Varex Imaging - Q3 2023
August 1, 2023
Transcript
Operator (participant)
Greetings. Welcome to the Varex third quarter full year 2023 earnings call. At this time, all participants are on 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. Please note this conference is being recorded. I'll now turn the conference over to your host, Christopher Belfiore. You may begin.
Christopher Belfiore (Director of Investor Relations)
Good afternoon, welcome to Varex Imaging Corporation's earnings conference call for the third quarter of fiscal year 2023. With me today are Sunny Sanyal, our President and CEO, and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex's website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2023. Unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2023 to the second quarter of fiscal year 2023. 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 and 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 measures in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.
Sunny Sanyal (President and CEO)
Thank you, Chris, and good afternoon, everyone. I'm pleased to report another solid quarter for Varex. Revenue of $232 million in the third quarter of fiscal 2023 is a new quarterly record for us. Non-GAAP gross margin of 34% exceeded our expectations, and Non-GAAP earnings per share of $0.37 was at the high end of our guidance. These results were helped by continued strength in our industrial business. In addition, we increased cash by $30 million in the quarter, primarily driven by diligent inventory management and increased profitability. Revenue in the third quarter was up 2% sequentially and 8% year-over-year. Revenue in the medical segment increased 1% sequentially and 5% year-over-year, while industrial revenue increased 5% sequentially and 20% year-over-year.
Non-GAAP gross margin in the third quarter was 34%, which was better than our expectations and up 100 basis points compared to the second quarter. This was primarily due to the higher portion of industrial sales. Adjusted EBITDA in the third quarter was $38 million, and non-GAAP EPS was $0.37. We ended the third quarter with $152 million of cash, cash equivalents, and marketable securities on the balance sheet, up $30 million from $122 million in the prior quarter. This was primarily due to higher profitability and $13 million reduction in inventory in the quarter. Let me give you some insights into sales detail by modality in the quarter compared to a five-quarter average, which we will refer to as sales trend.
In our medical segment, global sales of CT tubes was solid in the quarter and remains above its sales trend. Our fluoroscopy and oncology modalities improved in the quarter, but were flat compared to their respective sales trends. Mammography was solid in the quarter and above its sales trend. Dental, which can be lumpy from quarter to quarter, remained down in the third quarter, but is trending in a more positive direction, and radiographic continues to grow above its sales trend. Global sales of our industrial products were robust for the second straight quarter, and order intake remained solid. The continued strength was primarily in our nondestructive inspection business across various applications, including cargo screening and oil and gas. We also saw increased adoption of our photon counting technology with growth in food, battery, and electronics inspection in the quarter.
Taking a step back from the quarter, I'd like to provide a brief update on some of our products we introduced over the last year. Our dynamic detector platform, AZURE, continues to make solid progress with our customers who are integrating these detectors into various systems, including those for cardiovascular and surgery applications. The AZURE platform is a cost-effective, high-performance dynamic detector technology aimed at enabling us to secure design wins for dynamic applications. These detectors are targeted at expanding our applications footprint in our new and existing customers. It offers high resolution and high performance at lower X-ray dose-... than its amorphous silicon equivalent and is a cost-effective alternative to CMOS detectors, which become expensive at larger sizes. We expect to see continued adoption of AZURE and expect that many new system launches by our customers in the coming years will design in our AZURE detectors.
Since its launch in 2022, we have seen strong interest in this platform, and we are happy with how this technology is performing in the field. At the same time, we are seeing continued uptake of our LUMEN detectors. We now have a full portfolio of LUMEN detectors used across various modalities, including dental and fluoroscopy. We recently also introduced LUMEN detector models made in our factory in China for sales in global markets where there are no political or economic barriers to sales of products Made in China. We expect to see shipments of LUMEN detectors made in our factory in China starting in October of this year. The LUMEN platform offers a U.S.-designed detector for radiographic applications at a globally competitive price and is targeted at expanding our coverage of these applications.
