Varex Imaging Corp (VREX) 2021 Q3 法說會逐字稿

Greetings. Welcome to the Varex Third Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the call over to your host, Howard Goldman. Please go ahead.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the third quarter of fiscal year 2021. With me today are Sunny Sanyal, our President and CEO; Sam Maheshwari, our CFO; and Chris Belfiore, our new Director of Investor Relations.

Before turning the call over to Chris, as many of you know, I will soon be retiring from Varex. I want to thank the Varex leadership team for the opportunity to head our investor relations mission that began several months prior to our spin-off. It's been an honor to work with all of you. Chris?

Thank you, Howard. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed from our Varex website at investors.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 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2021 to the second quarter of fiscal year 2021 rather than to the same quarter of the prior year.

Please be advised that during the 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 measure in our earnings press release, which is posted on our website.

I will now turn the call over to Sunny.

Thank you. Good afternoon, everyone, and please join me in welcoming Chris Belfiore to the team. And Howard, thank you very much for all your contributions over the last 4 years. We wish you all the best in your retirement. I'm pleased to report that sales momentum continued in the third quarter of fiscal 2021 with revenues reaching $211 million, driven by strong demand in both Medical and Industrial segments. Higher sales volume and continued execution on expense management led to margin and profitability expansion in the quarter.

We continue to see strong demand for CT tubes globally during the quarter, as well as robust detector sales for both medical and industrial applications. In the third quarter, all medical modalities, except dental returned to pre-COVID sales levels or better. Our revenues in the third quarter increased 4% sequentially, driven mainly by gains in the Medical segment. Revenues increased 23% year-over-year by improvement in both Medical and Industrial segments.

Our non-GAAP gross margin increased to 36% due to higher volume and productivity, partially offset by unfavorable product mix. Our non-GAAP operating margin improved to 14% of revenues. As a result, non-GAAP EPS was $0.40 and exceeded the top end of our guidance range.

Let me give you some high-level insight into how different modalities and applications trended during the quarter. Medical segment revenues increased 7% sequentially and 22% year-over-year. The strong trend in CT tube sales continued during the third quarter, enabling our already large installed base to grow further. Since many of the tubes were for new systems, it bodes well for our future sales related to replacement tubes.

In our other medical modalities, oncology, fluoroscopy and mammography posted healthy potential growth, and are back to or above pre-COVID levels. We believe growth in Medical segments was driven in part by demand that had been deferred over the past year, as well as expansion of healthcare services in some markets and adoption of new technologies. Revenues in our Industrial segment decreased 6% sequentially and increased 31% year-over-year. We attribute some of the sequential decline in the Industrial segment to inter-quarter timing of sales.

In Q3, demand for digital detectors for nondestructive inspection increased across several of our industrial verticals, including battery inspection and oil and gas. However, demand for imaging products for security screening at ports and borders, as well as baggage screening at airports continued to be soft. I'd like to take a few minutes to provide an update on China. As we have talked about in the past, China represents a significant growth opportunity for Varex. This has been mainly driven by strong demand for CT systems, increased installations at fever clinics and a focus on making rural health systems more self-reliant are expanding the need for CTs in China. This growing installed base of CTs is expected to generate continued demand for replacement tubes.

Our strategy in China of establishing relationships with local OEMs drives continued growth momentum. And as we have said recently of the initial 12 CT projects that we have been working on with 8 local OEMs, 9 projects have been brought to market and 3 are still in process. In addition to the continued adoption of new CT systems, we expect the previous generation of 16-slice CT systems to be upgraded to 64 and 128 CT systems. This upgrade cycle of the current installed base in China should add another layer to an already strong growth story.

These system upgrades are expected to be driven by China's goal of building a more self-reliant rural healthcare system that can handle advanced diagnostic procedures, including cardiac applications. We expect our revenues from China to exceed $100 million by fiscal year-end 2021, which would represent 25% to 30% year-over-year growth for the last 2 years.

While digital detectors had been a significant part of our early growth story in China, year-to-date medical tubes represented over half of the revenues in China. We think this is key to the future growth story of our business in China. The majority of the installations of medical CT tubes is for new systems, which will contribute to future demand for replacement tubes.

