VREX - NASDAQ

Greetings, and welcome to the Varex Third Quarter Fiscal Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Belfiore.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the third quarter of fiscal year 2025. 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's 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 2025. In addition, unless otherwise stated, quarterly comparisons are made year-over-year from the third quarter of fiscal year 2025 to the third quarter of fiscal year 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 or 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-K. The information in this discussion speaks as of today's date and we assume no obligation to update or revise the forward-looking statements in this discussion. On today's call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.

Thank you, Chris. Good afternoon, everyone, and thank you for joining us for our third quarter earnings call. We are pleased to report that third quarter revenue of $203 million was above the high end of our guidance. During this quarter, we saw continued strength in our Industrial segment and our revenue in China was better than forecasted and in line with the recent quarters. You may recall that our Chinese customers had asked us to hold shipments earlier in the quarter when tariffs were around 145% levels. As expected, once the tariffs dropped to around 55%, customers resumed their delivery requests. I'm happy to say that we were able to accommodate their shipment needs. On a related note, concurrent with the reduction in tariffs, the Ministry of Commerce in China paused both investigations that it had launched in early April. Non-GAAP gross margin of 34% in the quarter was above the high end of our guidance. Compared to expectations, gross margin benefited from higher volume and favorable product sales mix as well as lower impact from tariff-related expenses compared to expectations. I'm also happy to say that during the quarter, we paid off our $200 million convertible notes, which reduces our overall debt burden and simplifies our capital structure. Turning to third quarter results. Total revenue was down 3% year-over-year with Medical segment down 4% and Industrial segment up 1%. Non-GAAP gross margin of 34% was 100 basis points higher than in the same quarter last year. Non-GAAP earnings per share in the third quarter was $0.18, up $0.04 compared to last year. We ended the third quarter with $153 million of cash, cash equivalents and marketable securities on the balance sheet, down $73 million from the prior quarter. This decline was primarily due to the use of cash to repay our $200 million convertible note. Let me give you some insights into sales detail by modality in the quarter compared to a 5-quarter average, which we refer to as the sales trend. Global sales of CT tubes remained strong in the quarter and were in line with the sales trend. Sales in oncology and mammography modalities were above their respective sales trends in the quarter, while sales in radiography and dental modalities were in line with their respective sales trends. Sales in our fluoroscopy modality were below its sales trend. Demand in our Industrial segment remained strong in the quarter. Need for security screening globally continued to drive sales of cargo inspection components as well as our recently launched security inspection systems. Similar to prior quarters, strong demand for check baggage inspection and cargo screening at airports as well as non-destructive inspection in other verticals drove growth in our industrial X-ray tubes product line. Moving to some product highlights. In Medical, we continue to make progress with our India expansion plans and expect to begin production of radiographic detectors around fiscal year-end. As mentioned previously, our objective for India is to establish low- cost manufacturing for value tier radiographic components where we face competition from Asia-based companies. We expect our factories in India to be a key enabler for driving growth in radiographic components in the coming years. Since our announcement at RSNA, customer interest for LUMEN HD detectors continues to grow, and we are providing customers and prospects with detectors so that they can do their integration and validation. The LUMEN HD and HD Pro digital radiography detectors are our new competitively-priced family of detectors, which offer superior image quality, high reliability, fast image acquisition with lightweight and very user-friendly design and several options for workflow improvement. As mentioned before, this product line is expected to showcase both our innovation and cost leadership and