Greetings. Welcome to the Varex Second Quarter Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Chris Belfiore, Director of Investor Relations. You may begin.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the second quarter of fiscal year 2022. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast on this conference call includes a supplemental slide presentation that can be accessed at Varex's website twerximaging.com/news. The webcast and supplemental slide presentation will be archived on Varex' website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the second quarter of fiscal year 2022. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of fiscal year 2022 to the first quarter of fiscal year 2022 rather than to the same quarter of the prior year. Finally, all references to the year are to the fiscal year and not 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 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, and good afternoon, everyone. We continue to see robust demand for our products in the second quarter of fiscal 2022 and achieved sales of $215 million despite ongoing supply chain constraints. The current operating environment remains challenging with persistent supply constraints, inflationary cost pressure and continued COVID-related shutdowns outside the U.S. While we continue to work to mitigate these headwinds, they impacted our performance in the second quarter, and we expect this to continue in the third quarter. Despite these headwinds, we remain focused on delivering on our backlog while investing in innovation and being the partner of choice for our customers. Turning to the results; revenue in the second quarter increased 8% sequentially and 6% year-over-year. Revenue in both Medical and Industrial segment increased sequentially. Non-GAAP gross margin in the quarter was 34%, in line with our expectations as price actions helped offset some of the cost increases. Adjusted EBITDA was $38 million and non-GAAP EPS was $0.37. Our cash position remained strong at $115 million at the end of the quarter. Balance was down $43 million sequentially, driven by a redemption of $27 million of our senior secured notes as well as working capital investments. Now based on a qualitative assessment, let me provide some high-level insights into the demand environment for our different modalities and applications during the quarter. Medical segment revenues increased 10% sequentially and 9% year-over-year. We continue to see robust demand globally for CT tubes. Demand was also strong in our other medical modalities, including fluoroscopy, oncology, radiography, dental and mammography. In addition, all modalities posted improved revenues compared to the prior quarter and a year ago. Revenues in our Industrial segment increased 3% sequentially and decreased 6% year-over-year compared to a very strong quarter in Industrial last year. We continue…

Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparison to -- of our results for the second quarter of fiscal 2022 with those of our first quarter of fiscal 2022. Demand remained robust during the quarter, and we were able to mitigate some of the supply chain constraints in the last few weeks of the second quarter. This allowed us to post revenues of $215 million, which was $10 million above the midpoint of our expectations. That said, rising costs of raw material and logistics pressured gross margin offset by volumes being higher than expectations and our pricing initiatives. Non-GAAP EPS was near the top of our guidance at $0.37, which benefited from a credit to SG&A expense. Second quarter revenues increased 8% from the first quarter, helped by improved production towards the end of the quarter. Medical revenues were $170 million and industrial revenues were $44 million. Sequentially, medical sales increased 10% and industrial sales increased 3%. Medical revenues were 79% and industrial revenues were 21% of the overall revenues for the quarter. Looking at revenue by region, Americas increased 13% sequentially. EMEA increased 3% and APAC increased 8%. Overall, China was 15% of the revenue in the quarter. Let me now cover our results on a GAAP basis. First quarter gross margin was 33%, in line with the previous quarter. Operating expenses were $44 million, down $7 million and operating income was $27 million, up $13 million sequentially. This resulted in net earnings of $8 million and GAAP EPS of $0.18 on fully diluted 42 million shares. Moving on to non-GAAP results for the quarter. Gross margin was 34%, in line with our expectations and similar to last quarter. Price improvement offset by higher costs helped us to maintain our gross margin…

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Larry Solow with CJS [ph] Securities. Please proceed with your question.

Great, thanks. It's CJS. Good afternoon, guys. Just on the on the realization of price increases, Sam, you mentioned sort of -- those price increases were put in, obviously, more on defense as opposed to offensive just to sort of cover your costs. Just a couple of questions there. So you mentioned most of these are annualized contracts. So I assume we're there kind of calendar '22, so we're not even halfway through the year yet or less than that, obviously. So perhaps you've done some of them, but hopefully, you still have some -- at least some wind at your back in terms of more price increase or benefit rolling through, but perhaps costs are even higher than you -- when you first start putting these in. So can you come back to drawing board and maybe put more in? Or how do you look at that? And I sort of my assumption that you still have a good amount to go. Is that a fair statement?