Outside the CT market, we see other avenues of potential growth in the region. As we have pointed out in the past, our Wuxi facility is capable of manufacturing several 1,000 detectors per year. The detectors manufactured in the Wuxi plant now span various modalities, including radiographic, dental, oncology and fluoroscopy. This broad set of local offerings, strong industrial detector sales have enabled our detector sales in China to reach levels previously achieved in 2017 and 2018, prior to the onset of the trade war with China and associated tariffs. In addition, our local OEM relationships in China provide a platform to grow into other modalities. We are currently targeting to enter into cardiology, dental and radiation therapy. We are very excited about the opportunities that China represents and look forward to continuing to work with our OEM partners in delivering on the expansion and improvement in health care delivery system for the region.

Let me now give you a brief update on product development efforts. First, we recently launched the LUMEN 4336W detector with IP68 rating, which allows the detector to be immersed in liquids, which can help with cleaning and disinfection. This detector is part of a new platform, which offers other advanced capabilities as well as increased durability and ease of use for end users. With COVID continuing to be a problem globally, will -- we believe these detectors will be well received by OEMs and healthcare providers.

Second, on the Z Platform front for dynamic digit digital detectors, our first new product is approaching formal product launch with 2 more following soon after. All 3 models are getting traction with OEMs and are covered by a few multi-year customer contracts. Third, in the area of nanotube technology, our joint venture has continued to make progress with product life testing with good results and is now working on customer prototypes. And lastly, during the quarter, we completed the acquisition of the outstanding minority stake in Direct Conversion, reflecting our continued belief in the potential for photon-counting detector technology.

Before I turn over the call to Sam, I just want to spend a minute talking about global supply chain issues that you are all aware of. During the second quarter, we highlighted supply chain constraints largely around the freight and logistics. Supply chain challenges became more pronounced in the third quarter and is impacting the availability of some raw materials and semiconductors. We have been able to work through these challenges so far, but we see potential for supply chain constraints and shipping disruptions in Q4 and beyond. Our output may become challenged by the supply chain constraints and we are working very closely with our current and ultimate suppliers to mitigate potential impacts.

With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I'll provide sequential comparison of our results for the third quarter of fiscal year 2021 with those of our second quarter of fiscal '21.

Varex continued to deliver strong results in the quarter and we saw solid demand across all modalities. For the quarter, revenue was above the guidance midpoint and non-GAAP EPS was above the top end of the guidance range.

Third quarter revenues were $211 million, an increase of 4% from the second quarter, medical revenues were $167 million and industrial revenues were $44 million. But for both Varex in total and the medical segment, this is the highest revenue level in 3 years. This translated to 9% medical and 21% overall industrial sales. Sequentially, medical sales grew 7%, while industrial sales declined 6%. The decline in industrial sales was due to the timing of shipments, which is more of a quarter-to-quarter aberration. Revenue levels in all 3 regions remained strong. Americas was down 7% sequentially, while EMEA grew 13% and APAC grew 6%.

Let me now cover our results on a GAAP basis. Third quarter gross margin was 35% and up over 300 basis points sequentially from the previous quarter. Operating income increased $10 million compared to the second quarter and operating margin increased 400 basis points sequentially to 12%. Net earnings increased $9 million compared to the previous quarter and earnings per diluted share were $0.29 compared to $0.08 in the second quarter.

Moving on to non-GAAP results for the quarter. Gross margin was 36%, a sequential improvement of 150 basis points from the second quarter, driven by higher sales volume and improved productivity in manufacturing and service areas, partially offset by unfavorable product mix. Our gross margin has improved sequentially from 28% in the last quarter of fiscal year 2020 to 34% in Q1, 35% in Q2 and now to 36% in Q3. As this year comes to an end, we are achieving the gross margin target that we set earlier in the year.

This performance over the last 4 quarters has been possible due to a continued increase in sales volume, timely completion of cost reduction goals, favorable product mix and through our initiatives to improve efficiencies in our manufacturing and servicing activities. Despite the ongoing freight and supply chain related challenges, we are very pleased with our gross margin performance.

R&D spending in the third quarter was $19 million or 9% of revenues, which is in the middle of the 8% to 10% range that we target for R&D. R&D was 42% of operating expenses in Q3, as compared to 40 -- 41% in Q2, reflecting our continued spending prioritization towards innovation and new product development. SG&A was approximately $27 million in Q3, slightly higher than the prior quarter, but sequentially down 30 basis points as a percentage of sales.