our goal is to gain share globally with these detectors. We have received all necessary regulatory licenses for the U.S. and Europe and we have begun shipping certain models from our Salt Lake City factory. We expect to begin manufacturing and shipping these products from one of our factories in India around fiscal year-end. In photon counting, we're making progress as expected with a couple of OEMs who are integrating our technology in their new systems and these projects are moving forward. Meanwhile, we're also in different stages with other prospective customers who are exploring their design options for CT and other applications. We recently released for general availability a photon counting detector called THOR for very high-speed industrial CT imaging. Potential applications for THOR include non-disruptive, non-destructive testing for EV batteries, semiconductor components, food and material sorting applications. This detector is engineered to operate in demanding industrial applications where both precision and high-speed imaging is a critical requirement. On the systems side of our business, in our Industrial segment, cargo systems continue to perform well. Varex was honored to have its VXM6 mobile X-ray inspection systems on display at the Blue Light Show in London this past quarter. This is a show highlighting key technology for emergency service teams, enabling them to keep communities safe. This is precisely what the versatility of the mobile X-ray system provides, securing various sites and allowing the emergency response teams to have the flexibility and mobility of deploying the mobile X-ray unit where and when needed. On July 14, we announced additional new orders worth $17 million for cargo inspection systems for international customers to help secure sea and land ports. These new orders bring our year-to-date bookings to over $55 million, which is a testament to our strong reputation for quality and innovation in high-energy linear accelerator-based imaging. To date, we have installed and commissioned several systems in Saudi Arabia, Turkey, Colombia and Bangladesh. Additionally, we're in various stages of implementation of portals, gantries and mobile systems in Brazil, Ukraine, Mexico and expanding to other locations in Saudi Arabia. A typical cargo inspection system consists of a linear accelerator, which is the source of high energy X-rays, an array of detectors, software for image acquisition, image viewing and workflow and an electromechanical framework that ties it all together. We are a vertically integrated systems provider and build each of the major components ourselves. We also have legacy competency in building and deploying full systems, many of which are still in use by the U.S. Customs and Border Protection. We believe that being vertically integrated gives us a distinct advantage. By being able to bring innovation to each component, we believe that we can serve the cargo inspection industry better and more cost effectively. These capabilities resonate with our current and prospective customers. Through our knowledge and legacy experience in cargo systems, supplemented by small asset purchase, we have been successful in developing systems integration capability out of our facility in Stoke-on-Trent in the United Kingdom. At the same time, we have been investing in our Las Vegas facility that provides components to our U.K. based operations as well as for the broader security inspection industry customers. We are ramping up systems production at our facility in the U.K. and investing in customer demonstration capabilities in both the U.K. and in the U.S. We have a well-established services team and a part supply and logistics infrastructure with global reach through whom we are installing and servicing our customers. We are prepared to expand these capabilities as the business grows. We have been focused on developing our sales channel, which includes Varex employees, in-country agents who we have known for many years as well as several application specialists and engineers who support the sales process. We have an active pipeline of projects that we are bidding in and continue to develop our future sales funnel of prospects for new business opportunities globally. In summary, our Industrial segment continues to perform well and we are seeing positive trends across our Medical segment despite a very challenging and constantly changing global trade environment. We expect to finish out the fiscal year on a strong note. I'd like to thank all our employees globally for their hard work and commitment in helping us deliver a solid quarter. With that, let me hand over the call to our CFO, Sam Maheshwari.

