Varex Imaging Corp Q2 FY2021 Earnings Call

Greetings. Welcome to the Varex second quarter fiscal year 2021 earnings call. Please note, this conference is being recorded. I will now turn the conference over to your host, Howard Goldman, Director of Investor Relations. Howard, you may begin.

Good afternoon, and welcome to Varex Imaging Corporation's earnings conference call for the second quarter of fiscal year 2021. 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 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 second quarter of fiscal year 2021. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the second quarter of fiscal year 2021 to the first quarter of fiscal year 2021 rather than to the same quarter of the prior year. Please be advised that during this call, we will be making forward-looking statements, which are predictions or projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Those 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 financial 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. And now I'll turn the call over to Sunny.

Thank you, Howard. Good afternoon, everyone, and welcome. I'm pleased to report that our financial results for the second quarter were stronger than our expectations, and revenue exceeded pre-COVID levels. Continued strong global CT tube sales and higher sales of industrial digital detectors drove this growth. Demand for our other medical imaging products related to certain elective medical procedures also increased. Our revenues in the second quarter increased 15% sequentially due to gains in both medical and industrial segments. Revenues increased 3% year-over-year. Our non-GAAP gross margins increased to 35% due to higher volume and a favorable product mix. Our non-GAAP operating expense declined sequentially and year-over-year, reflecting benefits from previous cost reduction actions. Our non-GAAP operating margin improved to 13% of revenues. As a result, non-GAAP EPS was $0.35 and exceeded the top end of our guidance range. Next, let me give you some high-level insight into how our different modalities and applications trended during the quarter. Medical segment revenues increased 13% sequentially and 1% year-over-year. Momentum in CT tube sales, which has been building over a number of quarters, remained strong in Q2. Many of these tubes were for new systems, which are also expected to result in future sales of replacement tubes. In our other medical modalities, oncology, mammography and radiography also saw growth while fluoroscopy and dental remained flat. We believe this growth is due to demand that had been deferred over the past year as well as from expansion of health care services in some markets. Revenues in our industrial segment increased 24% sequentially and 13% year-over-year. In Q2, demand for digital detectors for nondestructive inspection increased across several of our industrial verticals. However, demand for our imaging products for security screening at ports and borders as well as baggage screening at airports continued to lag. Now I'd like to take a few minutes to highlight the great work we're doing in our X-ray tubes business. In the future, I'll highlight other areas of our business in the same way. Demand for new CT systems in China and upgrades of CT systems globally are driving growth in our Tubes business. In China, we believe demand is likely to grow at approximately 10% a year for the next several years due to increased installations at fever clinics and a focus on making rural health systems more self-reliant. Our strategy in China has been to establish relationships with local OEMs. I'm happy to say that of the initial 12 CT projects we have been working on with 8 local OEMs, 9 projects have been brought to market and 3 are still in process. We believe that local Chinese OEMs have made very good progress and currently account for approximately 40% of CT sales in China. Based on our experience, new OEMs tend to initially focus on gaining market share through launching entry-level systems. This has occurred in China for the CT modality. We are now seeing that the local OEMs are ready to expand into 64, 128 and higher-slice CT system projects in order to provide greater diagnostic imaging capabilities, including systems that are needed for cardiac procedures. These projects are potential future opportunities for us and the relationships that we have built with these OEMs over the past 5 years will play a significant role in our continued success in the China CT market. As part of our local-for-local strategy, our Wuxi facility continued to scale up