Operating expenses were $46 million and sequentially up approximately $1 million due to increase in R&D. We continue to keep operating expenses in control, while successfully meeting increased customer demand, helping improve the quarterly profitability. Overall, our strategy to deliver higher earnings through improved operating leverage is on track and working very well. Operating earnings increased to $30 million or 14% of revenue, as compared to $26 million or 13% of revenue in the previous quarter.

Tax expense in the third quarter was $6 million as compared to less than $1 million in the previous quarter. Recall, during Q2, 2 onetime favorable items in taxes drove a $2 million benefit and resulted in an unusually low tax expense for Q2.

Net earnings increased to $16 million or $0.40 per diluted share compared to $14 million or $0.35 per diluted share in Q2. Despite the higher tax rate in Q3 of 26%, we were able to grow EPS by $0.05 compared to the second quarter.

Please note that due to our convertible notes related bond hedge and recently achieved GAAP income profitability and the associated trading range of our shares, there is a difference between diluted shares for GAAP and non-GAAP purposes. We have provided a reconciliation between the 2 at the end of our earnings press release.

Now turning to the balance sheet. Accounts receivables increased by $19 million, partially due to higher sales. As a result, DSO increased by 6 days to 64 days. Inventory declined $5 million and days of inventory declined to 161 days. Accounts payables increased by $14 million, mainly due to increase in raw material procurements to support higher demand. As a result, days payable increase to 44 days.

Now moving to debt and cash flow information. Cash flow from operations improved to $22 million. We ended the quarter with cash of $128 million on the balance sheet, an increase of $17 million in the quarter.

Gross debt outstanding at the end of the third quarter was $512 million and debt net of cash came down to $384 million, reflecting our priority to continue to deliver on a net debt basis.

As we announced in early July, our cash generation enabled us to pay down a portion of our debt. On July 15th, we redeemed $30 million of over $300 million senior secured notes. Due to debt reduction on a go-forward basis, interest expense will be lower by approximately $2.4 million on an annualized basis.

Adjusted EBITDA was $39 million in the third quarter, a solid improvement from $33 million in the prior quarter. I'm pleased to note that if you were to analyze our last 6 months of performance, the net debt leverage ratio at the end of Q3 would be below 3x.

In summary, our previously stated financial strategy of improving capital leverage and operating leverage is working very well. I want to take a moment to thank our Varex colleagues worldwide for their tremendous efforts in achieving these results.

With that, let's look at our expectation for the fourth quarter. Revenues are expected between 205 and $225 million, and non-GAAP earnings per diluted share are expected between $0.25 and $0.40. Our expectations based on non-GAAP gross margin in a range of 35% to 36% and non-GAAP operating expenses in the range of $46 million to $47 million.

And with that, we will now open the call for your question.

(Operator Instructions) Your first question comes from Anthony Petrone with Jefferies.

Congratulations on the strong quarter. Maybe Sunny, I don't know, Sam we can start with, just sort of the dynamic between the underlying demand and maybe that's mostly on the CT side in China and just your comments on the supply chain. It just seems that while on the one hand we do have an elevated level of demand that's perhaps linked to some level of backlog recapture out of the pandemic, there's still some uncertainties on the supply chain. So maybe a little bit more details on underlying CT tube and component demand? And where you see the specific bottlenecks in supply chain and how do you think it sort of trends over the next 12 months?

Hey, Anthony. This is Sunny. So we're in a strong demand environment and at this point, we feel good about, as we head into Q -- to the fourth quarter and looking into next year, we feel good about the demand side. And the issues with supply chain are fairly similar to what you would have been hearing from other companies and that there's 2 categories of supply chain issues, one, where just there's a shortage of commodities. And we have been dealing with it for quite some time. I mean, you find sometimes coppers were -- there is a shortage of copper or shortage of aluminum and castings. And it's a daily discussion with suppliers and making sure we have a good handle on their delivery dates and what they're doing. They understand our demand side and we're placing -- we're doing all the right things, placing appropriate orders and lead times, et cetera. And that's what we're battling and we've been doing that. But lately, semiconductor side has also become an issue.

So the way I would summarize this is, there are supply chain issues that are broader than what we faced maybe a couple of quarters ago with more commodities, more materials and more suppliers that are every now and then becoming delinquent and we're -- their shipments. And we -- but going into the fourth quarter, we have accounted for that and we have tried to deal with that. So we have visibility to our supplies, as we look forward to at least the next quarter. But as we look further out, we just sense that the risks are broader than they were a quarter ago. We're managing our way through it. We're doing all the things that we can. We are aligning up alternate suppliers, qualifying alternate sources. But I just wanted to highlight that we're -- at this point, given the strength of the demand side, we're not demand constrained right now in the near-term and we will continue to work the supply chain side.

