment and how we can work with them closely to increase our value proposition for them and help them be successful in those markets.

Photon counting -- so Suraj, that's my response to your question on China. And by the way, regardless of what our President says or regardless of what the Chinese Premiere says, they all have their chatter, but then our relationships with the customers haven't changed much, and the orders keep coming in and orders have remained pretty stable and strong and consistent.

In terms of photon counting, we're making really good progress. All I can say at this point is the 2 OEMs that we're engaged with are knee deep in their product commercialization process. They're in that process of -- in their typical R&D cycles. I cannot comment on what stage they're in or what they're doing. All I can say is that they're heads down and charging forward full steam.

At the same time, our other OEMs are also sort of -- that have been engaging with us, continue to engage with us and are continuing to look -- they're looking at the data. And we're in this mode where there's a bit of dearth of data in the sense that until our first few OEMs come out and expose themselves and talk about their systems, you're not going to -- we're going to only be able to share with them the type of data that we generate ourselves, and that's what we're doing. And they're using that to validate and do their own assessment of the technology, and that continues to move forward. So we're continuing to build a pipeline and interest of OEMs.

Our goal is to democratize this technology. The early entrants in photon counting CT have targeted the very, very high end of the market. Our interest here is to say what can we do about a large swath of the CT market, and that's where we're headed. So think of it as we're in the game, but in a different sort of a way.

Got it.

And then, Suraj, I'll take your last question for me in terms of gross margin in Med Device. So in general, the more the complex product, then the more margins we have generally, because we are providing a lot more value in that given product. So when it comes to tubes and detectors, et cetera, in the Medical segment, generally, the products are more complex in CT and oncology modalities, so to say. So our margins are generally higher in those modalities. When it comes to RAD and dental, our margins are somewhat lower, particularly we are having some challenges in addressing the RAD market, radiographic market while producing the product out of Germany or the U.S.

So in RAD, we do have a strategy to produce these products out of India and be able to be competitive in the market while still making good gross margins there. But this is still, at least at this time, for this last quarter, it's a journey in play. And in 12 months, we hope to have a very different story around that with the help of India coming online and fully ramped up. So that's on the gross margin for various segments in Medical Device.

And then on the Industrial side, Typically, we are seeing very good traction in photon counting for Industrial applications. And it's a new product, new technology. At the same time, we've talked about a few times before in terms of our linear accelerators as well as cargo systems. Margins are a bit low when we ship the hardware, and when these products, after 18 or 24 months, they go into service, then we are able to capture a higher margin. So on the Industrial, I would say, service business, photon counting is higher margin than the rest of the business.

Next question is coming from James Sidoti from Sidoti & Company.

Sam, can you talk a little bit about inventory? It was up pretty significantly in the quarter. Is that because of the surge in orders for cargo inspection systems? And where do you think that number goes over the next few quarters?

Yes. So that's a great question, Jim. So yes, some of the increase in inventory is clearly intentional as we get ready to ramp up cargo systems. And some of our products in cargo are first-time implementation. So we also need to produce the product, ship it over to the customer site and get it site accepted. So there is a bunch of product which is finished goods and actually is at site is going through qualification and overall final testing or final acceptance is what we call it. So some of the inventory is because of that. At the same time, given the strength in the business, we are also expanding our factory in Las Vegas. And at the same time, the finished assembly for cargo systems happens in the U.K. So we are expanding at both the places in terms of inventory.

And then another reason for the increase in inventory is that we are beginning some of the qualification cycles for detectors in India. So there is inventory over there as well. So between, I would say, primarily cargo systems and the Industrial segment, that is what is driving the inventory increase. And then secondarily, it is India. And then there is another factor that there is now more tariff capitalized into the inventory. So that has also driven inventory up a little bit. So I would say our goal would be to bring this inventory down. It should get normalized. I would say inventory is probably $10 million, $15 million higher, and I would like to see it be brought down by those amounts in the next couple of quarters.

Okay. And in terms of your plans for refinancing, what's the next milestone there? And can you just give us some color on where you think you'll go, what direction?

Yes. So just to remind everybody, our high-yield debt that is due for maturity in September -- in October of 2027. And we would like to refinance it before it goes current, so more than 12 months before its maturity. So the way I'm looking at it is refinance it before October of 2026, which is this year. And so we've been working on it, and we are making good progress there. And so we'll share more information with you as and when it becomes the right time to share, but we've been working on that.

And what's the interest rate on that debt?

So right now, it is 7.875% interest rate right now. Hopefully, we are able to bring it down with the refinancing, but we'll just have to work on it and announce it and share with you as and when our decision becomes more clear.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to you for any further or closing comments.

Thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through February 24 and can be accessed at vareximaging.com/investor-relations. Thank you, and goodbye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Greetings, and welcome to the Varex Fourth Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Christopher Belfiore, Director of Investor Relations. Please go ahead, sir.

Good afternoon, and welcome to Varex Imaging's Earnings Conference Call for the Fourth quarter and fiscal year 2025. With me today are Sunny Sanyal and our President and CEO; and Sam Maheshwari, our CFO.

Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website.

To simplify our discussion, unless otherwise stated, all references to the quarter are for the fourth quarter of fiscal year 2025 and to the year are for fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the fourth quarter of fiscal year 2025 to the fourth quarter of fiscal year 2024. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated.

Please be advised that during this call, we will be making forward-looking statements, which are predictions and projections about future events. These statements are based on current information, expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date, and we assume no obligation to update or revise the forward-looking statements in this discussion.

On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

With that, I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our fourth quarter earnings call. We are pleased to report a strong finish to the year with fourth quarter revenue of $229 million, up 11% year-over-year and at the high end of our guidance.

During the quarter, we saw strong demand from our global CT customers and continued to see strength in our Industrial segment which posted its highest revenue quarter ever at $77 million.

Non-GAAP gross margin of 34% in the fourth quarter was above the high end of our guidance benefiting from the higher volume and favorable product sales mix in the quarter.

Turning to the fourth quarter results. Total revenue was up 11% year-over-year, with Medical segment up 5%; and Industrial segment up 25%. Non-GAAP gross margin of 34% was 130 basis points higher than that in the same quarter last year. Non-GAAP earnings per share in the fourth quarter was $0.37, up $0.21 compared to last year.

Looking at results for the full fiscal year, total revenue of $845 million, increased 4% compared to fiscal 2024. Medical revenue of $593 million increased 2% year-over-year and Industrial revenue of $252 million increased 10%.

Non-GAAP gross margin of 35% was 230 basis points higher than last year. Non-GAAP EBITDA at $122 million was up $33 million from $89 million last year. Non-GAAP earnings per share for the year was $0.90, up $0.35.

We ended the year with $155 million worth of cash, cash equivalents and marketable securities on the balance sheet compared to $213 million last year. Recall that during the third quarter of fiscal 2025, we used approximately $75 million of our cash to retire our convertible debt.

Let me give you some insights into sales detailed by modality in the quarter compared to a 5-quarter average, which we refer to as sales trend. Our Medical segment saw strong demand in the quarter led by global sales of CT tubes, which were above its sales trend.

Sales in fluoroscopy and radiography were also above their respective sales trends in the quarter, while sales in mammography and dental modalities were in line with their respective sales trends. Sales in our oncology modality were below its sales trend.

Our Industrial segment posted its strongest quarter ever as demand for security screening continue to drive sales of security inspection systems and components globally.

We also saw positive trends in nondestructive testing and inspection in the aerospace and defense and food inspection verticals as our customers continue to find new ways to use our technology to solve problems they were unable to address in the past.

During fiscal 2025, we advanced our key growth initiatives, including the introduction of innovative new technologies like Photon Counting for CT, a radiographic detector for the value segment from our new facility in India, and cargo systems in Industrial.