loading of X-ray tubes for the China market. By loading tubes, we mean assembling the X-ray tube in our core into locally sourced housings for OEMs' specific customizations and final testing before shipping to our customers. Over the past year, while most of our customers maintained momentum with their current R&D projects, many of them have slowed down their commitments to new R&D projects while they assessed the market situation. During the quarter, we saw an increasing momentum in new product development activity within our customer base across their extra imaging product lines, which we interpret as a reflection of their confidence in the markets that they serve. Our own R&D activity, on the other hand, did not slow down. Later this fiscal year, we plan to introduce 2 new CT tubes, specifically for high-end 256 and 320-slice CT systems. During the quarter, our software business received FDA 510(k) clearance for an enhanced version of our CT lung screening application, which uses artificial intelligence for automated detection of suspicious nodules. And at the same time, during the past few quarters, we have continued to make progress with our investments in innovation focused on nanotube technology. Now I'd like to share some additional details about this exciting new technology being developed through our joint venture, VEC Imaging. For simplicity, throughout this nanotube discussion, my use of the word 'our' refers to our joint venture, where we own 50%. First, let me start by outlining the differences between conventional X-ray tubes that use thermionic element technology and our cold cathode nanotube technology. On the left-hand side of the slide, you will see that conventional X-ray tubes require an electric power source to heat up a filament. Operating temperatures can get up to 2,400 degrees Celsius. In addition, the ability to place conventional emission sources close to each other is limited, a term that we call packing density. In contrast, our nanotube technology uses a localized electric field to extract electrons from solid-state emitters. This technology operates at room temperature and has very high switching speeds. Due to its form factor and high packing density, our nanotube technology enables us to design X-ray tubes where many emitters can be sequentially arranged and turned on or off at high speeds. These multi-beam X-ray tubes can offer increased design flexibility to build lighter, mechanically simpler, and more compact imaging systems. We believe that our nanotube technology will provide many benefits over conventional X-ray sources. First and foremost, we believe that systems designed using nanotube-based X-ray sources will significantly lower the total cost of ownership for hospitals and imaging centers. For example, in a CT application, a lower TCO could be realized by eliminating the very heavy rotating gantry along with numerous interconnected parts, pieces, and components that are needed to support the complex mechanical design. These electromechanical components add cost, complexity, and weight, and require significant downtime and expenses to maintain, repair, and replace over the life of the system. In contrast, systems designed using our nanotube technology could have very few, if any, moving parts and would be much simpler in design, have a significantly smaller footprint, and weigh much less. This simplicity is expected to result in lower maintenance costs and significantly reduced system downtime. In addition, the next-generation systems would be smaller, lighter, and portable and could give health care organizations additional flexibility in their care delivery process. We believe the combination of our nanotube technology and Varex's multi-decade experience with designing and manufacturing X-ray sources will enable our customers to redefine medical imaging in the coming years. To give you a status update, our R&D efforts with nanotube technology are progressing well. X-ray sources are characterized by energy, emission, and a few other parameters. We have achieved our intended energy output of 40 to 180 kilovolts at different emission levels measured in milliamps. We are now conducting accelerated life testing of different configurations of tubes. While life testing is ongoing, to date we have completed over 1 billion projections per emitter at 160 kilovolts. We believe this is the equivalent of several years of emitter life for a typical CT application. We are encouraged by these results and are continuing to move forward with our product development efforts. With that, let me hand over the call to Sam.