Thanks, Sunny, and hello, everyone. Our performance in the third quarter was better than our expectations. Revenues of $203 million were above the high end of our guidance as well as non-GAAP gross margin of 34% and non-GAAP EPS of $0.18. Comparing the third quarter to the same period in fiscal '24, revenues decreased 3%. This decrease was due to a 4% decrease in our Medical segment, partially offset by a 1% increase in our Industrial segment. Medical revenues were $142 million and Industrial revenues were $61 million. Medical revenues were 70% and Industrial revenues were 30% of our total revenues for the quarter. Analyzing revenues by region, Americas saw an increase of 1% compared to the third quarter of fiscal '24. EMEA revenues were down 2%, while APAC decreased 8% year-over-year. In the first 6 weeks of the quarter, the Chinese customers paused receiving shipments due to unusually high tariffs. However, the subsequent pause in tariffs helped them to resume receiving their deliveries during the second half of the quarter. We are pleased to meet the shipment needs of our Chinese customers. As a result, sales volume to China ended up fairly in line with the recent quarters and contributed 15% of total revenues for the company. Sales to China increased 4% for the quarter year-over-year. Let me now cover our results on a GAAP basis. Third quarter gross margin was 33%, up about 100 basis points year-over-year. Operating expenses were unusually high at $148 million, an increase of $90 million compared to the third quarter of fiscal '24. The primary driver of the increase was a non-cash goodwill impairment charge of $94 million due to a decline in the company's market cap. As a result of this non-cash charge, operating loss was reported at $81 million, net loss of $89 million and GAAP EPS loss of $2.15 per share based on a fully diluted 42 million share count. Now moving on to non-GAAP results for the quarter. Gross margin was 34%, up 100 basis points year-over-year, primarily due to a favorable product sales mix. Compared to our guidance, gross margin benefited from lower than previously anticipated impact from tariff-related expenses. R&D spending in the third quarter was $21 million, a decrease of approximately $1 million compared to the third quarter of fiscal '24 and representing 11% of revenue. SG&A expense was $30 million, a decrease of $1 million compared to the third quarter of fiscal '24 and representing 15% of revenues. Operating expenses totaled $51 million, a decrease of $2 million compared to Q3 of fiscal '24 and represented 25% of revenue. Operating income was $17 million, an increase of $2 million compared to the previous year and operating margin was 8% of revenue, up from 7% in the third quarter of fiscal '24. Tax expense in the third quarter was $2 million or 23% of pretax income compared to $352,000 or 6% in the third quarter of fiscal '24. Net earnings were $8 million or $0.18 per diluted share, up from $0.14 in the year ago quarter. Average diluted shares for the quarter on a non-GAAP basis were $42 million. Now turning to the balance sheet. Accounts receivable decreased by $9 million and days sales outstanding declined by 1 day to 61 days. Inventory increased by $14 million in the third quarter and days of inventory increased by 11 days to 201 days. The increase in inventory was primarily due to raw materials and work-in-process inventory related to the strength in our industrial business. Accounts payable was flat and days payable remained at 47 days. Now moving to debt and cash flow information. Net cash flow from operations was $8 million. We ended the quarter with cash, cash equivalents and marketable securities of $153 million, down $73 million compared to the second quarter of 2025. Reduction in cash and cash equivalents was due to the use of cash to pay off our convertible debt in June. Gross debt outstanding at the end of the quarter was $370 million and debt net of $153 million of cash and marketable securities was $217 million. Adjusted EBITDA for the quarter was $29 million or 14% of sales. Our trailing 12 months adjusted EBITDA was $110 million and our net debt leverage ratio was approximately 2x adjusted EBITDA on a trailing 12-month basis. Now moving on to the outlook for the fourth quarter. Guidance for the fourth quarter is as follows: revenues are expected between $210 million and $230 million, non-GAAP earnings per diluted share are expected between $0.10 and $0.30 of profit. Our expectations are based on non-GAAP gross margin of 32% to 33%, non-GAAP operating expenses of approximately $51 million, interest and other expense net in the range of $9 million to $10 million, tax rate of about 25% for the fourth quarter and non-GAAP diluted share count of about 42 million shares. With that, we'll now open the call for your questions.