In photon counting, during fiscal 2025, we worked closely with our OEM customers as they continue to advance their product development process. We also made significant progress with our photon counting CT project with the Technical University of Munich. In addition, we completed the first stage of our India expansion plans and have begun to ramp up production and shipments of radiographic detectors from this facility.

In Industrial, we're very pleased with how our cargo inspection systems business performed in fiscal 2025. During the year, we booked over %55 million in orders and shipped over 15 systems to several countries, including Mexico, Iraq, Brazil and Saudi Arabia. We continue to be focused on establishing our sales channels for cargo inspection systems by building on our strong relationships and reputation for quality and innovation in this vertical.

With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Let me begin by sharing a breakdown of our revenues for both the Medical and Industrial segments. Providing this information annually offers valuable context for understanding our performance and the strength of our business.

Our Medical segment spans nearly all X-ray imaging modalities, underscoring the breadth of our capabilities and market presence. Total Medical sales for fiscal 2025 were $593 million with CT as the largest modality and accounting for 40% of total Medical revenue. These CT sales are primarily driven by X-ray tubes as we currently do not participate in the supply of detectors for this modality.

From a geographic perspective, the Medical segment remains well balanced across all 3 regions, reflecting our strong global partnerships with leading imaging OEM. The slight skew towards APAC in fiscal 2025 was fueled by a recovery in China and increased sales to our top customer, Canon.

In fiscal 2025, revenue from our Industrial segment grew to $252 million, serving a highly fragmented customer base. The security vertical accounted for roughly 41% of total Industrial sales, up from 40% in fiscal 2024. This growth was driven by strong performance in our security inspection systems business which gained significant traction since its introduction early in fiscal '25. Our top 10 customers were 52% of revenues in fiscal '25 and revenue from our largest customer, Cannon, grew 6% year-over-year.

Turning to the fourth quarter. Our performance exceeded expectations. Revenues of $229 million were at the high end of our guidance. Non-GAAP gross margin of 34% and non-GAAP EPS of $0.37 were above expectations.

Compared to the same period in fiscal '24, total revenues increased 11%, driven by a 5% increase in Medical and a 25% increase in Industrial, primarily from cargo system shipments. Medical revenues were $152 million, and Industrial revenues were $77 million, representing 66% and 34% of total revenues, respectively. This marks the highest quarterly contribution of Industrial revenue to total Varex history, a milestone that speaks to the strength of our diversification strategy.

Now analyzing regional performance. Americas grew 9%, EMEA rose 16% and APAC increased 8% year-over-year. Sales volume to China remained steady, contributing 14% of total revenues underscoring the resilience of our health care market position despite the tariff challenges.

Let me now cover our results on a GAAP basis. Fourth quarter gross margin was 34%, an improvement of 140 basis points year-over-year, reflecting our continued operational discipline. Operating expenses were $58 million, up $2 million compared to the fourth quarter of fiscal '24. We reported operating income of $20 million net income of $12 million and GAAP EPS of $0.29 per share based on fully diluted 42 million shares.

For full fiscal year 2025, gross margin was 34%, up 270 basis points year-over-year, demonstrating strong margin improvement. Operating expenses totaled $318 million, an increase of $94 million compared to fiscal year '24. As noted previously, the primary driver was a noncash goodwill impairment charge of $94 million taken in Q3. This resulted in an operating loss of $28 million, a net loss of $70 million and a GAAP loss per share of $1.70 based on fully diluted 41 million shares.

Now moving on to the non-GAAP results for the quarter. Gross margin in Q4 was 34%, up 130 basis points year-over-year, primarily due to the higher volume and a favorable product sales mix. For the full year, we delivered gross margin 35%, up 230 basis points year-over-year and in line with the goal we communicated at the start of the year.

R&D spending in the fourth quarter was $24 million, an increase of $2 million compared to the fourth quarter of fiscal '24 and representing 10% of revenues. R&D was $91 million for fiscal '25, an increase of $4 million compared to last year and represented 11% of revenues. For both the quarter and year, the increase in R&D was primarily due to investment in growth initiatives, including security systems in Industrial, photon counting and radiographic in Medical.

SG&A expense was $31 million, in line with the fourth quarter of fiscal '24 and representing 14% of revenues. For the full year, SG&A expense was $122 million, down $1 million compared to last year and representing 14% of revenues.

Operating expenses totaled $55 million, an increase of $2 million compared to the fourth quarter of fiscal '24 and represented 24% of revenues. For the full year, operating expenses totaled $213 million, an increase of $3 million compared to fiscal '24. Operating income was $23 million, an increase of $9 million compared to the previous year and operating margin was 10% of revenue, up from 7% in the fourth quarter of fiscal '24. For the full year, operating income was $80 million, an increase of $28 million compared to last year, and operating margin was 9% of revenue, up from 6% in '24.

Tax expense in the fourth quarter was $2 million or 14% of pretax income compared to a $2 million benefit in the fourth quarter of fiscal '24. For the full year, tax expense was $11 million or 22% of pretax income compared to $1 million in fiscal 2024 or 3% of pretax income.

Net earnings were $15 million or $0.37 per diluted share, up 131% from $0.16 in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $42 million. For the full year, net earnings were $0.90 per diluted share, up 73% from $0.52 in fiscal '24. Average diluted shares for the full year on a non-GAAP basis were 41 million shares.

Now turning to the balance sheet. Accounts receivable increased by $20 million and days sales outstanding increased by 1 day to 62 days. Inventory held steady at $299 million in the fourth quarter and days of inventory decreased by 21 days to 180 days. Accounts payable decreased by $1 million and days payable decreased 5 days to 42 days.

Now moving to debt and cash flow information. Net cash flow from operations was $8 million in the quarter. We ended the quarter with cash, cash equivalents and marketable securities of $155 million, up $3 million compared to the third quarter of 2025. Compared to fiscal '24, cash was down from $213 million, primarily due to the use of $75 million to reduce our debt in June.

Gross debt outstanding at the end of the quarter was $370 million and debt net of $155 million of cash, cash equivalents and marketable securities was $215 million.

Adjusted EBITDA for the quarter was $35 million or 15% of sales. Our trailing 12 months adjusted EBITDA was $122 million and our net debt leverage ratio was approximately 1.8x adjusted EBITDA on a trailing 12-month basis.

Over the years, our net leverage ratio has continued to come down, and this year's performance marks the lowest level we have reported as a public company. This achievement underscores our commitment to deleveraging and reflects our ability to establish a stable long-term capital structure since our spin-off from Varian.

Now moving on to outlook for the first quarter. Guidance for the first quarter is as follows: Revenues are expected between $200 million and $215 million, non-GAAP earnings per diluted share are expected between $0.05 and $0.25 of profit. Our expectations are based on non-GAAP gross margin of 32% to 34%, non-GAAP operating expenses of approximately $52 million, interest and other expense net in a range of $8 million to $9 million, tax rate of about 23% for the first quarter and non-GAAP diluted share count of about 42 million shares.

I would like to now hand the call back to Sunny for some thoughts on the year ahead.

Thank you, Sam. Looking back, we faced a challenging start to fiscal 2025 due to unpredictable global tariff situation. However, as we had anticipated, our customers' ordering patterns normalized once tariff situation stabilized.

Looking ahead, our customers in China are projecting stronger orders and sales for 2026 and compared to 2024 and 2025. Last year's uncertainty around the implementation of stimulus programs led hospitals to delay imaging equipment purchases, but this appears to be behind us.

Customers in China are now saying that they are seeing increased tender activity driven by demand for value tier and mid-tier CT systems to support rural health care expansion plans.

I'm also happy to say that we were recently informed by MOFCOM that investigations regarding CT2 pricing have been paused indefinitely.