Our industrial business has seen solid growth this year, partly due to strength in our nondestructive inspection applications, which utilize our linear accelerator products, also referred to as Linacs. These are high-power X-ray sources that are used in inspection of large objects such as cargo containers, automotive parts, jet engines, and rocket motors. We're excited to say that this technology was used in the manufacturing of India's Chandrayaan-3 rocket, which is carrying a rover to the moon. Varex Linacs were used to inspect the integrity of the rocket motors, propellant tanks, and detecting voids, cracks, and other abnormalities. Varex is the world leader in high-energy linear accelerators for industrial applications. Now we're proud to support India's growing space program.
In summary, we're very happy with our performance in the third quarter, and now I will turn over the call to Sam to go over details of our financial results.
Sam Maheshwari (CFO)
Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparisons of our results for the third quarter of fiscal 2023 with those of our second quarter of fiscal 2023. I'm pleased to report another strong quarter. We exceeded the midpoint of guidance for revenue. Gross margin was above the guided range, and Non-GAAP EPS was towards the high end of guidance. The primary driver of the strong performance was the continued execution in our industrial segment. As a result, we reported sales of $232 million and non-GAAP gross margin of 34%. Non-GAAP EPS was $0.37. We generated $38 million of operating cash flow in the quarter, our second-highest cash-generating quarter as a public company. Third quarter revenues increased 2% compared to the second quarter of fiscal 2023.
Revenues increased 8% compared to third quarter of fiscal 2022. Medical revenues were $175 million, and industrial revenues were $57 million. Due to the ongoing strength of the industrial segment, industrial revenues climbed to 24% of our total revenues for the quarter. Medical revenues were 76%. Looking at revenue by region, Americas increased 8% sequentially, while EMEA increased 10% and APAC decreased 10%. China was 18% of the overall revenue for the quarter. Let me now cover our results on a GAAP basis. Third quarter gross margin was 33%, 100 basis points higher sequentially. Operating expenses were $52 million, down $5 million compared to the second quarter of fiscal 2023, and operating income was $24 million, up $8 million.
Net earnings was $9 million, and GAAP EPS was $0.21, based on fully diluted 50 million shares. Please note that GAAP and non-GAAP EPS for the third quarter reflect the adoption of ASU 2020-06. This involves an add back of $1.4 million of after-tax interest expense for us to our net earnings and adds approximately 10 million shares to the diluted share count. Moving on to the non-GAAP results for the quarter. Gross margin of 34% was up 100 basis points sequentially, driven primarily by higher pricing, higher proportion of sales in higher-margin industrial segment, and a favorable experience in freight expenses. R&D spending in the third quarter was $20 million, down $3 million compared to the second quarter.
This was due primarily to $2 million of payments related to technology milestones made to Micro-X in the second quarter of fiscal 2023. Overall, R&D was 9% of revenues within our targeted 8%-10% range. SG&A was approximately $29 million, flat compared to the second quarter. SG&A was 12% of revenues. Operating expenses were $49 million, or 21% of revenue. Overall, our operating expenses were slightly above our expectations. Operating income was $29 million, up $6 million sequentially. Operating margin was 13% of revenue, compared to 10% in the second quarter of fiscal 2023. Tax expense in the third quarter was $5 million, or 21% of pre-tax income, compared to $4 million, or 28% in the second quarter of fiscal 2023.
Net earnings were $17 million, or $0.37 per diluted share, up $0.11 sequentially. Non-GAAP EPS of $0.37 is calculated by adding after-tax interest expense of $1.4 million to net earnings of $17 million, and the result is then divided by 50 million shares. Turning to the balance sheet. Accounts receivable increased by $3 million from the prior quarter, and DSO held steady at 64 days. Inventory decreased $13 million in the third quarter, and days of inventory decreased eight days to 174 days. We are pleased with the progress in reducing inventory and expect this to continue in the fourth quarter of fiscal 2023. Accounts payable increased by $1 million, and days payable stood at 44 days. Moving to debt and cash flow information.
Net cash flow from operations was $38 million in the third quarter, due primarily to profitability and $13 million reduction in inventory. We ended the quarter with cash, cash equivalents, and marketable securities of $152 million, an increase of $30 million from the second quarter of fiscal 2023. Gross debt outstanding at the end of the quarter was $449 million, and debt, net of $152 million of cash and marketable securities, was $297 million. Adjusted EBITDA for the quarter was $38 million or 16% of sales. Our net debt leverage ratio was 2.3x, trailing 12 months of Adjusted EBITDA at the quarter end. Moving on to guidance.
