Greetings, and welcome to the Varex Imaging Corporation Fourth Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now my pleasure to turn the call over to Christopher John Belfiore, Director of Investor Relations. Go ahead, sir. Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the fourth quarter and fiscal year 2025.

With me today are Sunny S. Sanyal, our President and CEO, and Shubham Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex Imaging Corporation's website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex Imaging Corporation's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for 2025 and to the year are for fiscal year 2025. In addition, unless otherwise stated, quarterly comparisons are made year over year from 2025 to 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-Ks. 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 S. Sanyal.

Thank you, Chris. Good afternoon, everyone. 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 the Medical segment up 5% and the 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 detail…

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 three regions, reflecting our strong global partnership with leading imaging OEMs. The slight skew toward 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 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 2025. Our top 10 customers were 52% of revenues in fiscal 2025, and revenue from our largest customer, Canon, 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 2024, 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…

Thank you, Sam. Looking back, we faced a challenging start to fiscal 2025 due to the unpredictable global tariff situation. However, as we had anticipated, our customers' ordering patterns normalized once the tariff situation stabilized. Looking ahead, our customers in China are projecting stronger orders and sales for 2026 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 healthcare expansion plans. I am also happy to say that we were recently informed by MOFCOM that investigations regarding CT tube pricing have been paused indefinitely. We are intensifying our efforts to strengthen geopolitical resiliency through supply chain and manufacturing regionalization. We have 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 Imaging Corporation better to withstand current and future trade challenges. These operational and supply chain initiatives are reinforcing our customers' confidence in Varex Imaging Corporation 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…

Our first question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Sunny, Sam, can you hear me all right?

Yes, Suraj. How are you?

Gentlemen, congrats on a strong end to the year. Sunny, Sam, one of the comments you all made in your prepared remarks, 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, because it is split between medical and industrial, how should we think about the sustainability just given the customer concentration?

Yeah. 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 the 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 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 two 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 2026, do you think any of the systemic forces could change, you know, as you go through the year specifically within these two buckets? Gentlemen, thank you for taking my questions.

Thank you, Suraj. So Suraj, industrial as a percent of our overall sales has been growing. So it is 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 would 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 facility at Wuxi. So it is very difficult for us to now maintain consistency in between China and ex-China within the medical segment because of that phenomenon.

Sunny, forgive me. Can I ask another question?

Yes. Yes.

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

So the 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 some business in China. So but we are not anticipating a significant impact from at least a couple of examples that you cited. Secondly, our Chinese OEMs are also increasingly commercially focused outside of China. So at the end of the day, for us, it is 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 another place. Virtually, most of our customers used to be concentrated in one geography, and then they moved global into other geographies. And we are seeing that out of our customers in China as well. Thank you.

Thank you. Our next question is coming from Lawrence Scott Solow from CJS Securities. Your line is now live.

Great. Thank you. Good afternoon or good evening. I guess first question, Sunny, Sam, I know you do not give full-year guidance. I do not want to make too much of Q1. I know seasonally it is a little bit slower. But I guess it looks like you have like kind of flat to 8% growth, so mid-single-digit for the quarter, 4% to midpoint. Is there anything we could glean from that 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. Let me answer that question. Yes. At this point, the demand environment looks to be solid. And we expect full-year revenues to grow. We are expecting the medical business to grow for the year. We also expect the industrial business to grow. And we are expecting the medical business ex-China to grow, and at the same time, we are modeling China to be flattish. So that is some additional color that I can provide you for the full year. You know, and you mentioned that we do not guide annually just for various reasons. And so that is 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, you know, business volumes followed some more of an unusual pattern for us in FY '25. But 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 are assuming kind of flat or is in your budget. Not the full-year guidance because you are only going to share that with us. But it sounds like your customers in China expect growth. Although I know you also mentioned that it is a little bit to figure out now because you are shipping from China more often than not than you were previously, but any thoughts on that?

Yeah. It is becoming more and more difficult. Our customers, global customers, are changing their supply chains. But to the extent that what we can model, we are seeing China as stable, stable to slight growth, but given the tariff and all of the uncertainties around the 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 slip in 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 am just trying to figure out, I know you have the standalone systems now, but sometimes the mix will actually drive higher revenue on the service side. So but that would not be a lumpy higher revenue number. So any color to that strong performance, particularly on the margins in the quarter in Industrial?

Sure. I can try to answer that. So you are right, Larry. Industrial gross margins were quite a bit better than our expectations for this past quarter. You know, we experienced a higher than usual proportion of service revenues on our Linux installed base. And as you know, the service business is at much higher margin than the hardware equipment gross margins that we experience. So because of that service and time and material, which is generally unplanned service business experience. So that drove our gross margin 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 not the norm, but we did benefit from higher as a normal service.