We are intensifying our efforts to strengthen geopolitical resiliency through supply chain and manufacturing regionalization. We've also raised prices and are charging our customers for tariffs.

Together with export-oriented manufacturing and localized or regional supply chains, we have put several measures in place to position Varex better to withstand current and future trade challenges. These operational and supply chain initiatives are reinforcing our customers' confidence in Varex as a premier long-term partner. We plan to continue to invest in R&D to strengthen our competitive edge.

Looking at other future growth markets such as India, South Asia, the Middle East and Latin America, we see value tier and mid-tier products in both radiographic and CT, playing a critical role in driving our future growth. Our strategy is to lead with innovation while also maintaining cost effectiveness in these segments.

Our investments in supply chain, cost-effective product designs and expanded low-cost manufacturing in India are central to our strategy to drive growth in the value and mid-tier segments.

Our detectors factory in Vizag, India is ramping up production of our radiographic detectors, and we are expanding the site to enable even greater vertical integration to support further product cost-reduction efforts.

While we continue to advance our Photon Counting CT detector offering with our anchor OEM customers, we are engaged with additional OEMs to secure design-ins. A couple of years ago, we announced a collaboration with the Technical University of Munich to develop a technology demonstrator for Photon Counting CT system. Over the past 2 years, this project has achieved key milestones and we plan to showcase this system for customers at major trade shows in 2026.

Our goal is to demonstrate the value proposition of Photon Counting CT beyond just higher resolution images. We know that Photon Counting technology offers potential for more precise material discrimination, and we hope to be able to show clinical value and improved workflow with our capabilities.

This system will also showcase the added value of integrating multiple Varex components such as our high-power CT tubes optimized for photon counting detectors, along with our high voltage generator, connectors, heat exchangers.

By enabling customers to experience the full capabilities of our X-ray components and photon counting detector technology within a fully functional CT system, we intend to accelerate adoption of Varex's photon counting CT Detector offering.

November 8 marked World Radiography Day, commemorating Rungis discovery of X-rays 130 years ago. Since then, X-rays have largely been generated the same way using heated filament in a vacuum tube. Looking beyond photon counting, we expect nano tubes-based coal emitters to enable a new generation of X-ray sources that will drive development of new imaging applications for decades to come.

We are continuing to invest in nano tube-based coal emitters and are making progress with this technology in collaboration with several innovative OEMs who are developing novel applications.

As with any foundational technology, bringing applications to market takes time. We plan to provide more visibility to this technology at trade shows in fiscal 2026.

On the Industrial segment side, progress on our products and implementations of our systems are on track, and we're planning to scale up production capacity of our cargo systems in fiscal 2026. Recently, we shipped a batch of our VX M6 mobile cargo inspection system to our European customer, and we are now preparing to implement a rail cargo scanner for our customer in Latin America during fiscal '26.

The strong customer relationships and brand reputation that we have built over decades is giving us access to key tenders, and we have very good visibility into upcoming cargo systems opportunities through our channels.

Overall, we're happy with our performance in fiscal 2025 and are looking forward to another year of solid progress towards our strategic plans in fiscal 2026. These include exiting fiscal '26 with additional OEM design-ins for Photon Counting CT, ramped up detector production in India, introduction of new products in cargo systems, increased traction with new bendable industrial detectors and more OEM integration of nano tubes in multi-beam medical applications.

I want to thank all our employees and partners worldwide for their hard work and dedication. Their efforts and flexibility have been instrumental in delivering a solid year and driving the innovation that powers our growth initiatives in medical and industrial. Together, we're building momentum and shaping the future of our business. Thank you, everyone, for your commitment and passion for making this possible.

With that, we will now open up the call for your questions.

[Operator Instructions] Our first question is coming from Suraj Kalia from Oppenheimer.

Sam, can you hear me all right?

Yes, Suraj, how are you?

Gentleman, congrats on a strong end to the year. Sunny, Sam, one of the comments you made in your prepared remarks, I appreciate you giving us some incremental detail and maybe I got my numbers wrong, top 10 customers were 52% of sales. If I got that right, could you split it between Medical and Industrial? How should we think about the sustainability just given the customer concentration?

Yes, Suraj, thanks for your question. I can try to answer that. So the sustainability, and for a number of years, top 10 customers generally for us are in that range, 50%, 55% range. So this number is very much within the range over the last many, many years. The reason we do not break out Medical versus Industrial, Suraj, is that vast majority of those top 10 customers are Medical, and sometimes one industrial customer might be there. And if we begin to break that out, then it can become public information for that one customer, which is not something that for commercial reasons, we are doing it at this time. So that is the reason we do not break it out between Industrial and Medical.

Got it. Sunny, obviously, for the last 2 quarters, Medical has been somewhat soft but it has been more than compensated by industrials. Can you just walk us through what specifically -- are we seeing some sort of a structural shift? And as we enter '26, do you think any of the systemic forces could change as you go through the year, specifically within these 2 buckets?

Thank you, Suraj. So Suraj, Industrial as a percent of our overall sales has been growing. So it's approaching 30%, and we expect it will get up to mid-30s. So that is a trend that has been consistent. It has been consistently growing and growing faster than medical. Within medical, any movement between modalities or between China and non-China tends to be largely, I'd say, that volatility is month-to-month, quarter-to-quarter, and it moves around.

What we have been seeing, though, increasingly is given the geopolitical situation, more of our non-Chinese OEMs are asking us to ship product to them from our Chinese facilities from our facilities, Wushi so it's very difficult for us to now maintain consistency between China and ex China within the Medical segment because of that phenomenon.

Sunny forgive me, can I ask another question?

Yes.

Sunny, just -- I'm sure you've heard in the news, GE's thinking about or there's some speculation about them kind of selling or divesting their China business. Siemens Healthineers is splitting out. Any implications for Varex per se, maybe not in the short term, but how do you see -- if these happen, do you see any impact to Varex?

So vast majority of our business in China comes through our Chinese OEMs. So from that perspective, these announcements really do not have any significant implications for us, although our non-Chinese OEMs. Our global OEMs do do some business in China. So -- but we're not anticipating a significant impact from at least a couple of examples that you cited.

Secondly, our Chinese OEMs are also -- they're also increasingly commercially focused outside of China. So at the end of the day, for us, it's all about building our franchise of OEM partners and securing design wins and the geography while they start in one place, they can all end up in other place. Virtually most of our customers used to be concentrated in one geography and then they move global into other geographies. And we're seeing that out of our customers in China as well.

[Operator Instructions] Our next question is coming from Larry Solow from CJS Securities.

Great. I guess just first question, Sunny, Sam, I know you don't give full year guidance. I don't want to make too much of Q1. I know it's seasonally a little bit slower. But I guess it looks like you have like kind of flat to 8% growth of mid-single digit for the quarter, 4% to midpoint. Is there anything we could glean from the quarter in reference to the full year. Qualitatively, it sounds like things are going pretty well, both on Medical and Industrial. So just trying to get any high-level outlook for the full year that you can share would be great.

Sure, Larry. I'll let me answer that question. Yes, that's -- at this point, the demand environment looks to be solid. And we expect full year revenues to grow. We are expecting our Medical business to grow for the year. We also expect Industrial business to grow. And we are expecting medical business ex China to grow. And at the same time, we are modeling China to be flattish. So that's some additional color that I can provide you for the full year. As you know and you mentioned that we do not guide annually just for various reasons. And so that's the color I can provide.

And then trying to glean more from Q1 into the full year, I would say, for this coming fiscal year, Q1 and Q3 comps are somewhat easier for us in the sense because of tariff and this and that, business volumes followed somewhat of an unusual pattern for us in FY '25. But in FY '26, everything seems to be normal. So I would expect through the year, through various quarters, we would see normal gradual growth through the year as opposed to the up-and-down pattern that we saw in FY '25. So I would say Q1, Q3, easier comps, Q2, Q4, a little bit more difficult comps. But overall, we should see gradual growth through the year as is our typical pattern.