At the beginning of the second half of fiscal 2023, we provided guidance for sales growth for the year of 3%-5%. We expect to be in that range. Here is the guidance for the fourth quarter. Revenues are expected between $220 million and $240 million. Non-GAAP earnings per diluted share is expected between $0.20 and $0.40. Our expectations are based on non-GAAP gross margin in a range of 33%-34%, non-GAAP operating expenses in a range of $49 million-$50 million, tax rate of about 25% for the fourth quarter, non-GAAP diluted share count of about 50 million shares per ASU 2020-06. With that, we'll now open the call for your questions.
Operator (participant)
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Suraj Kalia with Oppenheimer & Company. Please proceed with your question.
Suraj Kalia (Managing Director)
Hi, Sunny, Sam, can you hear me all right?
Sunny Sanyal (President and CEO)
Yes, we can, Suraj. How are you?
Suraj Kalia (Managing Director)
Doing well. Gentlemen, congrats on a really nice quarter. Sunny, or Sam, either one. Specifically on medical, Sunny, one of the things that I know you have talked in the past, numerous times, and I know, you know, for example, GE HealthCare is also talking about photon counting detectors as a, as a key thing, you know, being viewed. Sunny, if you could, I'd love to understand, how should we adjudicate photon counting adoption and competitive dynamics? Maybe if you could, give us some real snapshot of where worldwide photon counting sales are, where Varex fits in that pie.
Sunny Sanyal (President and CEO)
Sure, Suraj. Photon counting is an emerging technology, and it's in the process of gaining reputation in the market, and it's only the last, let's say, 18 months or so, that in the medical field, it has been publicized quite a bit for CT type of applications. From our perspective, where we're excited about it because we went into photon counting in anticipation of solid, solid capabilities that would bring value in medical CT, and now we're seeing the industry also starting to move in that direction. We are, we are present with photon counting in two markets, industrial and medical.
The adoption cycle in industrial has been faster than in medical so far. Part of our strength in industrial this quarter is also driven by use of photon counting detectors in a few applications like food processing, battery inspection, et cetera. We're excited to see photon counting get traction. It's getting traction in industrial faster. We have some OEMs who are engaged in the use of photon counting in medical OEM, medical applications. More recently, we've started gaining a fairly good interest from the market with the use of CT. That said, this is a novel platform. We've said that our expected contribution to the growth in the medical side is still several years away while the market absorbs these technologies into their newer designs. That's where we stand.
Sam Maheshwari (CFO)
We're excited about the technology. It's moving forward, we're glad to see some of the major OEMs also lining up behind it, because that's what then makes the adoption, increase. Yeah. Suraj, I'll add that as of now, our photon counting and charge integration combined, that, that business is right now generating about $20 million of sales annualized, and we are seeing growth there. Just wanted to give you that perspective of where we are with this technology as of now, revenue-wise.
Suraj Kalia (Managing Director)
Perfect. Yeah, that is, that is really helpful. Sunny Sanyal, one more question for you and one for Sam Maheshwari. Sunny Sanyal, if you could, status on cold cathode?... Also MIC China 2025, what are the dynamics there currently, to the extent that you can share? Sam Maheshwari, you know, any updates, and forgive me if I missed this, we have multiple calls going on. Just in terms of inventory management and your gross margin, your pace of growth of GAAP gross margins, how should we think about it as we exit this year and going into, let's say, first half of 2024? Gentlemen, thank you for taking my questions, and congrats again.
Sunny Sanyal (President and CEO)
Okay. Suraj, for with respect to cold cathodes. Just like I said, with photon counting, new technology takes time to adopt. An adoption curve there is farther along than with cold cathode nanotube technologies. Nanotubes are much newer and the industry is trying to figure out what kinds of applications would be applied to it. Again, our, from our perspective, from a revenue contribution perspective, that's farther out than photon counting. Where we are with that technology is the, we're continuing to make progress on the product development and developing, making tubes with that technology. Our technology transfer from Micro-X has gone very well. We are continuing to with that work, and we're continuing to evolve that technology.