It's helpful. And just a couple of follow-ups for Sam, if we can get it in, the adjusted gross margin 36%, even with the supply chain issues, having an impact in the quarter. How much of that benefit was just sales volume related versus cost savings on Santa Clara? And then the last one for me would be on the R&D side, 9% of the higher sales basis was ahead of the recent trend. I'm just wondering is that linked to additional tenders or was it a pull-forward on other R&D initiatives?

Yes. Thanks, Anthony. So taking your first question related to gross margin. Yes, definitely gross margin is benefiting from higher sales volume and it has continued to benefit over the last few quarters as we are increasing sales every quarter. So that is definitely beneficial.

In terms of cost reduction and Santa Clara update, we have completed all of that migration or all the migration of manufacturing from Santa Clara to Salt Lake. That is pretty much, that is fully done at this point and we are benefiting, say, around $14 million, $15 million on an annualized basis. So that comes to around $3.5 million a quarter. So say 150 basis points. So that we are benefiting and that is fully flowing through the P&L at this time. I would say that we have previously committed a 100 basis point gross margin improvement towards the end of this fiscal year. So around Q4 for FY 2021, related to streamlining our manufacturing and servicing activities. And I would say that we are pleased to say that we have achieved that a bit sooner. We have achieved that in Q3. So that was a very big factor in terms of productivity improvements a bit sooner than initial plan or initial commit and so that is benefiting gross margin so that was about 100 basis points. And the things that are hurting gross margin or what I would call it headwinds to the gross margin it's clearly freight-related items, freight is continuing to run high.

As you know, there is uncertainty related to timeliness of ocean-related freight and until all of that gets sorted out, those delays and those uncertainties, we are using a bit too much of what I call our air freight and that is definitely more expensive. So currently, freight is a headwind of about 20 basis points to 30 basis points ongoing. But overall, they are positives and negatives, but overall, we are very pleased with the gross margin performance and those are the puts and takes as I talked about.

Now moving on to your next question in terms of the R&D as a percentage of sales. Yes, so we target 8% to 10%. We came in right around the middle of that $9 million. A lot of our R&D is driven by materials-related spending and when the engineers order, when that is delivered, et cetera. So there can be a little bit of fluctuation from quarter-to-quarter. But overall, we are investing in R&D, we are investing in delivering innovative products. There is a lot of need by R&D groups for more spending and actually accelerating the pipeline, et cetera. So I would say, right now, we will be fully funding R&D and I don't think we are close to 10% of sales or anything like that at least at this time. But we will guide you as we come closer to it. So right now, I think 9%, I feel good about and we feel good about releasing new products and all the work that is going on with our teams.

Your next question, Larry Solow with CJS Securities.

Howard, best of luck to you, and Chris, welcome aboard. Just to follow up on Anthony's question on -- just on the supply chain constraints or whatnot. Just in terms of guidance, you mentioned that Q3, the mix is all a little bit of a headwind or a little bit down. Just trying to parse out with your guidance for Q4, just at the high level, it seems like you need to get to the high level of sales to kind of match the Q3 EPS with more or less just the supply chain concerns and trade concerns or is there any other issues just as we look sequentially from Q3 to Q4, that would great?

Yes. So let me take this question. Sam here. Hey, so yes, in terms of Q3, there was a little bit of an unfavorable mix and that is really driven by less of an industrial sales as compared to the prior quarter. So that is what that is related to. So as you know, industrial is a higher margin segment for us. So that is the unfavorable mix there, okay. And then in terms of gross margin, I have shared with you that -- I shared with you maybe 2 or 3, maybe even a year ago, that our gross margins when we get back to pre-COVID levels in terms of revenue, say, $205 million, $210 million or something like that, in that range, we are expecting gross margin 35% plus/minus, 1 percentage points, because we have different customer concentration, different product concentration and a number of other things, and things can move from one quarter to another, customer can push out shipments. So we are still within that range. In Q3 we came out at around 36% and we -- instead of guiding 35% plus/minus 1, we are guiding 35% to 36%. So compared to what we had set expectations on, I think, we are a little bit on the higher side there and there isn't really nothing else beyond that at this time, Larry.