Got you. And the China piece, specifically, you're assuming kind of flat or as in your budget, not the full year guidance because we got sharing that with us. But it sounds like your customers in China expect growth, although I know you also mentioned that it's a little bit hard to figure out now because you're shipping from China more often than not than you were previously, but -- any thoughts on that?

Yes. It is becoming more and more difficult because our customers, global customers are changing their supply chains. But to the extent that what we can model, we are seeing China a stable, stable to slight growth. But given the tariff and all of the uncertainties around U.S.-China situation, we are modeling essentially a stable and a flattish China for the coming year.

Okay. And I want to just ask on Industrial, if I can seek one more question.

Yes, sure, go ahead.

Really strong -- yes, the quarter was strong. The year was strong. The quarter was really strong, obviously. I know a few million dollars could jack up those percentages a little bit, but also the gross margin was really strong in the quarter. Was there anything -- I'm just trying to figure out -- I know you have the stand-alone systems now, and sometimes the mix will actually drive higher revenue on the service side, so -- but that wouldn't be a lumpy higher revenue number. So any color to that, the strong performance, particularly on the margins in the quarter in Industrial?

Sure. I can try to answer that. So you're right, Larry. Industrial gross margins were quite a bit better than our expectations for this past quarter. We experienced a higher-than-usual proportion of service revenues on our linac installed base. And as you know, service business is at much higher margin than the hardware equipment gross margins that we experienced. So because of that service and time and material, which is generally unplanned, service business experience. So that drove our gross margins higher for the quarter.

So in order to kind of glean more than that, I think this is a little bit unusual for the Industrial business to produce that type of margin. We are shipping currently a decent amount of hardware. So I would say that Q4 gross margin was -- is not the norm, but we did benefit from higher as a normal service. And sorry, I was saying that when I say -- if you go back 2 years ago, our Industrial margin had much more of service component to it. And at that time, we could do 37%, 38%, 40% gross margin. And what I was going to add there is that my comment is more on the near to midterm. But in the long term, say, when you're thinking of, say, 2 years and stuff, when a lot of this hardware that we are currently shipping goes into service, that should provide a nice gross margin tailwind for us, and we would like to see our industrial margins go back up to 38%, 39%, 40% in that range.

[Operator Instructions] Our next question is coming from James Sidoti from Sidoti & Company.

So your revenue came in well above your guidance and the Street. Was there anything unusual? Did you pull any sales in from the first quarter? Or anything unusual in this fourth quarter that led to the revenue growth?

Jim, there was nothing unusual here. There always is a little bit of a push and pull driven by our own customers and their freight optimization type of a situation that can happen, but nothing to speak about in terms of pull in or push out. It's just that the demand in both the segments was strong, and we benefited from that. And also, we did ship cargo systems in this last quarter, and they can be $1 million to $2 million per system. So that can swing the numbers, 1 or 2 systems can increase the number as opposed to tubes or detectors, which are generally in the $50,000, $75,000 in that type of price range versus $1.5 million to $2 million type of a system. So that's a little bit more color behind the strong performance for Q4.

Okay. And I believe you said China was 14% of revenue. So I'd just check on my math, about $32 million compared to about $30 million a year ago. Is that fair right?

That is correct. This last quarter, China was $32 million, yes. And a quarter ago, I have $31 million that might just be rounding, Jim.

Yes. No, I was comparing to the fourth quarter of fiscal '24.

Yes. Yes.

Okay. All right. And India, it sounds like you started to ship the detectors. Do you expect those to ramp over the next couple of quarters? And when do you expect to start to ship tubes?

Okay. So when it comes to India, yes, we've started to ship detectors from India. So now the factory, as you just said, we expect it to ramp up over FY '26. So we are really excited about that, and we'll be planning to ramp that up.

And then the tubes factory, that is still under construction, although I would say it is towards the later stages of construction schedule. So once we complete the construction, then we need to bring in equipment and then qualify the equipment, run trial runs, et cetera, and make sure it's all optimized and qualified. So I would say that factory is still now 12 months away from production, from product shipments 12 to 15 months. But we've made a lot of progress there on the tube side and of course, detectors it started to ramp.

Okay. And as the business from India grows, should we see that in -- an improvement in gross margin? Or are those lower margin products?

Yes. So as you know, Jim, gross margin has many factors to it, which is overall cost, new product introductions as well as what the tariff environment is doing and, of course, customer concentration, product concentration and everything else like that. But just isolated to India. There are 2 aspects in India that are happening, some of the legacy product that we transfer from Salt Lake City to India, of course, that product will see a pickup in gross margin. So that's one aspect of India production. So that should see gross margin improvement.

However, the amount of product that we will transfer from Salt Lake City to India is mostly radiographic and it is a very small proportion of overall revenues. We are talking $10 million, $20 million, $30 million and not more than that. So that is a small amount of revenue that ships from India eventually, which is transferred from Salt Lake. But our bigger plants from India are to be more competitive in the radiographic segment -- subsegment of our Medical segment.

And so as we begin to ship from there and then as commercial, competitive and all other dynamics play out, we'll be able to provide you more color. But overall, we are thinking that the new business piece is corporate average gross margins, not necessarily a big driver for upward momentum to gross margin. So those are -- that's the 2 areas of color I can provide you as it comes to gross margin.

Separately, outside of India, as it comes to overall color for gross margin for the company, we've been doing a lot of work trying to take cost out, trying to pass tariff-related costs to our customers, and we are being successful at that. So that is helping our gross margin. And then as photon counting detector related products begin to ship and as some of our new products in cardiovascular, et cetera, begin to ship, that should provide a little bit more tailwind to our gross margin.

So I would say India impact on gross margin is there, but small. India enables us to grow in the RAD segment for Medical, but our cost reduction and other new products actually provide more of a tailwind for our gross margin as we look into late '26 and '27.

All right. And then last one for me. R&D. And I know that, that expense can move up and down. I think you had a payment to micro X in the first quarter. But in this quarter, it was up almost $3 million on a GAAP basis are from the June quarter. Was there noncash expense in there? Is that the timing of projects and how should we think about R&D? I know you said it will be up or are you going to continue to spend in R&D. But should that number continue to rise year-over-year?

So Jim, in R&D, there's a lot of expense tariffs. Engineers like to play with -- experiment with materials and everything else and also we need to buy material to build new prototypes. So -- and that is generally not on a linear basis across quarters. So it can jump up and down a couple -- $1 million or $2 million here and there. So that's what happens in R&D. But what I can say is overall, OpEx for coming year, we are planning it to be lower than this last fiscal year. So all I can say is that OpEx should be around [ 52, 53 ] a quarter for the full year as we go through the year.

Next question today is coming from Anderson Schock from B. Riley Securities.

Congrats on a really strong quarter and into the year. So you mentioned a batch of VX 6 mobile cargo inspection systems to a European customer and then implementing a rail cargo scanner this year, right, in 2026. Is there any color you can share on the size of these orders and the time line of shipping these? And I guess, how should we think about growth in 2026 compared to the $55 million in orders in 2025?

Yes. We haven't given specific color around that in that detail. We are expecting a growth year out of our cargo systems. So maybe I'll just leave it at that. I mentioned the VXM6 the cargo and the rail can as examples of new products. So at this point, for the products that we had set out to build and market in cargo systems. There were portals, gantries, mobiles, car scanners, there all of them are the products are there, and they are manufacturable and we have shipped them to customers, and they've either been installed or in the process of being installed. So that was my point about giving the color about these systems.

Okay. Got it. And then did I hear correctly that the anti-dumping investigations in China have been paused indefinitely?