We have, we have continued to make prototypes with our joint venture partner, and now we're working through some commercial aspects of our relationship. In, in short, you know, from our perspective, we're making good progress with the technology. We're happy with the technology, and we're seeing now customers starting to get engaged to get their head around how they might think about applications for this technology.
Sam Maheshwari (CFO)
Okay. Then coming back to your question, Suraj, on inventory and gross margin. In terms of inventory, as you know, we've been trying to bring inventories down, and we are very pleased with the progress that we made in this last quarter. We brought inventories down by $13 million, and our focus on that continues. We are expecting inventories to come down further. We are working in that direction. In the next three months and six months, we should be bringing inventory further down. We are not guiding by how much. We are not guiding the amount that we are targeting to bring down, but I think we have some room to bring it down further. Then in terms of gross margin, we've made good progress in this last quarter.
I would say that gross margin has benefited through various initiatives of ours. Manufacturing efficiencies have come back in. The freight environment has generally been favorable in the last quarter. As I talked about, you know, price cost drag has been minimized. There are still, we are still suffering through some continued price cost drag onto the P and L, and we have some high cost components in our inventory, and we are expecting them to fully work their way through the system by December-January timeframe. At that point, I'm thinking of a further pickup of, say, around 100 basis points in gross margin further. That is how gross margin picture is shaping up, and we remain committed to our target of getting to a non-GAAP gross margin somewhere between 34% and 35%.
Sunny Sanyal (President and CEO)
Suraj, you also asked about China 2025. I didn't understand the first word that you said with it, MIC. I wasn't sure what that, what you meant by that. As far as China 2025 is concerned, we, we, began our journey to address the needs, requirements for China 2025 a few years ago, and what we were taking, two different- oh, I see, Made in China. In terms of our, approach to it, we started, with our facility in Wuxi to make, products local, for local in China, and that has been... We started with tubes, we've expanded to detectors, and now we're making, a very large number of tubes and detectors in China. We are-- the couple of things are happening.
Our strategy for China, 2025, is to, to get our products registered with, and such that we can get the Made in China labeling, which is where we are currently, and we're continuing to expand the portfolio of products that, two products that we sell in China to be, to be made that way and have carried that kind of a label. In addition, we've been expanding our local commercial relationships in China, so that we contract locally with our Wuxi office, our Wuxi facility, to handle both shipment of new products, but then also warranty, service, support, and all the things that you would expect out of a supplier that's based in China for the Chinese manufacturers.
Our expectation is by 2025, vast majority of the products that we sell in China will be made, can be supplied from China. That's the approach we're taking. We have validated this approach with our global OEMs and with the local OEMs to see their level of comfort in what we're doing, and we seem to be in, in alignment with what they're expecting from us for China 2025.
Suraj Kalia (Managing Director)
Thank you.
Operator (participant)
Our next question comes from the line of Larry Solow with CJS. Please proceed with your question.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Great, thanks. A couple of follow-ups to Suraj's questions and a couple of new ones as well.
You mentioned before, I think Sam might have mentioned, on the photon counting, it's about $20 million in sales today, so that's, you know, about 2% of sales. Just trying to get a little my hands around, like, you have like a figure of sort of new products or products introduced in the last three years and how much they represent of your total sales today. I imagine it's still under 5%. Is that, is that fair to say?
Sam Maheshwari (CFO)
Larry, this is Sam. In terms of the revenue related to new products.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Mm-hmm.
Sam Maheshwari (CFO)
new products, which is over the last three years from that perspective.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Or, or whatever that you might have. Yeah.
Sam Maheshwari (CFO)
Whatever-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Whatever that. Yeah, I don't know how you guys look at that, but I'm just trying to get a sense of, you know, products introduced over, you know, some, some newer period, whether that's one year, three years, five years, and sort of how much revenue that's, that's, you know, contributing today and maybe, you know, what that could be in five years, you know?
