Varex Imaging Corporation

Greetings and welcome to the VERIX Q2 fiscal year 2025 call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Chris Belfour, Director of Investor Relations. Thank you, Chris. You may begin.

Good afternoon and welcome to Verix Imaging Corporation's earnings conference call for the second 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 our conference call includes a supplemental slide presentation that can be accessed at Verix's website at veriximaging.com. The webcast and supplemental slide presentation will be archived on Verix's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the second quarter of fiscal year 2025 to the second 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 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. With that, I will now turn the call over to Sonny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our second quarter earnings call. We continued to see strong demand in the second quarter, which resulted in revenue near the high end of our expectations. Both the medical and industrial segment delivered year-over-year revenue growth as we continued to see solid order coverage during the quarter. Gross margin of 36% in the quarter was higher than anticipated. This was primarily the result of improved volume, favorable product-sales mix, and productivity gains in both segments. Cash generation was strong, with cash from operations of $17 million in the quarter. This was driven by improved profitability and continued solid working capital management. Turning to the second quarter results, total revenue in both medical and industrial segments were up 3% year-over-year, respectively. Non-GAAP gross margin was 36%, up from 33% in the same quarter last year. Adjusted EBITDA and non-GAAP EPS in the second quarter were $34 million and 26 cents, compared to $25 million and 16 cents last year, respectively. We ended the second quarter with $226 million worth of cash, cash equivalents, and marketable securities on the balance sheet, up $13 million compared to fiscal 2024 year-end, and up $36 million year-over-year. In addition, we also have $125 million of restricted cash raised from our senior secured debt offering in December. As noted in our press release earlier today, we plan to use this restricted cash and other cash on hand to repay the outstanding principle of our convertible notes upon maturity in June. Let me give you some highlights of sales detail by modality in the quarter compared to a five-quarter average which we will refer to as the sales trend. Across both medical tubes and detectors, we continued to see strong demand in the quarter with improved mix, which drove increased profitability. Sales in our medical segment were up in the quarter, led by solid global sales of CT tubes, which were in line with their sales trend. Sales in fluoroscopy, oncology, mammography, and dental modalities were all above their respective sales trends in the quarter. Radiography was below its sales trend in the quarter. Our industrial segment continued to see strong demand. Strength in global security screening drove the sales of cargo inspection components as well as security inspection systems. We continued to see increased demand for checked baggage inspection and cargo screening at airports as well as non-destructive inspection in verticals such as aerospace and automotive. This demand drove growth in our industrial X-ray tube components product line, which continued to grow. Now let me switch gears to talk about how the current tariff environment is impacting Verix. Let me also remind you that it is a very dynamic environment, and our discussion today relates to the current tariff rates. The most pronounced impact of the tariffs for Varix as of today is due to the bilateral tariffs between the US and China. First, on the sales front, we currently expect that the 125% tariff imposed by China on the US products could negatively impact sales by about $20 million in the third quarter. This is primarily due to a pause in purchases by some of our China-based customers. Our customers typically maintain some level of inventory of our components, and some customers appear to be pushing back deliveries to buy some time to see if there could be an improvement in the tariff rates or if exemptions might become available to them. Separately, we are actively working on implementing a number of options that could reduce the impact for our customers in the near term, including pursuing commonly utilized mitigation practices and localizing more manufacturing activity in the regions. Second, on the cost side, raw materials and components sourced from global suppliers can include tariffs ranging from 10% to 145%. On an annual basis, materials imported into the US from China represent approximately 3% of total cost of goods sold. And roughly 17% of cost of goods sold is imported from the rest of the world. Our mitigation actions include passing the tariff charges to our customers, redirecting material purchases to suppliers in lower tariff countries, shifting manufacturing closer to the region of consumption, and localizing supply chain where possible. We expect the impact on our gross margins net of the mitigation efforts to be in the 150 to 200 basis point range on a go-forward basis. Separately, you may have seen reports that the China Ministry of Commerce recently initiated two investigations of medical products imported into China. One investigation relates to the impact of imports of x-ray tubes on the domestic industry and its competitiveness, and the other investigation relates to alleged sales in China of medical CT x-ray tubes and tube inserts made in the U.S. and India at prices that are less than what they are sold for in the home countries. We produce X-ray tubes for CTs in the United States, but not in India. We intend to cooperate with the investigation. Moving to some product highlights. In medical, I'm happy to note that our largest customer, Canon Medical Systems, introduced in Japan last month at the International Technical Exhibition of Medical Imaging Trade Show in Yokohama, a very innovative new CT system called Equilion RISE. which uses a CT tube made by Varix. Aquiline Rise is a whole body CT scanner and the first of its kind to be able to image a patient in multiple positions, from lying down to sitting to standing vertically, enabling detection of lesions that may not be visible in a lying down position. This type of operation requires immense mechanical sophistication and Varix's tubes have demonstrated the ability to perform under high G forces while rotating at different angles. We are proud of our partnership with Canon and our continued collaboration on new products. In photon counting, as mentioned previously, we continue to be actively engaged with large imaging OEMs to integrate our photon counting detector technology in their next generation CT systems. We have two OEMs who are active in their R&D process and others in our pipeline who are evaluating our technology. With photon counting, we have moved past the technology invention part of our development process, and now we are in our typical new platform introduction process with our OEMs, who in turn are in different stages of their new systems development. This week at the Control Trade Show in Stuttgart, Germany, which is one of the largest industrial non-destructive inspection technology conferences in the world, we are prominently showcasing our photon counting technologies for industrial imaging. A key offering is a product called Thor, which is a linear array detector for high-speed 3D imaging and inspection at the speed of production. This product is also suitable for certain medical imaging applications. I'm happy to say that we are continuing to make forward progress with driving adoption of photon counting and expect it to be a future growth driver for Varix. In our industrial segment where cargo systems is a key focus, Today we announced a new order worth $25 million to provide cargo inspection systems. This order is from an international customer for portal systems that will be used to secure sea and land ports. This order is in addition to the $14 million of orders that we announced last quarter from other international customers. As is typical for these orders, they are expected to be installed over the next 12 to 18 months. Two to three years after installing these systems, we expect to see an ongoing service revenue stream from these customers. We are seeing good traction with our offerings and continue to engage with many customers and prospects regarding new systems opportunities. In summary, we're pleased with our solid first half performance, and with the exception of China, encouraged by the demand trends across our business. While there are headwinds from the current tariff situation, we are partnering with our suppliers and customers to find ways to mitigate the impacts. Considering the mitigation efforts that we have in flight at this point, particularly in China, we're not planning any restructuring in our China business. Also, our customers have not canceled any orders in our $316 million backlog at quarter end. In addition, we remain committed to paying down our convertible debt next month. We will stay close to the evolving geopolitical situation and adjust our mitigation plans as necessary. We intend to continue to execute on our long range growth strategies that are based on innovation and cost leadership, and in parallel, continue to invest in our regional manufacturing operations and supply chain capabilities. I'd like to thank all our employees globally for their hard work and commitment in working through this challenging environment. With that, let me hand over the call to Sam.