Thanks, Sunny, and hello, everyone. Before getting to our numbers, I would like to acknowledge that on March 31, our Audit Committee appointed Deloitte as our new external auditors. There were no disagreements with our prior auditors on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedures. We look forward to working with Deloitte. As a reminder, unless otherwise indicated, I will provide sequential comparison of our results for the second quarter of fiscal year 2021 with those of our first quarter of fiscal '21. Varex delivered excellent results for the quarter, driven by broad-based strengthening of our business across both of our segments. For the quarter, both revenue and non-GAAP earnings per share were above the top end of the guidance range. Second quarter revenues were $204 million, a sequential increase of 15% from the first quarter. Medical revenues were $157 million, and industrial revenues were $47 million. This translated to 77% medical and 23% industrial sales. Sequentially, medical sales grew 13%, while industrial sales saw a strong 24% growth. On a regional basis, all 3 areas saw robust sequential growth. Americas grew 15% overall, with higher growth in the Industrial segment. EMEA grew 17%, while APAC grew 14%. Let me now cover our results on a GAAP basis. Second quarter gross margin was 32% and flat sequentially with the previous quarter. Operating expenses were down $2 million compared to the first quarter, and interest expenses were $10 million. Earnings per diluted share were $0.08 compared to a loss of $0.16 in the prior quarter. Moving on to non-GAAP results for the quarter, gross margin was 35%, a sequential improvement of 100 basis points from the first quarter, driven by higher sales volume and a favorable product mix. Freight and logistics costs ran high, and we expect them to remain high until the ocean freight-related delays and uncertainties subside and the air freight volume normalizes. I want to remind you that our gross margin can fluctuate from quarter-to-quarter due to segment mix between medical and industrial, product mix within each segment, customer concentration, cost performance, and factory utilization levels driven by sales volume. Our gross margin has improved sequentially from 28% in the last quarter of fiscal 2020 to 34% in Q1 and now to 35% in Q2. This performance is due to increase in sales volume, favorable mix, and through our initiatives to improve efficiencies in our manufacturing and servicing activities. R&D spending in the second quarter was $18 million or 9% of revenues. R&D was 41% of operating expenses in Q2 as compared to 37% in Q1, reflecting our spending prioritization towards innovation and new products. SG&A was $26 million in Q2 as compared to $29 million in the prior quarter. As a result, operating expenses were $45 million and down approximately $1 million sequentially due to a decline in SG&A, offset by an increase in R&D. We have kept operating expenses in control while successfully meeting increased customer demand in these challenging times, leading to a significant improvement in product sales in the last 6 months. Overall, our strategy to deliver higher earnings through improved operating leverage is on track and working well. Operating earnings increased significantly to $26 million or 13% of revenue as compared to $14 million or 8% of revenue in the previous quarter. Tax expense in the second quarter was less than $1 million as compared to $2 million in the previous quarter. During Q2, we had 2 large favorable items in taxes that drove a $2 million benefit and resulted in an unusually low tax expense for Q2. One item was related to German taxes, and the other was related to the Netherlands R&D tax credits. As a result, there was a one-time benefit to EPS of $0.06 per share in Q2. Net earnings more than quadrupled from Q1 to $14 million or $0.35 per diluted share. This compares to net earnings of $3 million or $0.08 per diluted share in Q1. Now turning to the balance sheet. Accounts receivables increased by $8 million due to higher sales. However, our collection efforts were efficient with DSO down by 4 days to 58 days. Our efforts to reduce inventory materialized in Q2 with inventory down by a healthy $22 million. This is a priority for us, and as a reminder, we are targeting a total inventory reduction of $25 million to $30 million during the current fiscal year. For the first half, we have got inventory down by about $24 million. Accounts payables decreased by $16 million to minimize supply chain uncertainties and improve efficiencies of our overall operations. As a result, days payables dropped to 34 days. Now moving to debt and cash flow information. Cash flow from operations improved to $13 million. While no interest-related coupon payments were due in Q2, we did pay $9 million in taxes in Germany for fiscal years 2017 through 2020. We ended the quarter with cash of $111 million on the balance sheet, an increase of $6 million in the quarter. Gross debt outstanding was $512 million, and debt net of cash came down to $401 million, reflecting our priority to continue to de-lever on a net debt basis. Adjusted EBITDA was $33 million in the second quarter, a significant improvement from $22 million in the prior quarter. I'm pleased to note that if you were to annualize our first half fiscal '21 EBITDA performance, the net debt leverage ratio at the end of Q2 would be 3.7x. This reflects excellent progress towards our goal of a leverage ratio of 3x. In summary, our previously stated financial strategy of improving capital leverage and operating leverage is working well. I want to take a moment to thank our Varex colleagues worldwide for their tremendous efforts to enable these results in such challenging times. Now moving onto our business outlook for Q3. Demand environment continues to remain strong for us and allows us to provide the following guidance for Q3. Revenues between $195 million to $215 million and non-GAAP earnings per diluted share between $0.15 and $0.35. Our expectations are based on non-GAAP gross margin in a range of 33% to 35% and non-GAAP operating expenses in the range of $44 million to $45 million. With that, we will now open the call for your questions.