And and

Yeah. Yeah. Go ahead. Sorry. And I was saying that

when I say if you go back two years ago, our industrial margin had much more of a service component to it. And at that time, we could do 35-37, 38-40% gross margin. And what I was going to add there is that my comment is more on the near to mid-term, but in the long term, say when you are thinking of say two 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.

Great. That is exactly where I was going. I appreciate that. Thank you. I am also I appreciate all that call. Thank you.

Thank you. Our next question is coming from James Philip Sidoti from Sidoti and Company. Your line is now live.

Hi, good afternoon. Thanks for taking the questions. So your revenue came in well above my estimate, well above your guidance in 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, no. 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 is 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 they can be $1 to $2 million per system. So that can swing the numbers. One or two systems can increase the number. As opposed to tubes or detectors, which are generally in the $50,000-$75,000 in that type of a price range. Versus $1.5 million to $2 million type of a system. So that is a little bit more color behind the strong performance for Q4.

Okay. And I believe you said China was 14% of revenue. So I am just checking my math, $32 million compared to about $30 million a year ago. Does that sound right?

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

Yeah. No. I was comparing to 2024.

Yes.

Okay. Alright. 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 have started to ship detectors from India. So now the factory, as you just said, we expect it to ramp up over FY 2026. So we are really excited about that. We are 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 the construction schedule. So once we complete the construction, then we need to bring in equipment and then qualify the equipment. Run trial runs, etcetera, and make sure it is all optimized and qualified. So I would say that factory is still now twelve months away from production, or from product shipments, twelve to fifteen months. But we 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 growth 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, concentration, product and everything else like that. But just isolated to India, there are two 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 is one aspect of India. 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 plans from India are to be more competitive in the radiographic segment, sub-segment 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 will 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 an upward momentum to gross margin. So those are the two 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, you know, we have been doing a lot of work trying to take cost out, trying to pass tariffs 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, etcetera, 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 as we look into late 2026 and 2027.

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

So, Jim, in R&D, there is a lot of expense that is, you know, engineers like to play with, you know, 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 million or $2 million here and there. So that is what happens in R&D. But what I can say is overall OpEx for the 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 million, $53 million a quarter. For the full year as we go through the year.

Okay. Thank you. That is very helpful.

Yeah. Thank you, Jim.

Thank you. Next question today is coming from Anderson Shock from B. Riley Securities. Your line is now live.

Hi, thank you for taking the questions and congrats on a really strong quarter and into the year. So you mentioned a batch of VXM mobile cargo inspection systems to a European and then implementing a rail cargo scanner this year, I guess in 2026. Is there any color you can share on the size of these orders and the timeline of shipping these? And I guess how should we think about growth in 2026 compared to the $55 million in orders in 2025?

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

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

Yes. There were two investigations. One was antidumping, that is a pricing matter. And the second one was an industry investigation, and both have been paused without any end date, definitely.

Okay, got it. Thank you for taking our questions.

Thank you, Anderson.

Thank you. Next question is a follow-up from Lawrence Scott Solow from CJS Securities. Your line is now live.

Great. Just quickly. I know you do not guide sensitive products, but so the $55 million in orders that you got for the systems are a little bit more than that. Bit for the security screening. Is that I mean, I assume the majority of that has not shipped yet without giving us a number. Is that fair?

I do not know if I could say majority. Some of that has been shipped, and a lot of that has not been shipped.

So Okay.

Or said another way, would you expect more to be shipped this year than last than in 2026 and 2025?

Okay.

Yes. The projects that are in flight 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 is likely some of that will also get shipped and installed in '26. We do not have a large backlog. So our cycle time from taking the order to when it gets out of our ships out of our docks is about six months.

Right. But that is actually pretty long for you for backlog. Right? Your business generally is not about

Yeah. Our components business, yes.

It is so so right. So that should that is probably yeah. Taiwan longer cycles for you at least.

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

Right. No. That is a good thing. Then just just last question. Just from a general you know, broad brush, tariff impact, there is some on the gross margin on the higher cost side, right? Assuming tariffs do not let us, you know, probably a tough assumption, but let us say nothing changes from here. Can you just kind of walk us through the impact of tariffs and does that I guess that may get better as you ship more out of India and China, but any just color on the impact currently? Would be great. Thanks. Yes.

Yeah, 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 tariffs decisions. Sure, sure. Yeah. So there is a little bit of variability to it depending upon where the right now, the tariffs have been flowing through our P&L and balance sheet, etcetera. And it is 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 to lower tariff country into the United States. Right. And then the finished goods the only country where I am aware of the China is China, where there is US sourced product getting tariffed 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 is still maybe I would say, at least twelve months away on that side.

Sure. Great. Thank you. Appreciate it.

Thank you, Larry. Thank you. We reached the end of our question and answer session. I would 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.vareximaging.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.