Okay. All right. Fair enough. Just maybe a couple of just questions in terms of China, you guys are obviously meeting or exceeding expectations that you've spoken about for years. Just trying to figure out, is there any sort of clarity, obviously, in terms of without getting into specifics, you're doing 100 this year, sounds like more than 50% of that is from tubes. In terms of market share gains or not and I think -- and the players who are sort of their local OEMs, is it just Varex and Phillips? Can you give us any more clarity? Are other GE and Siemens in there? And the mix between you guys and Phillips, I don't know if you want to speak to that, but are they enjoying the same kind of numbers that you guys are, I mean, how that guys are visible enough? Any color there would be great.

Larry, you can frame it -- I mean, one way to frame it would be, the local OEMs are gaining share in CTs in China, in aggregate. If we take all the local OEMs combined, where they were a few years ago versus where they are today vis-a-vis the local versus -- local OEMs versus global OEMs, the local OEMs have gained share. We have a very large share of those local OEMs' consumption of tubes. So from our perspective, we're gaining share in tubes in a very nice way in China and I feel good about that. So that's on a very good path, good trend, and these are all going into new sockets. So the market share position ought to keep growing and we're bullish about that.

On the detector side, I mentioned that, I am happy to say that, our detectors business has come back to the pre-trade war levels, where -- when we -- remember a couple of years ago with the trade war hit, we -- there were tariffs on both sides and we were hit by those and we pulled back in some areas, some because we just couldn't compete with extra costs. Since then our actions have allowed us to increase. But that has been broad-based. It hasn't been in any one particular modality. Radiographic continues to be challenged with the pricing as we've talked about particularly the China markets' low end. But then there is dental, there's oncology, there's fluoroscopy and so our strength and growth in detectors in China has been broad-based.

Now in terms of how we're doing versus overall market share, my -- I'd say we're keeping up with the market growth rates better. But at this point, I would -- I am not in a point to call out how we're doing versus others specifically. I am just going to say that I am really happy with the progress we've made with detectors and particularly, we've also seen a growth in industrial detectors in China.

Is there any way to tell other global OEMs outside of China, are they still providing -- China has this whole -- they only ship that's local home growing equipment, but -- are GE and Siemens or neither mentioned here, there -- are there other global OEMs still providing new equipment to the market or you have mostly -- yes?

Absolutely. The global OEMs have established, global OEMs are still selling in China. They're still selling their CT systems and other modalities. Our revenues in China come mostly from the local players there. But also we also get our share of China sales through some of these global OEMs. But yes, they are there. They are still a significant player in that market.

Okay. And last question maybe, Sunny for you while you took up the platform here. Just -- as I remember, if I look back I think it was in early'18, you guys had continued -- you got the reduced tax outlook and you take some of that savings and that you reinvested in the business and you did further investment into multiple price points on the CT, and CT machines in China and multiple different new detectors. And you certainly, in the last couple of calls, have been calling out certainly on a qualitative basis, a lot of newer products coming out. And I think if I look back 3 years ago, you had spoken about, it should be -- we should see an acceleration in revenue as we look out 3 years from now, some of these new product start maturing from prototype and get into commercialization. I realize with COVID and some exact science. But do you still kind of feel that over the next couple of years, we should see this acceleration of hopefully revenue growth to certainly have new product contributions?

Yes. So we -- if you recall, we took some of the benefits from reduced tax rates and said we would invest in R&D. So we put in some additional money to R&D to accelerate development upon the new platforms. And what you're seeing us talk about currently with our new Detector Platform, the LUMEN Platform, the Z Platform, the work we're doing with photon counting. There have been a number -- we accelerated some of that work. I mean, those products would have been otherwise -- would have been longer to bring to market. So we are expecting future growth out of those products and we -- I think we pulled in the launch of those products by taking those earlier investments. There were also investments that went into supply chain qualification, validation to set up our presence in China and you're seeing some of that play out in the form of our growth in China. The China CT was -- the growth is in across multiple tiers, the 16 slice, mid-tier, and high end. And so we invested in -- heavily in the segments that we thought would play out the best in China.