Our first question is from Larry Solow with CJS Securities.

I have a couple of questions. Perhaps Sunny, you could provide a quick overview. It seems that sequentially there is some improvement in the medical sector in new markets, though not everything has fully returned and the situation on the industrial side appears different. It looks like you are gradually seeing some opportunities open up, but it’s not completely there yet. Nevertheless, your revenue numbers were at the high end or even above your expectations, and you managed to keep your operating expenses aligned despite the increased revenue. Could you share some qualitative insights on the different markets and the sequential improvements?

We had a very strong quarter, with medical growing 13% sequentially. This performance was driven by broad-based demand, particularly in CT, which has shown strong demand over several quarters. However, two modalities, fluoroscopy and dental, remained neutral sequentially, consistent with their performance over the past year. These areas have their own cycles, but overall, it was encouraging to see strong demand. On the industrial side, we experienced a similar trend with strong demand, especially in electronics, which has been trending upward for several quarters. The only area within industrial that did not see significant growth was in security, cargo, and airport. Overall, I would say the demand and strength are broad-based, and we expect to see this continued strength in the next quarter.

As you look toward the next quarter and provide your guidance based on the numbers from Q2, it appears that you would need to reach the high end of your guidance again to match what you achieved this quarter. Is there any hesitation on your part? Are there specific factors related to timing that helped you in Q2 but may not provide the same benefits in Q3?

No, there weren't timing issues. We continue to see broad-based strength and demand going forward into the next quarter. We have tempered our expectations slightly due to some supply chain challenges. At this point, I can't pinpoint anything specific, but we are facing challenges with freight, including constraints and delays in transportation. We also have some material shortages that we are addressing. Therefore, we provided a cautious range that takes these supply chain issues into account. There are no capacity constraints in the factory regarding equipment or personnel. Ultimately, it's crucial for us to ensure we have the necessary parts to meet the demand.

Got it. And then just one question just on the China outlook. Obviously, big demand. China, obviously, wants to make everything internally. And as you mentioned, I think you said the local CT, those local OEMs are providing 40% now of the CT business. Over time, is there any outlook on that? As the local OEMs continue to build up, are these outside OEMs? I mean, particularly Siemens and GE, are they still selling considerably into this market? Or does it come to a point where it's only going to become you guys and they'll still have to be provided to the local OEMs who have a greater opportunity?

We anticipated five years ago that local Chinese OEMs, who had minimal market share at the time, would increase their share and capture more of the market, and they have done just that. Whether they will move from a 40% share to a significantly higher one is yet to be determined. However, it is clear that these local OEMs have been successful in designing and launching systems, and they have achieved commercial success as well. These systems are functioning effectively, providing services and support, and they have rapidly matured. Despite this, global OEMs also remain strong competitors in these markets and have benefited from overall market growth, although we have observed a shift in market share towards local OEMs. Our position in this landscape remains robust. The local OEMs have continued with their projects; we mentioned that eight out of ten are engaged with us, and we have not lost any projects. These projects are progressing well, and the OEMs have demonstrated persistence, learning from their experiences. There have been some minor delays typical of complex projects, but they are moving forward. We have three more projects advancing from the initial twelve that were launched, and we are optimistic as we see additional projects beginning to take form. This is motivated by their aim to transition to higher-tier CT systems. We expect that the primary CT systems in China will be the 64 and 128-slice systems. Therefore, we believe that growth will continue from the ongoing sales of new units in China while older CT systems, particularly the 16-slice models, will shift to higher-tier offerings. We are encouraged by these developments.

Our next question is from Anthony Petrone with Jefferies.

A couple of questions, backlog and then a few follow-ups on China. On backlog, Sunny, is there a way actually to sort of quantify the security cargo screening backlog? It's certainly been lagging through the pandemic. We'll expect it to continue to do so. On the flip side, this is, I believe, the highest margin business for Varex. So is there a way to sort of quantify what the backlog of orders looks like in security cargo screening? And then maybe just timing as to when you could see a reversal. And I'll have a few follow-ups on China.

Yes. So let me answer this question, Anthony. Sam here. So in terms of the security, the security cargo business, that business, industrial business overall for our sales runs around 20%. And out of that 20%, less than 1/3 of the industrial business goes through the security, cargo and port inspection, etc. So for a number of quarters, that business has been lagging and soft, so you could see how much the backlog might be building up out there. But for all of this to come back, particularly on the travel and baggage inspection side, we need to see travel resume and then airports releasing CapEx. So that should help us. I don't really have a good idea in terms of how much of the backlog is out there or pent-up demand might be there when travel resumes. In terms of port and cargo inspection, etc., it is somewhat lumpy, and it can come in, in a quarter, and then it can remain soft for a couple of quarters. We expect that dynamic on the cargo and port inspection side to continue. We are encouraged by what's happening in terms of the end customer demand in terms of the port inspection and cargo inspection. So that should pick up sooner than travel. That's our current expectation.