Thanks, Larry. So yes, we communicated to our customers in October and then we started working with them on price increases. So that activity like you rightly pointed out, began to kick in effectively from the January of this year, and it is going on a rolling basis. So we still have more activity ahead of us. And as the contracts come up for renewal, we are able to get those increases. So in a way, as we mentioned that generally, we have these on an annual basis. So for the next round or phase 2 of it, the earliest it would be is October 2022, if we decide to send out the letters and monitor the cost at that time. So we will evaluate the situation at that time. But right now, we are very much into our, call it, phase 1. And we hope inflation subsides, but we don't really have a very good perspective right now. We will just monitor the situation and then act accordingly. But we are very much into the initial phase right now.

Right. Okay. And just in terms of impact supply chain, just in terms of impact on revenue, not so much on the cost side. Is there -- is the medical segment -- and obviously, it's a bigger piece of your business, but it looks like that segment has actually experienced better growth relative to sort of rebounding from COVID versus industrial. Is that more just because their demand is better? Or is the industrial piece also maybe having disproportionate issues with supply?

I would characterize that the both medical and industrial are kind of experiencing that type of issues, if you would notice, industrial for us is a 20% revenue type of segment. That has been that way for many, many quarters, if not years. And that has continued on. Here and there, Larry, for a given quarter, you might see a spot effect here or there. But other than that, from a thematic perspective, it's still 80-20 or 79%, 21% in terms of revenue split. And that's continuing. You might see plus/minus a percent here or there in terms of proportional revenue for the overall company. So they're both getting impacted Similarly, of course, in the industrial business. We also have systems business, particularly on the security side. That business, there's been a lot of tender activity in that business recently. And when I say recently, I would say in the last 6 months, and Sunny mentioned that in his prepared remarks, that we are seeing activity there. So we are excited about that piece of the business, finally beginning to come back from the COVID. So on that business, there's been a bit of a delay from COVID to resurgence from COVID, whereas the other business has kind of picked up right after COVID?

Okay, great. And then just last question. Sunny gave us a little -- I appreciate the update on the R&D side. Good traction it sounds like a bunch of new products. And it does sound like maybe not an inflection point yet, but a lot of these larger programs, it seems like you're at least reaching the prototype stage, and there's probably still some time to go before you have mass commercialization. But it does sound like we're getting at least closer on many of these programs. Is that fair to say?

The programs are moving forward. So our R&D programs moving forward. They've continued to be funded. And what's encouraging for us is that on the customer side, there's also engagement and continued activity. A couple of years ago, some of that had slowed down, but we've seen now customers reengaged in earnest.

Okay, great. Appreciate that. Thank you, guys.

Thanks, Larry.

Our next question is from Suraj Kalia with Oppenheimer. Please proceed with your question.

Good afternoon, Sunny, Sam, can you hear me all right?

Yes, we can

Yes.

Perfect. Gentlemen, congrats on the quarter. Hey, Sunny, many, many, many calls going on at the same time. So please forgive me if you’ll have already mentioned this. Your core cathode, can you walk us through your regulatory approach? And any specific OEM feedback that could cause – that you’ll have received that might require some tweaking.

Yes. So Suraj, we provide the components to our OEMs who then incorporate these technologies into their systems. So we don't we don't file 510(k) or seek regulatory approval per se, our OEM customers do. And they have established processes and sometimes predicate devices that they'll use. So that is not something that we actively pursue and not a real consideration in terms of how we launch this technology. In terms of feedback, the OEMs are going through very similar process like they do with our other tubes, which is when you have a novel technology, they go back and forth between what the technology can do and what they need and so they go back and forth on that. So the feedback that we are getting from the OEMs have more to do with application-specific needs. So the basic technology is working very well. The multimeter tubes are working well. They might say, well, we need x number of emitters instead of -- this is -- that's an ongoing process. It's very dynamic as our customers go through the design phase of their system. So we're in that mode. And so with what we've done in medical and industrial, we're doing a combination of 2 things: helping our customers with supporting them with their specific design needs; and secondly, continuing to market this to other OEMs. So with the Ion seeking out applications that we think this technology is capable of serving.

Right. And Sunny, forgive, I should have been more specific about your end user regulatory approach. But – would it be an array of devices in terms of different configs on the number of emitters, KvP, so on and so forth across the board? And any update on the cycle testing, where you all are? Or are we pretty much done for the most part and its commercial launch, let’s say, X period down the line?

So look, we did a lot of the performance characterization early on, and then we talked to you guys about that in the last few quarters. We're past that point. We are satisfied with the basic performance, the capabilities and we've got a handle on the say, the bracket performance brackets on what these tubes are capable of from a dose energy, et cetera. So that -- there's really no more new news to add there. What we are doing right now is purely focused on getting application mind share and adoption. So when you have a novel technology like this, it takes quite a bit of work together with the customers to get adoption. That's the phase we're in. And once we get a few of these examples under our belt, we will be in a better place to then continue on with the demand generation side because we can give concrete examples.

