Varex Imaging Corporation

Okay. All right. And with regards to photon counting for the medical business, I think I heard you say that you have two OEMs where you're, you know, you're relatively far along with and you're talking to eight others. Is that correct?

Yeah. So let me clarify. So we've, the last several calls, we've talked about CT, photon counting for CT. Those were the two OEMs that I was mentioning. But I wanted to give a color beyond those two CT OEMs. By the way, we're seeking out, as we've said, we'd love to get a couple more, and we're working on that. But beyond that, in other modalities, so beyond CT, we're seeing there's activity with customers who are active, there's eight customers who are actively engaged with us in various other modalities for different kinds of applications, CBCT applications and DR and breast imaging and 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 products to market and there are others that are working actively on it.

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

Yeah, 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 29 as we had committed, but we still need, you know, I would love to see a couple more OEMs as well. Let me say, 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's been done so far, but where they can position themselves strongly in the market.

And then the last one for 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. You know, there's different kinds of memory chips. We're 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, you know, 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 and it's going to end up costing a lot, we will pass these on. Yeah.

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.

Understood. All right, well, thank you.

Thank you, Jim. The next question comes from the line of Young Lee with Jefferies. Please proceed.

All right, great. Thanks for taking the questions. I guess to start, last quarter, I think the results as well as the tone on the call was particularly strong, both end markets and business trends. Seems like this quarter it's more solid and in line. Appreciate the guidance for the rest of the year. It seems like fiscal 3Q is a little bit above consensus with 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?

I'll get us started, Jan. First of all, last quarter, remember before the last quarter, 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. 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 there that way. So this quarter as well, the same type of buying patterns continued. There was 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 I 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 we, you know, I still remain optimistic. I think we're just generally cautious about the environment. 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.

All right, got it. That's helpful. I guess maybe on industrials as well as EMEA, those two segments kind of came in a little bit below expectations. You know, industrials, it does still sound like the inspection systems are, you know, 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 Yang, 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 customer for linear accelerators, they had gotten 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, we've we are selling a 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, so that is that transition. Overall, this business is somewhat lumpy. It just goes into, you know, it comes, 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're 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 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 a annual to annual perspective, that business for us is growing pretty nicely in high single digits, so to say, and we expect it to continue to do so.

Okay, got it. Very helpful. I guess maybe one more to some of 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, you know, now you're resuming again. What's sort of driving this decision? Do you have, you know, a different process or a lot more visibility on an annual basis? If you can expand upon that decision, that would be really helpful. Thank you.

Yes. So, Yang, it's been always our intention to provide annual guidance. And if you go back early on when VARICS became public, we were providing annual guidance. And then COVID hit and then supply chain crisis. And then you would remember in the healthcare 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 So that was one of the reasons that we had suspended providing annual guidance a couple years ago, 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 forecasts, et cetera. So we've strengthened some of our procedures, and we are coming back to start to provide the annual guidance going forward.

Yeah, 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 stable. challenging right now, but within that, healthcare seems to be in a little bit better place, and as we look at the overall macro with the healthcare positioning and the demand for our products, particularly NexRay, 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.

All right, great. Very helpful. Thank you.

The next question comes from the line of Larry Solo with CJS Securities. Please proceed.

Great. Thanks. I guess just a couple of follow-ups to the previous questions. I know the growth you're assuming, 3%, was essentially the same as in the first half. It looks like it was low single digits, basically 1% medical, high single digits industrial, obviously a little bit of volatility quarterly. 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, you know, 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 we are not choreographing any message that the split or the rates in the second half versus the first half between the medical or 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, Sonia, when you spoke about some of your products, but it doesn't sound like it. Okay, now that's fair. A couple questions on the quarter. The non-cash charge for the micro-ex shares movement, that's adjusted out and adjusted EPS, correct?

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

Ah, okay. So that's actually in, that's in the EBITDA number two then?

Correct. It's in EPS, EBITDA, EBIT everything. Yes. 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? That is correct. Okay. That is correct. All right. Okay, so you don't adjust that. So that was a couple of cents EPS then, I imagine. It was almost too many, but that was more than a couple of cents, right?

Actually, four cents.

Four cents. Okay, so that's a big deal.

Okay, all right.

That's interesting. And then the OPX was a little bit higher than you expected. It was 54. You had gone to 52. Anything in there in particular?

Nothing in particular. You know, Larry, we've talked about in the past that we are fully funding a number of growth initiatives. And so sometimes in R&D and channel development, 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 plan. So there's a little bit of a movement there. But we are investing there. So they came in a little bit sooner. Okay. So that's the reason for that, yeah.

Okay. So you don't – I know you didn't give – I know you normally were giving margin guidance too, which you're not giving, I guess, anymore. Is that right? Or you didn't give it this quarter at least? No, I think – Which margin guidance, Larry? For Q3, did you give – for the Q3 guidance, did you give OPEX guidance? Did I miss that? Yes, yes, it is there on the slide, Larry.

We did provide office guidance.

Oh, okay. It was in the slides. I'm sorry. I just didn't have the slides up. 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 – 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. Yes.

Can you just give us any update just on the cargo screening? I know you mentioned it. briefly and you prepare remarks. 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.

Yeah, 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 continuing to see deals. 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 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 is in the fact that we're making these investments in growth.

Absolutely. Okay, I appreciate all that, Colin. Thank you, guys.

Thank you. 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 21st. 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.