[Operator Instructions] Our first question comes from the line of James Sidoti with Sidoti & Company.

So it sounds like you were able to fulfill the orders to China even though you only had 6 weeks to do it in the quarter. Did that result in higher than expected expenses?

Jim, this is Sunny. No, that did not result in any particular higher than normal expenses. It was just -- we have the capacity and we were able to -- we're glad we were able to fulfill that demand.

And what are your -- do you expect China sales in the fourth quarter to be on par with Q3 or possibly start to tick up?

So Jim, this is Sam. We do not guide really by region or by customer or product as such. But the demand -- overall, I can say that the demand in China is stable and healthy and it's continuing. So barring any other external event or any such situation, we would expect it to remain normal.

All right. And then when you discussed the photon counting OEM, you called out one of your industrial customers. Do you have any of your medical OEMs testing the photon counting technology?

Yes. So the big CT projects are on the medical side. On the industrial side, we have ongoing activity in several different applications. But our big focus and investment in photon counting has been for medical CT.

Right. And you've done a nice job paying down the debt with operating cash that you've kind of put in the bank over the past several quarters. What's the plan going forward? Do you think you'll continue to use your operating cash to pay down debt?

Yes. So Jim, as you know, we have another tranche of refinancing coming, but it's about 2 years away from now. So we need to address it before next fall. So right now, we are in a very comfortable cash situation. And overall, we would like to target our debt in the $300 million to $350 million range, gross debt, I mean. So from that perspective, right now, we would like to continue to build up the cash position. So we are in a strong position when we approach refinancing in the next 12, 18 months.

And the guidance you gave for $9 million to $10 million of interest expense for the fourth quarter, is that net of any interest income you get from the cash on hand?

It's net, yes. Yes, it's net interest income plus the other operating and expense items. So it's those 2 items.

Yes. So it's not just pure interest expense.

Our next question comes from the line of Suraj Kalia with Oppenheimer.

This is Shaymus on for Suraj. Congrats on the really strong quarter and nice guide for the 4Q. Just kind of trying to paint an overall picture. You guys gave a great guide for 4Q and whatnot. Can you guys kind of characterize kind of the capital spending environment and kind of what you're seeing? How sustainable is -- obviously, you had a great 3Q, 4Q looks great from what you've told us. Just trying to understand the sustainability in the medical side of the business kind of going into fiscal '26 and whatnot. So just any color you can provide there, kind of give us a little bit -- I know you won't probably give guidance, but again, just trying to help us start to model that out.

Yes. So Shaymus, the environment seems to be healthy. The demand pattern is good. And based on whatever hospital CapEx environment and overall priority of imaging from an investment perspective and the procedure volume, all of them -- what we see and read, all of them seem to be in a decent place as of now. So -- and remember, last year, FY '24, it was somewhat of a soft year because of the inventory destocking situation. So we are expecting to enter FY '26 with a decent situation here in terms of the macro or the macro demand environment. Is that what you were asking, Shaymus or did I misinterpret your question?

Yes. No, you for the most part got the gist of it. I guess kind of on a side note to that, just trying to understand, I know this is a sliding scale, so to speak, with your kind of performance in the quarter by line. I guess where are you kind of seeing strength? Because I know I think you noted like fluoroscopy is down, a lot of things have kind of been stable, so to speak. So I guess where within that Medical segment kind of are you seeing strength that's kind of leading to these kind of nicer revenue numbers?

Yes. I would say from a revenue mix perspective, our Industrial business is fairly strong and CT was strong in this last quarter and that's where we are seeing. Radiographic was somewhat stable. Fluoroscopy was down. So I would say a number of modalities were stable to slightly better than stable and the strength was there in CT and Industrial.

Okay. I appreciate that. And one more from our end. Just photon counting, I know you guys kind of gave a little bit of color on that. Can you give us any kind of, I'd say, metrics or something where we can start potentially seeing how many customers you are kind of working with at either any stages and kind of rough timelines for when you expect, say, 50% to kind of move to the next -- looking for commercialization and whatnot. I know you said, what is it, I think 27%, you gave a guidance number for the number of expected sales or sorry it might have been 29%. But yes, just trying to understand when we start kind of to see the initial kind of orders start coming in and you guys kind of add that to your backlog.

So let me try to respond to your question and then I'll ask Sam to also chime in. So we had indicated that we're expecting $150 million of contribution from photon counting. And that's at a point where we expect pretty good rollout on the CT side in Medical and at the same time, bout $50 million worth of contribution from Industrial. So on the Industrial side, that is more of a continuous growth. It's happening now. It's continuing to happen and in bits and bites, it's growing. And launch of a new product like THOR that I talked about will help with that. And then we expect to see pretty good uptick in Industrial. On the Medical side, we have telegraphed that we have 2 very solid candidates and good OEMs, strong OEMs that are in that phase of design implementation. So we're past the selection process and what they're going to do. Now they're actively building, developing and designing their systems. So for the next 12 months or so, you'll get a bit of a boring update from us. It's because as they continue to do their work. It's beyond that, that we expect them to start doing their pilots and then go down the process of bringing systems to market. I can't give you narrower dates than that because, one, it's really confidential for our customers. And even though we're not disclosing names, it's -- I just don't want to get to a point where we create a problem for our customers. But our timelines that we have talked about earlier, the 2029 time frame, that has not moved.