I'm happy to say that our assessments and the feedback and input that we got from our local OEMs has served us well and we're hitting the sweet spot of the market. It was going to be 16 slice for mass adoption and that's how it's been, there has been tremendous growth there. And going forward, as I said, we are expecting in addition to ongoing new socket sales and penetration of CT, there is going to be, and has already begun, a wave of -- we'll see the early 16 slice CT systems get replaced by 64, 128 slice CTs, the more feature-rich ones. And so all of that, I'd say Larry, has been enabled by us being at the right place at the right time with the products and that's what -- otherwise we would have probably had a more muted success in China.

I'll move onto our next question, which is coming from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Sunny, Sam, congrats on the quarter. So Sunny, a lot of questions have been asked. Maybe if I can just phrase it differently. Sunny, the demand, obviously, if there is demand and the supply issues that you talked about. On the demand side, is the pickup -- I mean, it just seems like Varex is moving into the next gear? Is the demand pickup more catch up in nature or are you seeing any structural changes that would be more durable, so to speak? And I'm not talking about 2 quarters, I'm talking more multiple, multiple quarters?

Yes. So it's a function of 3 different vectors. There is a little bit of a catch-up that there was -- in modalities where there was some pause. For example, there was a quarter where we had lower sales in oncology and there was some catch-up in the product. But CT demand continues to be strong and it's not just a catch-up. There was no catch-up in CT, it is just an expansion of healthcare services and it has been global. People are buying CTs and at a demand rate that is higher than that was expected, and there -- based on the forward-looking views that we're getting from our customers. We -- as you know, our customers give us their annual plan, give us 6 months of estimates. We see -- continue to see strong demand for CT and for an extended fair time, this is not us trying to catch up on the backlog or not being able to deliver and hence a pile up. In other modalities, like dental, the recovery has been in different -- at different levels and different velocities, at different points in time. So dental has been just ongoing, still catching up in some markets.

And so I could go -- I mean, so every modality And so I could go, I mean -- so every modality has its story. Rad has had tremendous uptick during COVID. There was a gap there. There was a little bit of slowing down and then it's picking back up. So it's hard to pinpoint one thing down, but as we look at it in aggregate, we see that the demand side is strong and our expectation is that, our customers who have taken a lot of orders during this time and they carry backlog that they are also going to continue to have to deliver on what they've taken over the next 6 months to 9 months. So as we look forward, we continue to feel strong about -- feel good about the demand side. And then lastly, there was the technology side of it. We've launched some new products and anytime you launch a new product you get some -- you see an uptick in demand for some of those products and we should --we expect that will continue into next year as well.

Suraj, I would also like to add here is that, if you remember 6, 9 -- 6 months ago or so, we added that, our response to the pandemic might be that countries and communities would be spending on healthcare infrastructure and imaging, and hence us would benefit through that as a result of that. So we feel it's not just one country situation. It's broad-based. It's broad-based across regions and modalities and seems to have strong legs to it. There is no one country that can stay that strong, etc. So I think the strength in China is somewhat new for us. The strength is broad-based, which is driven by, say, healthcare response, that is aiding and then obviously the new products that Sunny just said. So added altogether and that makes the different. That's...

And if you take the -- look at the industrial side, a lot of the demand that we've seen has come from market expansion. I mean, expanded activity in the market. Like, electronics inspection, battery inspection, the semiconductor inspections that has driven also additional volumes. And realize that we haven't yet caught up on the security and inspection side in airports has still been soft. So there is some more headroom there. So as we look at the overall demand profile, we feel good that there is some -- there is real momentum there and market-driven momentum.

Got it. Sunny, does the Delta variant concern you on the industrial side of the equation?

Not particularly and the reason for that is, if at all, travel is an area that gets impacted first as you know, and for us, the security-related side of our business has been slow. I mean, it's still -- we're still waiting for any significant recovery there. So if at all, it will be status quo for us on the cargo and security side.

On the industrial side, where the demand has been strong, has been strong despite COVID. After the initial blip when the initial -- initially when COVID hit, there was just a shock to the whole system and all the factories sort of stopped and people were frozen, and we saw a couple of quarters of industrial -- a pretty sharp slowdown in industrial. Since then the recovery has been almost -- despite COVID. So I don't think that we will experience the same, it would be hard to pin it down, but the demand side of industrial on this, particularly with semiconductor inspections, battery inspections, electronics inspection that is -- that doesn't seem to be COVID related. Oil and gas did slow down, but that was because of a peak in oil prices more so than COVID.