Yes. There were 2 investigations. One was anti-dumping, that's a pricing matter. And the second one was an industry investigation and both have been paused without any end date, so indefinitely.

Next question is a follow-up from Larry Solow from CJS Securities.

Great. Just quickly, I know you don't guide simple products. So the $55 million in orders that you got for the systems are a little bit more than that for the security screening, is that -- I mean, I would assume majority of that has not shipped yet without giving us a number. Is that fair?

I don't know if I could say majority. Some of that has been shipped and a lot of that has not been shipped.

Okay. Or said another way, would you expect more to be shipped this year than less than in '26 and '25?

Yes. The projects that are in flight, that will be -- will come off of that backlog. And then with it during the year, there will be orders that we capture depending on the timing, it's likely some of that will also get shipped and installed in '26. We don't have a large backlog. So our cycle time from taking the order to when it gets out of our ships out of our docs is about 6 months.

Okay. Right. But that's actually pretty long for you for backlog, right? Your business generally is not a backlog...

Yes, components business, yes.

So that's probably a longer cycles for you, at least, right?

It is. But in a systems business, it's not unusual to have more than a year of that type of a lead time. But in our case, we can -- we're at that point where we can get those out fairly quickly.

Right. No, that's a good thing. And then just last question, just from a general broad brush tariff impact there is some on the gross margin on the higher cost side, right. Assuming tariffs don't -- let's probably a tough assumption, but let's say nothing changes from here. Can you just kind of walk us through the impact of tariffs? And is that -- I guess that may get better? Or as you ship more out of India and China, but I know you just color on the impact currently that would be great.

Yes. Yes, Larry. So we are getting impacted by tariffs on the gross margin line, somewhere between 100 and 150 basis points. And now if those tariffs were not there, we would be clearly at a 35% gross margin, but with the tariffs being there, and there is a lot of discussion in the Supreme Court and this and that in terms of tariff decisions. Yes, so there is a little bit of variability to it, depending upon where the outcome is. But right now, the tariffs have been flowing through our P&L and balance sheet, et cetera, and it's impacting us around 100 to 150 basis points.

And you are right, in certain situations, rerouting supply chains from higher tariffs -- sourcing from higher tariff country to lower tariff country into the United States. And then the finished goods, the only country where I am aware of is China, where there is a U.S.-sourced product getting tariffs by China at around 10% right now. So some of that benefit can be obtained by us when the tubes factory in India goes online, so that can help. But it's still maybe, I would say, at least 12 months are way on that side.

We have reached end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through December 2 and can be accessed at www.verximaging.com/investorrelations. Thank you, and goodbye.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Greetings, and welcome to the Varex Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Belfiore.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the third quarter of fiscal year 2025. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website.

To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the third quarter of fiscal year 2025 to the third quarter of fiscal year 2024. Finally, all references to the year are to the fiscal year and not the calendar year, unless otherwise stated.

Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current information, expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated.

Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today's date and we assume no obligation to update or revise the forward-looking statements in this discussion.

On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our third quarter earnings call.

We are pleased to report that third quarter revenue of $203 million was above the high end of our guidance. During this quarter, we saw continued strength in our Industrial segment and our revenue in China was better than forecasted and in line with the recent quarters.

You may recall that our Chinese customers had asked us to hold shipments earlier in the quarter when tariffs were around 145% levels. As expected, once the tariffs dropped to around 55%, customers resumed their delivery requests. I'm happy to say that we were able to accommodate their shipment needs. On a related note, concurrent with the reduction in tariffs, the Ministry of Commerce in China paused both investigations that it had launched in early April.

Non-GAAP gross margin of 34% in the quarter was above the high end of our guidance. Compared to expectations, gross margin benefited from higher volume and favorable product sales mix as well as lower impact from tariff-related expenses compared to expectations. I'm also happy to say that during the quarter, we paid off our $200 million convertible notes, which reduces our overall debt burden and simplifies our capital structure.

Turning to third quarter results. Total revenue was down 3% year-over-year with Medical segment down 4% and Industrial segment up 1%. Non-GAAP gross margin of 34% was 100 basis points higher than in the same quarter last year. Non-GAAP earnings per share in the third quarter was $0.18, up $0.04 compared to last year.

We ended the third quarter with $153 million of cash, cash equivalents and marketable securities on the balance sheet, down $73 million from the prior quarter. This decline was primarily due to the use of cash to repay our $200 million convertible note.

Let me give you some insights into sales detail by modality in the quarter compared to a 5-quarter average, which we refer to as the sales trend. Global sales of CT tubes remained strong in the quarter and were in line with the sales trend. Sales in oncology and mammography modalities were above their respective sales trends in the quarter, while sales in radiography and dental modalities were in line with their respective sales trends. Sales in our fluoroscopy modality were below its sales trend.

Demand in our Industrial segment remained strong in the quarter. Need for security screening globally continued to drive sales of cargo inspection components as well as our recently launched security inspection systems. Similar to prior quarters, strong demand for check baggage inspection and cargo screening at airports as well as non-destructive inspection in other verticals drove growth in our industrial X-ray tubes product line.

Moving to some product highlights. In Medical, we continue to make progress with our India expansion plans and expect to begin production of radiographic detectors around fiscal year-end. As mentioned previously, our objective for India is to establish low-cost manufacturing for value tier radiographic components where we face competition from Asia-based companies. We expect our factories in India to be a key enabler for driving growth in radiographic components in the coming years.

Since our announcement at RSNA, customer interest for LUMEN HD detectors continues to grow, and we are providing customers and prospects with detectors so that they can do their integration and validation. The LUMEN HD and HD Pro digital radiography detectors are our new competitively-priced family of detectors, which offer superior image quality, high reliability, fast image acquisition with lightweight and very user-friendly design and several options for workflow improvement.

As mentioned before, this product line is expected to showcase both our innovation and cost leadership and our goal is to gain share globally with these detectors. We have received all necessary regulatory licenses for the U.S. and Europe and we have begun shipping certain models from our Salt Lake City factory. We expect to begin manufacturing and shipping these products from one of our factories in India around fiscal year-end.

In photon counting, we're making progress as expected with a couple of OEMs who are integrating our technology in their new systems and these projects are moving forward. Meanwhile, we're also in different stages with other prospective customers who are exploring their design options for CT and other applications.

We recently released for general availability a photon counting detector called THOR for very high-speed industrial CT imaging. Potential applications for THOR include non-disruptive, non-destructive testing for EV batteries, semiconductor components, food and material sorting applications. This detector is engineered to operate in demanding industrial applications where both precision and high-speed imaging is a critical requirement.

On the systems side of our business, in our Industrial segment, cargo systems continue to perform well. Varex was honored to have its VXM6 mobile X-ray inspection systems on display at the Blue Light Show in London this past quarter. This is a show highlighting key technology for emergency service teams, enabling them to keep communities safe. This is precisely what the versatility of the mobile X-ray system provides, securing various sites and allowing the emergency response teams to have the flexibility and mobility of deploying the mobile X-ray unit where and when needed.

On July 14, we announced additional new orders worth $17 million for cargo inspection systems for international customers to help secure sea and land ports. These new orders bring our year-to-date bookings to over $55 million, which is a testament to our strong reputation for quality and innovation in high-energy linear accelerator-based imaging.

To date, we have installed and commissioned several systems in Saudi Arabia, Turkey, Colombia and Bangladesh. Additionally, we're in various stages of implementation of portals, gantries and mobile systems in Brazil, Ukraine, Mexico and expanding to other locations in Saudi Arabia.

A typical cargo inspection system consists of a linear accelerator, which is the source of high energy X-rays, an array of detectors, software for image acquisition, image viewing and workflow and an electromechanical framework that ties it all together. We are a vertically integrated systems provider and build each of the major components ourselves.