Fair enough. And Sam, one question. I'll throw it your way in hop back in queue. I know your -- you briefly made some remarks about the lack of visibility in the current environment. I appreciate your commentary. Sam, at what point would you care to give us a perspective when inventory management, especially when LIFO comes into play, and that's where -- because gross margins are a key component of your story. How are you all managing that so that LIFO really doesn’t – just given everything going around with cost inflation. I’d love to get your perspective in terms of has there been any shift in your inventory management plans? Any additional color would be great. Gentlemen, thank you for taking my questions, and congrats.

Thank you, Suraj. So yes, in terms of inventory management practices, say, 6 quarters or 8 quarters ago, we were making our production and manufacturing processes more effective and we were able to bring inventory down. And that was during the COVID phase. And since COVID, demand has significantly taken a turn on the positive side and followed by supply chain issues. So at this time, we are looking at stocking more raw material and parts. So from that perspective, on an average, we are stocking more and our inventory has gone up, and it may go up a little bit more yet again. So that's one thing that we are trying to do. Sunny outlined a number of initiatives in terms of making sure we have the raw materials to be able to meet the customer demand. So we are taking all of those actions, as Sunny said, and I would simply add on top of that, that we are buying more. We are giving long lead purchase orders to our suppliers. So say, if we were buying giving a PO for 3 to 4 months in advance to a supplier, now we are doing that double that -- now we're doing double that. So in that way, we are providing a lot more visibility to our suppliers so that we are assured of getting the material. And that's -- those are some of the changes we have made. The factory as of now is running, I would say, inefficiently in the sense, and we have talked about it in the prior quarters with all of you, driven by supply chain, start and soft nature, trying to scramble for material and all of those things. So factories are inefficient, we are trying our best to manage through this situation, and we are also leveraging our balance sheet to ensure that we can meet the customers' demands.

Suraj, does that answer your question?

Yes, thank you.

[Operator Instructions] Our next question is from Jim Sidoti with Sidoti & Company. Please proceed with your question.

Good afternoon, thanks for taking the questions. The first one is can you talk about shipments on -- for the 3 months of the quarter were a fairly -- excuse me, very heavily weighted towards the third quarter because of the supply chain issues. I mean towards the third month of the quarter because of the supply chain issues?

Hi, Jim, this is Sam. Yes, the shipments for the quarter were not linear, and they were tilted towards the third month of the quarter. And as a result, it caused AR to be high on the balance sheet. And yes, so last 2, 3 weeks of the quarter, we were able to get the material, finish it up, finish the product and were able to ship it to our customers. Yes.

And I assume there was a lot of overtime during that period. So that impacted the gross margin as well.

Yes. And as I was just answering, Suraj, yes. We do have over time, we do have over time, under time, all of that goes on, we need to many times we do both and complete the product. So all those aspects are covered when I say I mean when factories are running inefficiently. So yes.

Okay. And then the credit for SG&A, can you just give us a little color on what that was about?

Yes. So that credit was related to our incentive plans. And in this quarter, we looked at where the demand is versus where we are able to ship, there is a gap, and we looked at that and we looked at the performance of last year this year, and we went ahead and adjusted for that and reestimated it, and that's what caused the credit on the P&L.

Okay. So we shouldn't expect that to continue in the next -- in the second half of the year?

That is correct, Jim. It would be only for Q2. The outside of that credit, the operating expenses were in line with what we had guided to you and also in line with what Q1 actuals were and also pretty much in line with what we are guiding towards Q3. So the base outside of the credit, operating expenses are running around $45 million or $45 million, $46 million range.

Okay. And then Sunny made a comment at the beginning now that despite the supply constraints, he said you expected growth for the year. Is that top line growth or bottom line growth or both.

Jim, I think we hope -- as of now, we are only guiding for Q3, but we are hopeful of full year top line growth and full year bottom line growth.

All right, thank you.

Thanks, Jim. We have reached the end of the question-and-answer session. And I will now turn the call over to Chris Belfiore for closing remarks.

Thank you for your questions and participating in our earnings conference call for the second quarter of fiscal year '22. The webcast and supplemental slide presentation will be archived on Varex' website. A replay of this quarterly conference call will be available through May 17 and can be accessed at the company's website or by calling (877) 660-6853 from anywhere in the U.S. or (201) 612-7415 from non-U.S. locations. The replay conference call access code is 1372-8899. Thank you, and goodbye.

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