Got it. And Sam, final 2, I'll just put both of them together. Sunny at RSNA, are we going to get an update on the core cathode status? And Sam, maybe this has already been asked. Please forgive me if this is redundant. The components of the $205 million to $225 million guide, how do you all think through the Medical and Industrial segments. Gentlemen, thank you for taking my questions and congrats once again.

Let me answer the first one. So on the core cathode technologies. What we are -- our status is that we are continuing on with the foundational technology development and now we're past the validation of the meters and strength of the meters. We're now into tube development and more of the validation like testing there, and we are in the mode -- next phase of our -- new product introduction mode, where we start building products sample, I mean, prototypes for our customers. We're in that mode. Obviously, we're really 2 months -- a couple of months away, so you're not going to hear anything significantly different. You'll hear more of the same that we're working on customer prototypes, getting customers engaged, and looking at development agreements with customers.

And Suraj, coming back to your question in terms of the industrial and medical breakdown of the guide. Generally, as you know, Industrial is 21% or somewhere around that, of overall revenues for us. And so I would say that is still our expectation, but stuff moves around, here and there from quarter-to-quarter. So I would say 21% of industrial, plus-minus 1%, that would be the normal expectation. So the guide and the growth is not necessarily pegged to medical only or industrial only. Both of them are growing for us and it may not exactly look that way once you go from one quarter to another. But as you look over multiple quarters, you would see that both are growing and we expect both to grow. And demand is pretty good on both sides. It will just come down to what we can supply through the factory and where it ends up. But demand-wise, we feel good about both of the segments.

(Operator Instructions) Your next question comes from Jim Sidoti with Sidoti & Company.

Yes. I'm going to try and ask the question. I think it's been asked a couple of times, I am asking it a little bit different. You just had 2 strong quarters over that $200 million mark. You're guiding for incurred one over that $200 million mark. For the fourth quarter, is there anything such as supply constraints or any other kind of headwind out there that you're concerned about that would cause you to dip below that $200 million per quarter mark over the next year or so or is there anything like that you are aware off?

Let me try to address that, Jim. So when it comes to Q4, as you know, we only guide to the quarter, so we are guiding on the Q4 right now. And in terms of Q4, the demand and of course on the supply side, we feel good about based on the visibility that we have. So that is how we are balanced our guidance for Q4. But as you know, there can be 100-year event or something can happen, so we would never say that it is 100% assured or anything like that. There can be a chance that something happens, which is completely unforeseen to us and we dip below $200 million. That can happen to any business and we would never say that. But overall, in terms of balancing the guidance, balancing the numbers, that's how we are providing the guidance for Q4. Beyond Q4 the -- comes less from supply chain and all of those issues as well as the farther out we go, the visibility is lower.

Currently, we are operating in a supply-constrained environment as opposed to a demand-constrained environment. And we feel good about our situation and position, so the $200 million watermark that you kind of highlighted. But there isn't anything that tells us that, hey, there is a significant this thing or that thing coming, but that doesn't mean that it may not happen. It may happen, which may be unknown to us, and as and when it happens, we'll share with you, but far, where we sit as of today, we feel good about our guidance and good about our business going forward beyond there. I guess that's as much as I can add, I don't know, Sunny, if you like to add something else.

No. I think nothing more to add there, Jim. We are -- demand trajectories in the right direction and so let me just leave it at that.

Okay. All right. And then last one, detail on the balance sheet. Your cash receivables picked up in the quarter. Is that due to the timing of shipments? Can you just add a little color to that?

Yes. I can add a little bit more color to that, Jim. Good question. Thank you. Yes. So obviously, the sales is growing. So when sales grow the AR picks up, that's just normal working capital that's there. There is one large customer of ours that decided for their own balance sheet dress up purposes to pay us a significant amount of cash, just the 1 week after the quarter ended. So our AR was a little bit higher in terms of DSO than I would have liked, but it's just stuff that happens. So there is that, beyond that, there is nothing else to there.

Thank you. I would like to turn the floor over to Chris for closing remarks.

Thank you for your questions and participating in our earnings conference call for the third quarter of fiscal year 2021. The webcast and supplemental slide presentation will be archived on Varex website. A replay of the quarterly conference call will be available through August 17th and can be accessed at the company's website or by calling 877-660-6853 from anywhere in the United States or 201-612-7415 from non-U.S. locations. The replay conference call access code is 13721643. Thank you and goodbye.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.