We also have legacy competency in building and deploying full systems, many of which are still in use by the U.S. Customs and Border Protection. We believe that being vertically integrated gives us a distinct advantage. By being able to bring innovation to each component, we believe that we can serve the cargo inspection industry better and more cost effectively. These capabilities resonate with our current and prospective customers.

Through our knowledge and legacy experience in cargo systems, supplemented by small asset purchase, we have been successful in developing systems integration capability out of our facility in Stoke-on-Trent in the United Kingdom.

At the same time, we have been investing in our Las Vegas facility that provides components to our U.K. based operations as well as for the broader security inspection industry customers. We are ramping up systems production at our facility in the U.K. and investing in customer demonstration capabilities in both the U.K. and in the U.S.

We have a well-established services team and a part supply and logistics infrastructure with global reach through whom we are installing and servicing our customers. We are prepared to expand these capabilities as the business grows.

We have been focused on developing our sales channel, which includes Varex employees, in-country agents who we have known for many years as well as several application specialists and engineers who support the sales process. We have an active pipeline of projects that we are bidding in and continue to develop our future sales funnel of prospects for new business opportunities globally.

In summary, our Industrial segment continues to perform well and we are seeing positive trends across our Medical segment despite a very challenging and constantly changing global trade environment. We expect to finish out the fiscal year on a strong note. I'd like to thank all our employees globally for their hard work and commitment in helping us deliver a solid quarter.

With that, let me hand over the call to our CFO, Sam Maheshwari.

Thanks, Sunny, and hello, everyone. Our performance in the third quarter was better than our expectations. Revenues of $203 million were above the high end of our guidance as well as non-GAAP gross margin of 34% and non-GAAP EPS of $0.18.

Comparing the third quarter to the same period in fiscal '24, revenues decreased 3%. This decrease was due to a 4% decrease in our Medical segment, partially offset by a 1% increase in our Industrial segment. Medical revenues were $142 million and Industrial revenues were $61 million. Medical revenues were 70% and Industrial revenues were 30% of our total revenues for the quarter.

Analyzing revenues by region, Americas saw an increase of 1% compared to the third quarter of fiscal '24. EMEA revenues were down 2%, while APAC decreased 8% year-over-year. In the first 6 weeks of the quarter, the Chinese customers paused receiving shipments due to unusually high tariffs. However, the subsequent pause in tariffs helped them to resume receiving their deliveries during the second half of the quarter.

We are pleased to meet the shipment needs of our Chinese customers. As a result, sales volume to China ended up fairly in line with the recent quarters and contributed 15% of total revenues for the company. Sales to China increased 4% for the quarter year-over-year.

Let me now cover our results on a GAAP basis. Third quarter gross margin was 33%, up about 100 basis points year-over-year. Operating expenses were unusually high at $148 million, an increase of $90 million compared to the third quarter of fiscal '24.

The primary driver of the increase was a non-cash goodwill impairment charge of $94 million due to a decline in the company's market cap. As a result of this non-cash charge, operating loss was reported at $81 million, net loss of $89 million and GAAP EPS loss of $2.15 per share based on a fully diluted 42 million share count.

Now moving on to non-GAAP results for the quarter. Gross margin was 34%, up 100 basis points year-over-year, primarily due to a favorable product sales mix. Compared to our guidance, gross margin benefited from lower than previously anticipated impact from tariff-related expenses.

R&D spending in the third quarter was $21 million, a decrease of approximately $1 million compared to the third quarter of fiscal '24 and representing 11% of revenue. SG&A expense was $30 million, a decrease of $1 million compared to the third quarter of fiscal '24 and representing 15% of revenues.

Operating expenses totaled $51 million, a decrease of $2 million compared to Q3 of fiscal '24 and represented 25% of revenue. Operating income was $17 million, an increase of $2 million compared to the previous year and operating margin was 8% of revenue, up from 7% in the third quarter of fiscal '24.

Tax expense in the third quarter was $2 million or 23% of pretax income compared to $352,000 or 6% in the third quarter of fiscal '24. Net earnings were $8 million or $0.18 per diluted share, up from $0.14 in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $42 million.

Now turning to the balance sheet. Accounts receivable decreased by $9 million and days sales outstanding declined by 1 day to 61 days. Inventory increased by $14 million in the third quarter and days of inventory increased by 11 days to 201 days. The increase in inventory was primarily due to raw materials and work-in-process inventory related to the strength in our industrial business. Accounts payable was flat and days payable remained at 47 days.

Now moving to debt and cash flow information. Net cash flow from operations was $8 million. We ended the quarter with cash, cash equivalents and marketable securities of $153 million, down $73 million compared to the second quarter of 2025. Reduction in cash and cash equivalents was due to the use of cash to pay off our convertible debt in June.

Gross debt outstanding at the end of the quarter was $370 million and debt net of $153 million of cash and marketable securities was $217 million. Adjusted EBITDA for the quarter was $29 million or 14% of sales. Our trailing 12 months adjusted EBITDA was $110 million and our net debt leverage ratio was approximately 2x adjusted EBITDA on a trailing 12-month basis.

Now moving on to the outlook for the fourth quarter. Guidance for the fourth quarter is as follows: revenues are expected between $210 million and $230 million, non-GAAP earnings per diluted share are expected between $0.10 and $0.30 of profit.

Our expectations are based on non-GAAP gross margin of 32% to 33%, non-GAAP operating expenses of approximately $51 million, interest and other expense net in the range of $9 million to $10 million, tax rate of about 25% for the fourth quarter and non-GAAP diluted share count of about 42 million shares.

With that, we'll now open the call for your questions.

[Operator Instructions] Our first question comes from the line of James Sidoti with Sidoti & Company.

So it sounds like you were able to fulfill the orders to China even though you only had 6 weeks to do it in the quarter. Did that result in higher than expected expenses?

Jim, this is Sunny. No, that did not result in any particular higher than normal expenses. It was just -- we have the capacity and we were able to -- we're glad we were able to fulfill that demand.

And what are your -- do you expect China sales in the fourth quarter to be on par with Q3 or possibly start to tick up?

So Jim, this is Sam. We do not guide really by region or by customer or product as such. But the demand -- overall, I can say that the demand in China is stable and healthy and it's continuing. So barring any other external event or any such situation, we would expect it to remain normal.

All right. And then when you discussed the photon counting OEM, you called out one of your industrial customers. Do you have any of your medical OEMs testing the photon counting technology?

Yes. So the big CT projects are on the medical side. On the industrial side, we have ongoing activity in several different applications. But our big focus and investment in photon counting has been for medical CT.

Right. And you've done a nice job paying down the debt with operating cash that you've kind of put in the bank over the past several quarters. What's the plan going forward? Do you think you'll continue to use your operating cash to pay down debt?

Yes. So Jim, as you know, we have another tranche of refinancing coming, but it's about 2 years away from now. So we need to address it before next fall. So right now, we are in a very comfortable cash situation. And overall, we would like to target our debt in the $300 million to $350 million range, gross debt, I mean. So from that perspective, right now, we would like to continue to build up the cash position. So we are in a strong position when we approach refinancing in the next 12, 18 months.

And the guidance you gave for $9 million to $10 million of interest expense for the fourth quarter, is that net of any interest income you get from the cash on hand?

It's net, yes. Yes, it's net interest income plus the other operating and expense items. So it's those 2 items.

Yes. So it's not just pure interest expense.

Our next question comes from the line of Suraj Kalia with Oppenheimer.