Yes. I can also just add that we had said by 2029, we would be expecting, say, $150 million or so in photon counting revenue with, say, 2/3 of that approximately from the Medical segment and 1/3 from the Industrial segment. Now keep in mind, right now, most of the photon counting shipments are in the Industrial area. And that side of photon counting business is continuously and very nicely progressing and improving. However, on the Medical side, we expect it to be in a step basis manner. So say, about $100 million of Medical contribution for photon counting revenue would mean that we need to have 3 to 4 OEMs design our product into their systems and be rolled out. And so say, 2 quarters or so ago, we were working very strongly with 1 OEM and now we are working with 2 OEMs. And so we are pretty happy with the progress we've made and how we are moving in this direction in terms of commercializing the technology.

And as I mentioned on our call, we have others in the pipeline that are in that phase of the consultative phase where they're trying to figure out how they would integrate this in their systems. They're doing the initial physics measurements and all the things that get them ready to get their head around the next product that they're going to bring to market. So the pipeline is good and the interest remains strong. So it's on its way.

Our next question comes from the line of Young Li with Jefferies.

I guess to start, I was curious on the China business outperformed expectations. I was wondering if you can talk a little bit about your expectations for potential outsized orders in China. Maybe some customers will take this opportunity to stock up on inventory to try to derisk future tariff updates. And also, are you seeing any impact from government stimulus in China?

Young, this is Sunny. So our order intake from China has been steady. As we said, in this third quarter, our sales in China was consistent with the performance in China over the last several quarters. So it's been -- there's -- they don't buy in a lumpy manner or we've not seen them try to predict just the tariff rates. The tariff rates themselves have been fairly steady for some time. So we're not seeing that yet and we've not seen that kind of behavior. So the demand is, I'd say, is steady in China. The only time we had a pause was when it was a ridiculous tariff rate of 145%, which made everyone just pause and say, geez, this can't be real. I bet it will come down. And so we took a breather. But other than -- and when they did come back, they came back to the levels of inventory that they needed. So that's the backdrop there. And then -- I'm sorry, I forgot the second half of your question.

Government stimulus impact.

Government stimulus. Yes. So again, like we've said before, there's been talk of stimulus and we've heard of stimulus programs making its way through the provinces and to the hospitals. But we have not seen yet any significant indicators of additional demand. It's very hard to tease that apart and say what's because of stimulus and what's secular or normal demand. All I can -- all we can see is that the Chinese government remains committed to their expansion of healthcare services and the healthcare -- Ministry of Health Commission, I believe that's what it's called, continues to push for getting imaging technologies into rural hospitals. And I think there have been circulars that we've seen where they want at least 164 slice CT in every single county hospital in China. And as you know, there's like 15,000 of them. So we expect that this demand for CTs to continue along with their expansion of healthcare services in a fairly steady manner.

All right, great. Very helpful. I guess just your comment on ramping up system productions in the U.K. and investing in the Vegas facility as it relates to the industrial cargo systems business. Is that a signal that we should be seeing more outsized orders in the coming quarters? And can you maybe put the order sizing in context for us? I mean it's -- it ranges from $14 million to $25 million, but can we see $25-plus million type of orders in future quarters?

So first of all, the facility in the U.K., the expansion there is mainly for -- as business ramps up and we've taken in $55 million worth of orders for us to continue to fulfill them. We need space, we need people. And so that's what I was referring to and we will continue to do that. In terms of the health of that business and future orders, all I can say is that the pipeline is strong. We've got a good pipeline. We're competing in -- I have to believe that given our reputation, given our footprint currently, we're probably seeing virtually every deal, if not -- I mean, if not every -- majority of the deals. And so we see the pipeline, it's healthy. What's uncertain -- there's some amount of uncertainty around timing of when those deals will happen because of just their tender-driven process. So what we don't want to do is to fall behind on our ability to deliver. So that's why we want to make sure that we ramp up thoughtfully and that's what we're doing. In terms of deal sizes, I can't predict that. But what we have so far, the $17 million-ish type, $25 million-ish type of order sizes are not abnormal for us.