Great. And then that port, just a quick follow-up there, Sam. On the port side, you mentioned 20% of overall is industrial, 1/3 of that is airport screening. Should we assume that 1/3 is cargo port screening? Is that the right math on that piece of the business?

1/3 of industrial is cargo plus port plus airport package. Sunny Sanyal: What we call it is security.

Got it. Okay. Then shifting to China, maybe a little bit on the OEM contracts specifically that you announced, and you announced some new contracts for newer systems. Just maybe an idea of how many of those systems are in clinical trial development. How many are gearing up for commercial installation? So that would be the first question. And then lastly, on China, just an update on the Wuxi manufacturing plant. Where that plan sits in terms of its capacity today. And over time, will Wuxi exclusively be supplying into China?

Anthony, this is Sunny. I'll begin with the latter part of your question. Wuxi has been expanding effectively, focusing on both tube and detector manufacturing. The tube manufacturing phase is essentially light manufacturing. We initially began with aftermarket tubes, but we are now also producing OEM tubes. We plan to continue scaling this operation. As we renew contracts with our OEM partners, many are opting for local agreements, allowing us to supply them through these local contracts and manage all service, support, repairs, etc., from Wuxi. However, all of the core inserts are still being produced in Salt Lake, which we then ship. We source local housings and kits, customize, test them locally, and then ship. We'll maintain this approach, which is primarily a local-for-local operation for now, and we currently have no plans to shift to a local-for-global model. In contrast, the detector side is progressing differently. We can manufacture various types of detectors, including radiographic, dental, oncology, and some fluoroscopy models. Our goal is twofold; it's not just about assembling kits but also sourcing local parts and materials. A more robust supply chain has been established, enabling us to build detectors at a lower cost in China. This shift began a couple of years ago in reaction to tariffs to meet local market needs. However, we intend to continue expanding operations in Wuxi. Since the detectors aren't highly customized, they could potentially be shipped to other markets worldwide. Customizations usually involve superficial modifications like labels and stickers. In terms of capacity, we can produce several thousand detectors annually in China, so we don't currently face capacity constraints. The scaling of the Wuxi operation is on track and will persist. Regarding your question on local OEMs and contract renewals, we are currently engaged in various phases of product development with our new projects. Of the 12 initial projects, three are in more advanced stages, while newer projects like the 128-slice and 64-slice systems are at different development stages. It's hard to provide many specifics, but they are generally in similar phases to earlier projects. We don't anticipate these projects will take five years like previous start-ups, as they are based on existing CT infrastructure that our customers and OEMs have established. Additionally, we have initiated projects with other modalities, such as cardiovascular systems, indicating that these OEMs plan to diversify their offerings. Having built strong relationships with these customers over the past five years gives us a significant advantage in the market, and we intend to capitalize on it.

Our next question is from Jim Sidoti with Sidoti & Company.

You've talked about new products on the last couple of calls. You talked about the high-end detectors a little bit the last time, the nanotube technology this time. Can you give us a sense on how soon these projects turn to revenue?

New products developed from existing platforms typically launch more quickly. Since we can release these in a couple of years, our OEMs already have the necessary infrastructure and interfaces in place, which allows them to adopt these products relatively fast. They are well-understood IT applications. For instance, when we talk about detectors, we differentiate them from tubes. A new detector model can be integrated swiftly. When launching new products, we strive to maintain as much of the previous interface as we can, enabling seamless integration into our customers' designs and environments. The pace at which our customers adopt these products is mainly determined by the timing of their new projects. They usually align the introduction of a new detector model with new product launches. Generally, it takes about three years before we start seeing revenue from a new detector. Initially, volumes are low, but once our customers roll them out, revenues increase significantly in the second year of their launch, whether we're discussing new detectors or significant enhancements to existing platforms. However, the introduction of entirely new platforms, such as a CMOS platform, can take longer as it involves more extensive changes. For example, photon counting detectors cannot simply be integrated into older applications due to their fundamentally different technology and imaging methods. Even if we launch a new product, it can take our customers another two to three years to adapt their applications accordingly. This delay can be frustrating, as the time to generate revenue is lengthy. Once these new technologies are integrated, they are typically used for a long time. New platforms, especially those as innovative as photon counting, have extended revenue realization periods. For instance, when introducing a new CT tube, established Chinese OEMs can quickly integrate our new 16-slice and 64-slice CT tubes into their upcoming systems. But with something like nanotube technology, which is completely distinct and involves overhauling mechanical and electrical components, revenue realization could take five years or more. This is why we are cautious about projecting near-term revenues from these groundbreaking technologies, which represent a significant shift in imaging.