This is Shaymus on for Suraj. Congrats on the really strong quarter and nice guide for the 4Q. Just kind of trying to paint an overall picture. You guys gave a great guide for 4Q and whatnot. Can you guys kind of characterize kind of the capital spending environment and kind of what you're seeing? How sustainable is -- obviously, you had a great 3Q, 4Q looks great from what you've told us. Just trying to understand the sustainability in the medical side of the business kind of going into fiscal '26 and whatnot. So just any color you can provide there, kind of give us a little bit -- I know you won't probably give guidance, but again, just trying to help us start to model that out.

Yes. So Shaymus, the environment seems to be healthy. The demand pattern is good. And based on whatever hospital CapEx environment and overall priority of imaging from an investment perspective and the procedure volume, all of them -- what we see and read, all of them seem to be in a decent place as of now.

So -- and remember, last year, FY '24, it was somewhat of a soft year because of the inventory destocking situation. So we are expecting to enter FY '26 with a decent situation here in terms of the macro or the macro demand environment. Is that what you were asking, Shaymus or did I misinterpret your question?

Yes. No, you for the most part got the gist of it. I guess kind of on a side note to that, just trying to understand, I know this is a sliding scale, so to speak, with your kind of performance in the quarter by line. I guess where are you kind of seeing strength? Because I know I think you noted like fluoroscopy is down, a lot of things have kind of been stable, so to speak. So I guess where within that Medical segment kind of are you seeing strength that's kind of leading to these kind of nicer revenue numbers?

Yes. I would say from a revenue mix perspective, our Industrial business is fairly strong and CT was strong in this last quarter and that's where we are seeing. Radiographic was somewhat stable. Fluoroscopy was down. So I would say a number of modalities were stable to slightly better than stable and the strength was there in CT and Industrial.

Okay. I appreciate that. And one more from our end. Just photon counting, I know you guys kind of gave a little bit of color on that. Can you give us any kind of, I'd say, metrics or something where we can start potentially seeing how many customers you are kind of working with at either any stages and kind of rough timelines for when you expect, say, 50% to kind of move to the next -- looking for commercialization and whatnot. I know you said, what is it, I think 27%, you gave a guidance number for the number of expected sales or sorry it might have been 29%. But yes, just trying to understand when we start kind of to see the initial kind of orders start coming in and you guys kind of add that to your backlog.

So let me try to respond to your question and then I'll ask Sam to also chime in. So we had indicated that we're expecting $150 million of contribution from photon counting. And that's at a point where we expect pretty good rollout on the CT side in Medical and at the same time, bout $50 million worth of contribution from Industrial.

So on the Industrial side, that is more of a continuous growth. It's happening now. It's continuing to happen and in bits and bites, it's growing. And launch of a new product like THOR that I talked about will help with that. And then we expect to see pretty good uptick in Industrial.

On the Medical side, we have telegraphed that we have 2 very solid candidates and good OEMs, strong OEMs that are in that phase of design implementation. So we're past the selection process and what they're going to do. Now they're actively building, developing and designing their systems.

So for the next 12 months or so, you'll get a bit of a boring update from us. It's because as they continue to do their work. It's beyond that, that we expect them to start doing their pilots and then go down the process of bringing systems to market.

I can't give you narrower dates than that because, one, it's really confidential for our customers. And even though we're not disclosing names, it's -- I just don't want to get to a point where we create a problem for our customers. But our timelines that we have talked about earlier, the 2029 time frame, that has not moved.

Yes. I can also just add that we had said by 2029, we would be expecting, say, $150 million or so in photon counting revenue with, say, 2/3 of that approximately from the Medical segment and 1/3 from the Industrial segment.

Now keep in mind, right now, most of the photon counting shipments are in the Industrial area. And that side of photon counting business is continuously and very nicely progressing and improving. However, on the Medical side, we expect it to be in a step basis manner.

So say, about $100 million of Medical contribution for photon counting revenue would mean that we need to have 3 to 4 OEMs design our product into their systems and be rolled out. And so say, 2 quarters or so ago, we were working very strongly with 1 OEM and now we are working with 2 OEMs. And so we are pretty happy with the progress we've made and how we are moving in this direction in terms of commercializing the technology.

And as I mentioned on our call, we have others in the pipeline that are in that phase of the consultative phase where they're trying to figure out how they would integrate this in their systems. They're doing the initial physics measurements and all the things that get them ready to get their head around the next product that they're going to bring to market. So the pipeline is good and the interest remains strong. So it's on its way.

Our next question comes from the line of Young Li with Jefferies.

I guess to start, I was curious on the China business outperformed expectations. I was wondering if you can talk a little bit about your expectations for potential outsized orders in China. Maybe some customers will take this opportunity to stock up on inventory to try to derisk future tariff updates. And also, are you seeing any impact from government stimulus in China?

Young, this is Sunny. So our order intake from China has been steady. As we said, in this third quarter, our sales in China was consistent with the performance in China over the last several quarters. So it's been -- there's -- they don't buy in a lumpy manner or we've not seen them try to predict just the tariff rates. The tariff rates themselves have been fairly steady for some time. So we're not seeing that yet and we've not seen that kind of behavior. So the demand is, I'd say, is steady in China.

The only time we had a pause was when it was a ridiculous tariff rate of 145%, which made everyone just pause and say, geez, this can't be real. I bet it will come down. And so we took a breather. But other than -- and when they did come back, they came back to the levels of inventory that they needed. So that's the backdrop there.

And then -- I'm sorry, I forgot the second half of your question.

Government stimulus impact.

Government stimulus. Yes. So again, like we've said before, there's been talk of stimulus and we've heard of stimulus programs making its way through the provinces and to the hospitals. But we have not seen yet any significant indicators of additional demand. It's very hard to tease that apart and say what's because of stimulus and what's secular or normal demand.

All I can -- all we can see is that the Chinese government remains committed to their expansion of healthcare services and the healthcare -- Ministry of Health Commission, I believe that's what it's called, continues to push for getting imaging technologies into rural hospitals.

And I think there have been circulars that we've seen where they want at least 164 slice CT in every single county hospital in China. And as you know, there's like 15,000 of them. So we expect that this demand for CTs to continue along with their expansion of healthcare services in a fairly steady manner.

All right, great. Very helpful. I guess just your comment on ramping up system productions in the U.K. and investing in the Vegas facility as it relates to the industrial cargo systems business. Is that a signal that we should be seeing more outsized orders in the coming quarters? And can you maybe put the order sizing in context for us? I mean it's -- it ranges from $14 million to $25 million, but can we see $25-plus million type of orders in future quarters?

So first of all, the facility in the U.K., the expansion there is mainly for -- as business ramps up and we've taken in $55 million worth of orders for us to continue to fulfill them. We need space, we need people. And so that's what I was referring to and we will continue to do that.

In terms of the health of that business and future orders, all I can say is that the pipeline is strong. We've got a good pipeline. We're competing in -- I have to believe that given our reputation, given our footprint currently, we're probably seeing virtually every deal, if not -- I mean, if not every -- majority of the deals.

And so we see the pipeline, it's healthy. What's uncertain -- there's some amount of uncertainty around timing of when those deals will happen because of just their tender-driven process. So what we don't want to do is to fall behind on our ability to deliver. So that's why we want to make sure that we ramp up thoughtfully and that's what we're doing. In terms of deal sizes, I can't predict that. But what we have so far, the $17 million-ish type, $25 million-ish type of order sizes are not abnormal for us.

Young, I would add that in terms of our CapEx requirements, and maybe that's what you're thinking or maybe a little bit reading your mind here. From a CapEx perspective, we have guided $25 million to $30 million CapEx for the year, last year, this year as well as the coming year. That would include investments in U.K. that we plan to make to ramp up our ability to address the orders and ship the product. So that $25 million to $30 million CapEx would include this.

And then I would just add that in cargo systems business, order size more than $25 million is not uncommon. So it's just our ability to compete and win. So it can happen. But at the same time, as I said, it will be great if we win those orders and then we would be able to fulfill them, but we'll be mindful about the CapEx that we need to invest in those facilities.

