Varex Imaging Conference Call Summary Company Overview - **Company**: Varex Imaging - **Business Segments**: - Medical Imaging: Approximately 70% of revenues - Industrial Imaging: Approximately 30% of revenues - **Products**: X-ray tubes, X-ray detectors, associated software, and other components - **Key Customers**: Major medical imaging OEMs including GE, Siemens, Philips, Canon, and Hologic [3][4] Core Business Insights - **Tariff Mitigation**: - Successfully passed increased tariff costs to customers since April 2022 - Increased local manufacturing in China and Europe to mitigate tariffs - Recent Supreme Court ruling has reduced tariff rates, expected to positively impact P&L in 4-6 months [5][6][7][8][9] - **Market Environment**: - Stable demand in medical imaging with hospital capital expenditure (CapEx) remaining a top priority - Historical resilience during economic downturns, with stable to slight growth observed [10][11][12] - Channel inventory issues have been resolved, leading to improved procurement from China [13] - **Customer Engagement**: - Increased collaboration with major customers on new system developments, showing positive engagement and excitement [14] Industry Trends - **Transition from Analog to Digital**: - Complete in developed markets (U.S., Western Europe, Japan) but ongoing in regions like South Asia and certain Latin American countries [15][16] - **New Manufacturing in India**: - Two factories being established for radiographic products to regain market share in price-sensitive segments - First factory for detectors is operational but not yet at full capacity; second factory expected to be completed by end of 2023 [17][18][19][21] Industrial Segment Performance - **Cargo Inspection Systems**: - Strong sales of $55 million in FY25, with expectations for continued demand in FY26 driven by increased border security and tariff compliance needs [22][23][24][25] - **Service Revenue**: - Service revenue from cargo systems expected to be accretive to margins, typically starting after a warranty period of about 18 months [26][27] Technological Advancements - **Photon Counting Technology**: - Offers advantages such as high-speed imaging (10,000 frames per second) and significant dosage reduction (60-70% less) in medical applications - Expected to enhance image quality and provide material discrimination capabilities [28][29][30][31][32] - Anticipated market introduction in early 2027, with ongoing collaborations with customers [33][35] Financial Health - **Debt Refinancing**: - Total debt reduced to $350 million with a new coupon rate of approximately 6%, down from 7.875% - $18 million of debt paid down as part of refinancing, allowing for flexibility in future cash flow management [38][39][40] Future Outlook - **Exciting Developments**: - Anticipated growth from photon counting, cargo inspection, and Indian manufacturing initiatives - Focus on improving operating leverage and EBITDA margins as new products ramp up [44] - **Concerns**: - Ongoing volatility and uncertainty in the policy environment, which poses challenges for strategic planning [45]

Financial Data and Key Metrics Changes - Total revenue for the second quarter was $213 million, a 3% increase year over year, driven by a 3% increase in both Medical and Industrial segments [23][24] - Non-GAAP gross margin was 36%, up from 33% in the same quarter last year, reflecting improved volume and productivity gains [9][27] - Adjusted EBITDA for the quarter was $34 million, compared to $25 million in the previous year [9][23] - Cash from operations was strong at $17 million, with total cash, cash equivalents, and marketable securities at $226 million, up $36 million year over year [9][31] Business Line Data and Key Metrics Changes - Medical segment revenues were $154 million, constituting 72% of total revenue, while Industrial segment revenues were $59 million, making up 28% [24] - Sales in the Medical segment were led by strong global sales of CT tubes, with fluoroscopy, oncology, mammography, and dental modalities all performing above their respective sales trends [10] - The Industrial segment saw strong demand, particularly in global security screening, which drove sales of cargo inspection components and systems [11] Market Data and Key Metrics Changes - Americas revenue increased by 2%, EMEA revenues were flat, and APAC revenues increased by 8%, primarily due to increased sales in China [24] - Sales in China increased by 25% year over year but declined by 11% compared to the prior quarter, with China sales constituting 15% of total sales [24][25] Company Strategy and Development Direction - The company plans to mitigate the impact of tariffs through various strategies, including localizing manufacturing and pursuing operational strategies to reduce costs for customers [12][14][22] - The focus remains on long-term growth strategies based on innovation and cost leadership, with continued investment in regional manufacturing operations [22] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about demand trends across the business, despite headwinds from tariffs, and noted that no orders have been canceled from the $316 million backlog [21][22] - The company anticipates a sales impact of approximately $20 million in China due to tariffs, with a potential EPS reduction of $0.15 to $0.20 in the third quarter [32] Other Important Information - The company plans to use restricted cash from a senior secured debt offering to repay outstanding convertible notes upon maturity in June [9][31] - The gross debt outstanding at the end of the quarter was $570 million, with a net debt leverage ratio of approximately 2.1 times adjusted EBITDA [31] Q&A Session Summary Question: Update on orders in China and customer purchasing behavior - Management noted that while some customers are pausing purchases, they continue to place orders for essential products, particularly for high-end tubes [35][36][40] - Customers are trying to manage inventory while awaiting potential tariff resolutions [41][42] Question: Impact of the $25 million cargo inspection order on capacity - Management confirmed that lead times for delivery are typically 120 to 180 days, with civil works affecting timelines [47][48][50] Question: Clarification on tariff impacts and revenue drivers in China - The majority of revenue in China comes from CT tubes, and customers are currently delaying orders while exploring alternatives [57][58][62] Question: Trends outside of China and overall demand - Management indicated that demand trends outside of China remain strong, with broad-based strength in both medical and industrial segments [78][80] Question: Updates on the India plant and tariff mitigation strategies - The company is accelerating activities in India to help mitigate tariff impacts and is qualifying suppliers from India [85][86] Question: Anticipated impact of tariffs on industrial business - Tariffs are expected to impact the industrial business as well, but the sales of industrial products into China are minimal [94] Question: Potential for near-term tariff relief and its impact - Management indicated that any near-term relief could lead to immediate recovery in sales, depending on timing [102][103]