Sam Maheshwari (CFO)
Yeah. Larry, I do not have that number off the top of my head here right now.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
I do want to qualitatively say that in our business, once we release the product, it goes through a pretty reasonable, a fairly long adoption cycle, in the sense the product-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Mm-hmm
Sam Maheshwari (CFO)
is being released, and the customers are trying to make it into their product, and then they release their product. When that customer's product picks up volume, that is when we see volume. It is quite normal and natural.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Got it.
Sam Maheshwari (CFO)
In our business that for quite some time, and that quite some time could easily be two years, one-two years, easily.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right
Sam Maheshwari (CFO)
... where the product has been released, and it is not generating a significantly high amount of revenues. From that perspective, for the first three years of product release, we may not be seeing a whole lot of revenues, and so we do not track it that way.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
we
Larry Solow (Partner, Managing Director, and Equity Analyst)
Yeah, absolutely.
Sam Maheshwari (CFO)
We can, we can figure that out for some other conversation, in future.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Cool.
Sam Maheshwari (CFO)
I think in our business, it'll make more sense in terms of thinking more from a five-year horizon perspective.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Absolutely. Yes.
Sam Maheshwari (CFO)
We, yeah. We can talk about it at, at some other later call, Larry Solow.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Yeah.
Sam Maheshwari (CFO)
I don't have that right now.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay.
Sunny Sanyal (President and CEO)
Larry, I can give-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Yeah.
Sunny Sanyal (President and CEO)
Let me give you one, one frame of reference.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Yeah. Yeah, go ahead, please.
Sunny Sanyal (President and CEO)
Sorry. One frame of reference.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sunny Sanyal (President and CEO)
You may recall, when we, when we, spun off, at that time, we had a lot of discussions about China and, CT tubes...
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right
Sunny Sanyal (President and CEO)
-in China and the contribution of revenues from those. It's been now six years, and at that time, those tubes were designed, and we Recall, we said our OEMs were implementing them, designing them in. We are now five, six years into that journey, and now you, you see what our China revenues are.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Absolutely.
Sunny Sanyal (President and CEO)
That's sort of you can have as a frame of reference, what happens when we launch products, how long does it take, and once we do, what kind of volume sort of to expect in an active market.
Larry Solow (Partner, Managing Director, and Equity Analyst)
You know, I appreciate that, Colin.
Sunny Sanyal (President and CEO)
So-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Sunny. Yeah, no, I appreciate that. While I got you on that, the 18% that you referenced or Sam referenced as coming from China, is, is the vast majority of that today in, in CT tubes?
Sunny Sanyal (President and CEO)
It's in tubes, yes, and majority of tubes are CT tubes for us there.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right. Okay. Right. Okay. Okay. Did I cut you off there? Maybe you were gonna say something else.
Sunny Sanyal (President and CEO)
No, that's it.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay. All right. Just to follow up on the margin question. I guess early in the year, I think you guys quite sort of cited price to cost lag, inflation, or price to cost lag, maybe tied with inflation because you were trying to catch up with price raising, but also some supply chain issues. I think you sort of said you were, you know, you thought there were like a 400-500 basis points tailwind on EBIT, Adjusted EBIT margin. You know, how far along are we? You know, you kind of mentioned you have like another 100 bips on gross margin.
If I just look at, you know, what you did this quarter versus what you did in Q1, you're sort of 400 bips higher. Does that kind of capture that 400-500 bips that you spoke about in Q1? You know, can we get more as we look out? You know, how, how should we view that?
Sam Maheshwari (CFO)
Yes, Larry. you know, six, nine months ago, when we talked about it, there were a number of things that were headwinds, and slowly...
Larry Solow (Partner, Managing Director, and Equity Analyst)
Got it.
Sam Maheshwari (CFO)
... we have been working on it, including freight and manufacturing efficiencies and supply chain-driven issues, et cetera. A lot of them.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right
Sam Maheshwari (CFO)
are now back, back to, back to the pre-crisis or pre-COVID crisis type of levels.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Great.
Sam Maheshwari (CFO)
I would say at this point, there is still 100-200 basis points of improvement possible from where we are here.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay.