Our next question comes from the line of Larry Solow with CJS Securities.

I guess first question, just on the guidance. Nice improvement year-over-year, I think it's implying 7% growth and sequential growth at the midpoint. So is most of that growth going to come from the -- just looking at it sequentially or maybe even year-over-year too, is it more on the medical side just in Q4 or industrial usually has been kind of tracking around that $60 million for several quarters. So bump up a lot more on both segments. Just trying to a little more color there.

Yes, Larry, I think both the segments are -- we expect to grow both the segments in Q4. In Industrial, of course, we have a number of orders that we have taken in cargo systems that we expect to fulfill. And on the medical side, we have a backlog to address from our customers in Japan, Europe, et cetera.

Okay. I'm actually more curious just on the gross margin outlook. So if you look back Q2, obviously, I think that may have been a lot of the stars aligned where you have 36% gross margin. But it felt like exiting Q2, if the China story could at least stabilize, your sales would be a lot better, which are appears did happen this quarter and your outlook implies even 10% sequential growth. How come the gross margin is this quarter and then your next quarter outlook is even lower. Is that because of I assume mix? Is that more because you're delivering on some of these -- you're delivering upfront equipment versus maintenance or any color there would be appreciated?

Sure, yes. So Larry, remember in Q2, which is where you're comparing it to, in Q2, we had talked about a one-time refund from customs agencies in Germany, an outcome of multiple years of back and forth with them. So that was a one-time benefit, I would say, and we did highlight in that quarter's commentary.

Right. Well, how much was that benefit? I thought that was...

That was about 200 basis points, 200 basis points.

So even so you're still down from 34% to 32.5% at the midpoint in your guidance, but you're growing sequentially 5% at midpoint?

Yes. So your point is well taken. And the degradation in gross margin of say, 150 basis points that you're talking about is really coming from the tariff aspect, the tariff pieces. We are passing it along to customers, but we are not able to fully mitigate it. And so that is impacting about 100 to 150 basis points.

And then on the cargo systems business, we've talked about that, that business is slightly lower in gross margin. So that is also happening. So that is all in the mix here, which is what has caused...

And the Industrial piece, in particular, I know that margin has -- at least from the front end of last fiscal year, has come down because I think you were delivering more on the equipment side and less on the service, right?

Correct. That's what I meant.

Yes, yes. And is that -- I guess, as that installed base grows and then the warranties expire and then there's service requirements, I guess some of that should come back to help you, right? And the -- because the maintenance, I believe, is margins a lot better. Is that correct?

Yes. That is absolutely correct that the service margins are much higher on the industrial side. So all the linear accelerators and cargo systems, et cetera, you rightly pointed out, have a warranty period of 18 months, sometimes 24 months. And we began shipping quite a bit of linear accelerators, I would say, towards the mid part of 2024. And so from mid-2026 onwards, they should be coming off of warranty and begin to contribute that.

If you look at our numbers, we have improved Medical segment's gross margin. However, as you rightly said, Industrial gross margin has come down. So the gross margin is seeing a little bit of a segment headwind, but it's all good news in the sense we are shipping quite a bit of hardware and we should...

Sure. The hardware is problem. Yes, yes.

Yes. And in 18 months, we should get the benefit from it. Yes.

Okay. And just in general, from a high level, Q4 guidance, just the trends last 2, 3 quarters going back to Q2, too. Just as we think about fiscal '26, at least from a high level, is most of the -- and again, outside of China, let's just say, China stabilizes from here for now. But global OEM order patterns, inventory destocking, it feels like a lot of that's getting closer to normal. So could '26 be -- continue to have a sort of low-to-mid single-digit or perhaps even better top line growth? I know you're not giving guidance yet, but just trying to -- maybe you can give us some of the big bullet points as we think out over the next few quarters where we stand?

Sure, yes. So I think the first point you raised was about the inventory destocking. And we had said that we expected it to be over by March, April time frame and it actually did happen that way. So we are fairly beyond that phenomenon at this point.

And also China has stabilized and then came the tariffs. There was a little bit of instability, but seems to be normalizing now and cannot really predict what happens in the next month. It's a very, very fluid and dynamic environment. But it seems to be a little bit more stable than when we talked to you last time, say, 90 days ago, it was extremely unstable at that time.

So overall, both the Medical and Industrial businesses seem to be in a decent place. And barring any other external events that we don't think of right now, they should be -- they should grow and we should be in a decent position. So overall, I would say -- I would concur that we should be expecting '26 to be a growth year for us. But obviously, it's a bit too soon. And external events can always come in a positive way or a negative way, but we'll deal with it as they come and as we get closer to the year.

[Operator Instructions] Our next question comes from the line of Anderson Schock with B. Riley Securities.

This is Brandon Carney on for Anderson. Congratulations on the quarter. I think you just mentioned some impact of the tariffs contributing to the GM guide. Do you have any updates on the progress of redirecting supply chains as part of your tariff mitigation strategy? I know you said that, that would take some time, but is there anything you've been able to do or plan to do in the near term?

So yes. And Brian, is that, Brian?

Brandon.

Brandon, sorry. So yes, we've been making good progress. I would say that we've not completed or concluded our efforts there, but we are midstream and we are definitely making good progress there. Our efforts in producing out of India are doing good.

But at the same time, we are also making progress in terms of creating structures like bonded warehouse and also increasing manufacturing in a given region to service that region. So we are slowly making those changes. As you know, it takes time.

At the same time, we've also started passing along price increases to our customers. So we've been successful in that. And a number of initiatives that we are in midstream, for example, redirect material spending to suppliers in a lower tariff region, so to say, and duty drawback and bonded warehouse and also more local-for-local manufacturing.

So all of those initiatives are in play. But I would say we are in the -- I would not say we are in the early innings, but we are definitely not beyond the mid-innings on these initiatives. I would say we are somewhere closer to midpoint in some of these initiatives. It takes time.

Got it. Maybe just following up on that. If you're able to start shipping detectors from the India plant by the end of the year, do you think that, that would have an immediate impact on the tariff exposure in China or will we have to wait another quarter or 2 to see the impact?

So India, the main strategy for India for us is to be able to produce radiographic components in a more cost-effective manner so that we are more price competitive in the market. This is a value tier type of a market. So that is our strategy out of India.

And so we plan to produce out of India for global consumption. So in that regard, if we are shipping out of U.S. to a foreign country, then all the supply chain or raw material that we are bringing into the U.S. would be -- we'd be able to avoid tariffs on that raw material because we are not bringing it in U.S., manufacturing it here and shipping it out of here. So in that regard, yes, it would be helpful. But I just wanted to make sure our primary and secondary strategies are clear in terms of their priority.

And also just to add, even for detectors, our detectors business in China is supported by manufacturing in China. And vast majority of the components that go into it are also procured in that region. So China is pretty independent from in that sense.

Okay. Got it. Is there any connection between the India plant and production in the U.S.? I'm just wondering if there's any components from India coming into the U.S. that might be affected by the recent sort of escalation in trade tensions between those 2 countries?

Yes. There is not -- I mean, there may be small, but there is no significant dependence in the U.S. for product coming from India. And keep in mind, dual sourcing and triple sourcing has been some of the mantras for the supply chain folks and the team here. So we are slowly increasing our supply chain from a supply chain resiliency perspective, other countries. So -- and India anyway has been a new initiative for us. So there is not a whole lot of dependence of the Salt Lake factory for supply chain out of India. There is some, but not significant.

Thank you. And ladies and gentlemen, this does conclude today's conference. We have reached the end of the question-and-answer session. This concludes today's conference call. You may disconnect your lines at this time. We thank you for your participation.