Young, I would add that in terms of our CapEx requirements, and maybe that's what you're thinking or maybe a little bit reading your mind here. From a CapEx perspective, we have guided $25 million to $30 million CapEx for the year, last year, this year as well as the coming year. That would include investments in U.K. that we plan to make to ramp up our ability to address the orders and ship the product. So that $25 million to $30 million CapEx would include this. And then I would just add that in cargo systems business, order size more than $25 million is not uncommon. So it's just our ability to compete and win. So it can happen. But at the same time, as I said, it will be great if we win those orders and then we would be able to fulfill them, but we'll be mindful about the CapEx that we need to invest in those facilities.

Our next question comes from the line of Larry Solow with CJS Securities.

I guess first question, just on the guidance. Nice improvement year-over-year, I think it's implying 7% growth and sequential growth at the midpoint. So is most of that growth going to come from the -- just looking at it sequentially or maybe even year-over-year too, is it more on the medical side just in Q4 or industrial usually has been kind of tracking around that $60 million for several quarters. So bump up a lot more on both segments. Just trying to a little more color there.

Yes, Larry, I think both the segments are -- we expect to grow both the segments in Q4. In Industrial, of course, we have a number of orders that we have taken in cargo systems that we expect to fulfill. And on the medical side, we have a backlog to address from our customers in Japan, Europe, et cetera.

Okay. I'm actually more curious just on the gross margin outlook. So if you look back Q2, obviously, I think that may have been a lot of the stars aligned where you have 36% gross margin. But it felt like exiting Q2, if the China story could at least stabilize, your sales would be a lot better, which are appears did happen this quarter and your outlook implies even 10% sequential growth. How come the gross margin is this quarter and then your next quarter outlook is even lower. Is that because of I assume mix? Is that more because you're delivering on some of these -- you're delivering upfront equipment versus maintenance or any color there would be appreciated?

Sure, yes. So Larry, remember in Q2, which is where you're comparing it to, in Q2, we had talked about a one-time refund from customs agencies in Germany, an outcome of multiple years of back and forth with them. So that was a one-time benefit, I would say, and we did highlight in that quarter's commentary.

Right. Well, how much was that benefit? I thought that was...

That was about 200 basis points, 200 basis points.

So even so you're still down from 34% to 32.5% at the midpoint in your guidance, but you're growing sequentially 5% at midpoint?

Yes. So your point is well taken. And the degradation in gross margin of say, 150 basis points that you're talking about is really coming from the tariff aspect, the tariff pieces. We are passing it along to customers, but we are not able to fully mitigate it. And so that is impacting about 100 to 150 basis points. And then on the cargo systems business, we've talked about that, that business is slightly lower in gross margin. So that is also happening. So that is all in the mix here, which is what has caused...

And the Industrial piece, in particular, I know that margin has -- at least from the front end of last fiscal year, has come down because I think you were delivering more on the equipment side and less on the service, right?

Correct. That's what I meant.

Yes, yes. And is that -- I guess, as that installed base grows and then the warranties expire and then there's service requirements, I guess some of that should come back to help you, right? And the -- because the maintenance, I believe, is margins a lot better. Is that correct?

Yes. That is absolutely correct that the service margins are much higher on the industrial side. So all the linear accelerators and cargo systems, et cetera, you rightly pointed out, have a warranty period of 18 months, sometimes 24 months. And we began shipping quite a bit of linear accelerators, I would say, towards the mid part of 2024. And so from mid-2026 onwards, they should be coming off of warranty and begin to contribute that. If you look at our numbers, we have improved Medical segment's gross margin. However, as you rightly said, Industrial gross margin has come down. So the gross margin is seeing a little bit of a segment headwind, but it's all good news in the sense we are shipping quite a bit of hardware and we should...

Sure. The hardware is problem. Yes, yes.

Yes. And in 18 months, we should get the benefit from it. Yes.