Sam Maheshwari (CFO)
I would say.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay
Sam Maheshwari (CFO)
... more closer to 100, 150 basis points. you might see-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay
Sam Maheshwari (CFO)
... some noise here and there from quarter to quarter. and-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right
Sam Maheshwari (CFO)
... and we are working through it.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right
Sam Maheshwari (CFO)
A lot of these other factors have now actually been recovered or we have already, we are behind it, and that is the cause of the margin improvement.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Yeah, fair enough. You sort of said that 100 bips on gross margin. It feels like once you hopefully get that sometime, maybe by the end of the calendar year, and maybe there's a little bit more on the operating end, but going forward beyond that, it would just have to be new products driving higher prices or operating leverage, I guess, right?
Sam Maheshwari (CFO)
Yeah, there will be three things, Larry. One is what you said exactly, sales volume. Second, will be the.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
That will drive the operating leverage.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
Then the new products will be a major factor in that. The third element there is the segment mix, as industrial-
Larry Solow (Partner, Managing Director, and Equity Analyst)
Okay
Sam Maheshwari (CFO)
... becomes a higher portion of the business, then it has a, a positive gross margin effect on the overall margin.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Got it. Okay, let me just squeeze in one more question. Just on the guidance, I get the gross margin, maybe down a little bit because you had, you had a nice quarter mix this quarter, and usually Q4 medical is usually stronger, seasonally stronger, that's a little bit lower margin. I'm just trying to figure out how come, you know, as we look out to Q4, I, I thought, you know, seasonally and with medical being stronger and being the majority of revenue, usually you have a better Q4 than Q3. Is there any reason why we're kind of at the same guidance range, or is it, you know, anything, you know, I'm missing there? Thanks.
Sam Maheshwari (CFO)
Yeah, sure. Larry Solow, I'll let me take that question for you, for you. If you look at our second half of FY 23 versus the first half of FY 23, we are up around 7%. If you look at last year, second half to first half, we were about 8%.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
I would say if you look at it a little bit broader than the quarter, we are pretty much showing the same, same pattern, but within the quarter, what can end up happening is $2 million, $3 million, $4 million comes into this quarter versus the next quarter, and so that can give that optics of quarter to quarter.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Right.
Sam Maheshwari (CFO)
If you look at it, from a half versus half, we are pretty much doing what we said. Also for the full year, we kinda guided 3%-5%, and at the midpoint here, we are looking at, you know, 4.3% or something for the full year growth. Essentially, from our perspective, we are achieving what we set out to do for FY 2023.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Mm-hmm
Sam Maheshwari (CFO)
... $ a couple millions here and there between the quarters can have that optics effect.
Larry Solow (Partner, Managing Director, and Equity Analyst)
Got you. Fair enough. I appreciate all the color. Thank you.
Sam Maheshwari (CFO)
Thank you, Larry.
Operator (participant)
Our next question comes from the line of Young Li with Jefferies. Please proceed with your question.
Young Li (SVP of Equity Research)
All right, great. Thanks so much for taking our questions. Maybe to start on the industrials performance, you know, good to see the continued growth and margin contribution there. I guess I'm wondering if you can maybe talk a little bit about the sustainability of the growth trend, you know, your visibility into the ordering patterns there. You know, is this sort of, you know, are we still in the early innings of a multi-year growth cycle for industrials?
Sunny Sanyal (President and CEO)
Sure. Industrial has been strong for us, and it has been, I think, post-COVID, it has come back and been consistently strong and it has been growing. We're very pleased with it. We're also at a point where, there are certain segments of the market that are, that are, adopting imaging fairly rapidly, and so we continue to be, benefit from, from that effect. Look, we're fairly optimistic about continued adoption of technology in industrial, and it, it seems to be, you know, there are parts of that industry that are tender-driven, that can be lumpy, but nondestructive inspection, in general industrial areas are, are fairly, have been fairly steady and strong for us. I'm, I'm optimistic about the long-term prognosis because it's largely a greenfield market.
It's also, you know, it's, it's growing faster than medical as well as we've discussed in the past.