Okay. So it sounds like we should see maybe a small contribution of revenue in perhaps fiscal '22 and '23, but those game-changing technologies, those are out another 3 or 4 years after that?

That's correct.

And then you talked a lot about China. India has been in the news a lot the last couple of weeks. The pandemic has really started to have some impact there. Do you have customers in India? And is there potential to grow sales there as well?

We do have customers in India, but the local OEM base is not as strong as in other regions. There are a few local OEMs, and we are collaborating with them, similar to our efforts in China. I believe that in three to five years, we will see these OEMs begin to develop further. While we do have some business with local OEMs, the majority of the market in India is currently served by international and global OEMs. The reason we are observing strength in CT not just in China but globally is that some of our products are also being sold in India. However, we do not have control over how our customers distribute their products, making it difficult to determine what is specifically going to India. To summarize, we conduct business directly in India through Indian OEMs, and we also operate in India via global OEMs.

And then the last one for me, are you seeing any significant increases in material costs right now? Or are you able to manage that and offset it through some of the other cost-saving initiatives you put through?

Yes. Let me have Sam respond to that.

Yes. Yes, currently, we are seeing a little bit higher material costs or input costs. I talked about freight. So freight and input costs definitely are a little bit of a headwind to the gross margin currently. So far, we have not seen a big impact, and we are managing through it. My expectation is we will manage through it. And hopefully, it remains a minor impact, but we are seeing high input costs too.

Our next question is from Mike Ott with Oppenheimer.

Congrats on a nice quarter. Curious in medical, if you're continuing to see the higher utilization as a harbinger for future capital demand that you mentioned on your last call?

It generally is. Higher utilization for us means two things. First, we see an increase in replacement components due to wear and tear on items like tubes and connectors. Second, it leads to replacements of entire systems. We're encouraged by both of these factors. We've observed growth in utilization levels, which is why there's been such broad-based demand across many modalities, and this gives us significant optimism.

That's great to hear, Sunny. And then just a quick housekeeping one for Sam. When you gave the fiscal second quarter sequential revenue growth rates by geography, just like for EMEA, was that up 17%?

Yes, they were all up double-digit percentages. I just don't remember exactly right now. But yes, all of the 3 regions were up quite strongly. Yes.

Our final question is a follow-up from Larry Solow with CJS Securities.

Great. I appreciate the opportunity to follow up. Sunny, you mentioned the photon counting technology. I'm curious if you can provide some context. When you acquired Direct Conversion a couple of years ago, if I recall correctly, their sales were around $20 million, and there was a solid backlog. So there seemed to be a good runway for growth. My first question is whether that growth has been affected at all by COVID. Is that still in place? The second question regarding the photon counting technology is whether you hinted in your last presentation about potentially entering the CT detector space, or more specifically, the data acquisition segment where Analogic has held a strong position. Is that accurate? And do you have any updates on the timing for that?

The existing photon counting component sales experienced a decline during the COVID period due to their use in both medical and industrial applications. The medical side notably slowed down during this time in both areas. However, we have observed a resurgence in activity, and it is continuing to grow. The pipeline and backlog we had remained intact, even though some original equipment manufacturers fell short during the COVID period. We invested in them for their long-term potential, particularly in market expansion into CT detectors, and that technology development project has progressed well. We now have modules in development, and there is interest from OEMs. We are collaborating with them to ship modules for testing and validation, and this is advancing positively.

Thank you for your questions and participating in our earnings conference call for the second quarter of fiscal year 2021. The webcast and supplemental slide presentation will be archived on Varex's website. A replay of this quarterly conference call will be available through May 18th and can be accessed at the company's website or by calling (877) 660-6853 from anywhere in the U.S., or (201) 612-7415 from non-U.S. locations. The replay conference call access code is 13719035. Thank you, and goodbye.

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