Okay. And just in general, from a high level, Q4 guidance, just the trends last 2, 3 quarters going back to Q2, too. Just as we think about fiscal '26, at least from a high level, is most of the -- and again, outside of China, let's just say, China stabilizes from here for now. But global OEM order patterns, inventory destocking, it feels like a lot of that's getting closer to normal. So could '26 be -- continue to have a sort of low-to-mid single-digit or perhaps even better top line growth? I know you're not giving guidance yet, but just trying to -- maybe you can give us some of the big bullet points as we think out over the next few quarters where we stand?

Sure, yes. So I think the first point you raised was about the inventory destocking. And we had said that we expected it to be over by March, April time frame and it actually did happen that way. So we are fairly beyond that phenomenon at this point. And also China has stabilized and then came the tariffs. There was a little bit of instability, but seems to be normalizing now and cannot really predict what happens in the next month. It's a very, very fluid and dynamic environment. But it seems to be a little bit more stable than when we talked to you last time, say, 90 days ago, it was extremely unstable at that time. So overall, both the Medical and Industrial businesses seem to be in a decent place. And barring any other external events that we don't think of right now, they should be -- they should grow and we should be in a decent position. So overall, I would say -- I would concur that we should be expecting '26 to be a growth year for us. But obviously, it's a bit too soon. And external events can always come in a positive way or a negative way, but we'll deal with it as they come and as we get closer to the year.

[Operator Instructions] Our next question comes from the line of Anderson Schock with B. Riley Securities.

This is Brandon Carney on for Anderson. Congratulations on the quarter. I think you just mentioned some impact of the tariffs contributing to the GM guide. Do you have any updates on the progress of redirecting supply chains as part of your tariff mitigation strategy? I know you said that, that would take some time, but is there anything you've been able to do or plan to do in the near term?

So yes. And Brian, is that, Brian?

Brandon.

Brandon, sorry. So yes, we've been making good progress. I would say that we've not completed or concluded our efforts there, but we are midstream and we are definitely making good progress there. Our efforts in producing out of India are doing good. But at the same time, we are also making progress in terms of creating structures like bonded warehouse and also increasing manufacturing in a given region to service that region. So we are slowly making those changes. As you know, it takes time. At the same time, we've also started passing along price increases to our customers. So we've been successful in that. And a number of initiatives that we are in midstream, for example, redirect material spending to suppliers in a lower tariff region, so to say, and duty drawback and bonded warehouse and also more local-for-local manufacturing. So all of those initiatives are in play. But I would say we are in the -- I would not say we are in the early innings, but we are definitely not beyond the mid-innings on these initiatives. I would say we are somewhere closer to midpoint in some of these initiatives. It takes time.

Got it. Maybe just following up on that. If you're able to start shipping detectors from the India plant by the end of the year, do you think that, that would have an immediate impact on the tariff exposure in China or will we have to wait another quarter or 2 to see the impact?

So India, the main strategy for India for us is to be able to produce radiographic components in a more cost-effective manner so that we are more price competitive in the market. This is a value tier type of a market. So that is our strategy out of India. And so we plan to produce out of India for global consumption. So in that regard, if we are shipping out of U.S. to a foreign country, then all the supply chain or raw material that we are bringing into the U.S. would be -- we'd be able to avoid tariffs on that raw material because we are not bringing it in U.S., manufacturing it here and shipping it out of here. So in that regard, yes, it would be helpful. But I just wanted to make sure our primary and secondary strategies are clear in terms of their priority.

And also just to add, even for detectors, our detectors business in China is supported by manufacturing in China. And vast majority of the components that go into it are also procured in that region. So China is pretty independent from in that sense.

Okay. Got it. Is there any connection between the India plant and production in the U.S.? I'm just wondering if there's any components from India coming into the U.S. that might be affected by the recent sort of escalation in trade tensions between those 2 countries?

Yes. There is not -- I mean, there may be small, but there is no significant dependence in the U.S. for product coming from India. And keep in mind, dual sourcing and triple sourcing has been some of the mantras for the supply chain folks and the team here. So we are slowly increasing our supply chain from a supply chain resiliency perspective, other countries. So -- and India anyway has been a new initiative for us. So there is not a whole lot of dependence of the Salt Lake factory for supply chain out of India. There is some, but not significant.