Young Li (SVP of Equity Research)
Mm-hmm. Okay, very helpful. I guess my follow-up, just on China, 18% of rev, that implies, I guess, low single- to mid-single-digit growth year-over-year. You know, that's below the historical growth trend. Would be great if you can provide some more color on the growth that you saw this quarter, you know, how did it perform relative to your expectations and, you know, what's the outlook for growth for China going forward?
Sam Maheshwari (CFO)
Yeah, sure, Young. China performed as per our expectations. There was neither a positive versus expectations or a negative in this last quarter. And then coming back to your question of, you know, year-over-year growth, I would say that the numbers for China are now becoming fairly, fairly becoming reasonably large for us. The law of large numbers as well as coming in as well as, you know, it's difficult for a region to continue to grow 15%-20% ongoing basis, but even smaller percentages now are reasonably large size in terms of the dollar amount.
You are seeing year-over-year growth kind of moderate, but we are seeing strength and but, but, in terms of percentages, that strength is moderating, which is natural, and we have talked about this in the past, that over, over time, China growth will fall in-- fall back in line with the rest of the world, but there is still some more room to go there in terms of China growing faster than the rest of the world. It-- China is, as of now, China is behaving and sales are happening like how we would expect it to do.
Young Li (SVP of Equity Research)
All right. Thank you very much.
Operator (participant)
Our next question comes from the line of James Sidoti with Sidoti & Company. Please proceed with your question.
James Sidoti (Analyst)
Hi, good afternoon, and thanks for taking the questions. Can you talk a little bit about inventory at your medical OEMs? You know, I know at the beginning of the year, you were worried that-
... because they were having supply chain issues, that they maybe had an oversupply of your components and might be cutting back. You know, now six, six-eight months, you know, down the road, have those supply chain issues subsided? You know, where, where is inventory of your product, you know, at, at the OEMs?
Sunny Sanyal (President and CEO)
Hi, Jim, this is Sunny. I'll generalize. Yes, a couple of quarters ago, there was, there, there were some acute problems with some of our OEMs, with getting their factories to flow because of supply chain issues. They had huge backlogs, and there was some amount of our products that were in inventory. You may recall, that's why our first quarter was faced a lot of stress as a result of that. Since then, the flow seems to have improved through the production environments of our customers, and they're, they're not declaring victory yet. There's still supply chain issues, spotty, and we are seeing those as well. While broad-based supply chain issues have eased, there's still spots where we get, you know, fewer vendors, there are situations where things get caught up.
It's not fully out of the woods yet, but I would say that the overall inventory levels of our product with, I'd say, our customers are lower than where they were in, I'd say, a couple of quarters ago.
James Sidoti (Analyst)
Okay. Then one of the other concerns you had, two quarters ago was hospital capital spending. You thought it might slow down because of the economic uncertainty. You know, again, you know, six months down the road, it seems like the recession may not be as bad as we thought initially. Have you seen pressures there subsided as well? Have you seen hospitals more willing to, to, to step up their capital spending?
Sunny Sanyal (President and CEO)
You know, what we are seeing is that the labor-related costs are easing up, and increasingly we're hearing hospitals doing better with their use of temporary labor. We see that as a positive, that increase improves profitability. We've also seen, some amount of buying, continued buying by hospitals. It's, I'd say it's more positive than it was before, but beyond that, it's hard for, for us to speculate what that environment looks like, particularly on a generalized global basis. These things vary by geography.
James Sidoti (Analyst)
Okay. All right, I'll just sneak in one more on a balance sheet. Prepaid expense and other current assets, that was up about $15 million-$16 million in the quarter. Is that where some of the cash is?
Sam Maheshwari (CFO)
Yes. Jim, I just want to make sure I hear it correctly. Did you say prepaid and other current assets?
James Sidoti (Analyst)
Right.
Sam Maheshwari (CFO)
Yes. Some of the cash, because it is beyond 90 days, is considered other current assets, and that's where it is. Yes.
James Sidoti (Analyst)
Okay. All right. Is there any other reason why that was up so, so much in the quarter, or is that just the, the, the, basically the cash equivalents?
Sam Maheshwari (CFO)
That is basically the cash equivalents. It might be $ a few hundred K here and there, a noise level change, but most of it is, is the other, is the cash equivalents.
James Sidoti (Analyst)
Right. Okay. All right. That's what I thought. I just wanted to make sure. All right. Thank you.
Sam Maheshwari (CFO)
Thank you.
Operator (participant)
Our next question comes from the line of Anthony Petrone with Mizuho Securities. Please proceed with your question.
Anthony Petrone (Managing Directior of Equity Research)
Thanks for listening to me in here. More on just manufacturing mix, just kind of want to get an update on what, what amount is actually being produced at Wuxi versus Salt Lake, and how that influences margin, overall gross margins. As we look ahead over the next couple of years, where can that mix trend? I'll have one follow-up question.
Sam Maheshwari (CFO)
Anthony, this is Sam. Good to hear your voice. In terms of Wuxi production, Wuxi, in the overall scheme of things, is even as of now, is a smaller site for us. I would say about closer to 70% of value or revenue volume is done through Salt Lake City, and the remaining is done through Germany, Philippines, Netherlands, and Wuxi. That gives you a little bit of a perspective. I would say it is still, on an annualized basis, less than 10% of our overall revenue volume going through Wuxi. That gives you a little bit of a perspective there. In terms of overall gross margin, it just depends from what type of modality that we are shipping from there, and it can change.
It is not something which is due to labor difference or anything else. It is, it gets impacted largely depending upon which customer, what modality that we are shipping from Wuxi versus Salt Lake City. It's a little bit of a hard question to answer. It can vary from quarter to quarter.
Anthony Petrone (Managing Directior of Equity Research)
Maybe just an update on the mix between tubes and flat-panel detectors, other components. You know, last year, extending maybe even 18 months ago, there was pressure in pricing on flat-panel detectors, but CT tubes in particular were holding price quite well. Anything of note on the pricing side between tubes and flat-panel detectors as we look into the back half of the year, maybe even into 2024? Thanks again for taking the questions.
Sam Maheshwari (CFO)
Yeah. In general, a few years ago, I would say our business used to be 45% sources, 45% panels and detectors, and 10% would be Connect & Control or CNC and software. As of now, I would say we are around 10% CNC and software, that the 90% split, which used to be equal between sources across industrial and medical segments, used to be 45% and 45%. Now that has moved 50% towards tubes and 40% towards panels, driven by the factor that tubes, the sources side, the medical sources side, has grown a bit faster than the panel side. That is the overall distribution between panels and X-ray sources and the other components of the business. What was the second question, Anthony?
Anthony Petrone (Managing Directior of Equity Research)
Price.
Sam Maheshwari (CFO)
Oh, in terms of pricing, as you know, 18 months ago, 18, 18 or so months ago, we, we had a broad initiative across the entire customer base for price increases. I would say that we've been successful at that. We've been getting prices. Then, it has been somewhat in phases for some time. Semiconductors, which largely go into panels, those prices spiked up, and that enabled us to that helped us to increase prices on the panel side a bit more. Then on the tube side, since it's more of a mechanical and a hardware type of a product, those metals and all those prices, those costs go up, and based on that, we were able to increase prices on sources.
I would say as of now, as I look back at the last 12-18 months of experience, our price increases on the sources side has been a bit higher than on the panel side.
Anthony Petrone (Managing Directior of Equity Research)
Thank you very much.
Operator (participant)
We have reached the end of the question and answer session. Now I will turn the call back over to Chris Belfiore for closing remarks.
Christopher Belfiore (Director of Investor Relations)
Thank you. Thank you for your questions. I'll now hand the call back to Sunny for some final comments.
Sunny Sanyal (President and CEO)
Thank you. Thank you, Chris. In closing, we're very pleased with the solid third quarter results and on track to achieve our target growth rate for the year. As always, I'm very proud of our global team and employees that, who make a difference on a daily basis. Thank you all for taking the time to join us today and for your continued interest in Varex.
Christopher Belfiore (Director of Investor Relations)
Thank you, Sunny, and 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 August 15th and can be accessed on our website, vareximaging.com/investorrelations. Thank you and goodbye.
Operator (participant)
This concludes today's conference, and you may disconnect your lines at this time. Thank you for participating.