Earnings Call Transcript - VREX Q3 2023

Operator, Operator

Greetings. Welcome to the Varex Third Quarter Full Year 2023 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, Christopher Belfiore. You may begin.

Christopher Belfiore, Host

Good afternoon and welcome to Varex Imaging Corporation’s earnings conference call for the third quarter of fiscal year 2023. With me today are Sunny Sanyal, our President and CEO; and Sam Maheshwari, our CFO. Please note that the live webcast of this conference call includes a supplemental slide presentation that can be accessed at Varex website at vareximaging.com. The webcast and supplemental slide presentation will be archived on Varex’s website. To simplify our discussion, unless otherwise stated, all references to the quarter are for the third quarter of fiscal year 2023. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the third quarter of fiscal year 2023 to the second quarter of fiscal year 2023. Finally, all references to the year are to the fiscal year and not calendar year unless otherwise stated. Please be advised that during this call, we will be making forward-looking statements, which are predictions and projections about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated. Risks relating to our business are described in our quarterly earnings release and our filings with the SEC. Additional information concerning factors that could cause actual results to materially differ from those anticipated is contained in our SEC filings, including Item 1A, Risk Factors of our quarterly reports on Form 10-Q and our annual report on Form 10-K. The information in this discussion speaks as of today’s date, and we assume no obligation to update or revise the forward-looking statements in this discussion. On today’s call, we will discuss certain non-GAAP financial measures. These non-GAAP measures are not presented in accordance with, nor are they a substitute for GAAP financial measures. We provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measures in our earnings press release, which is posted on our website. I will now turn the call over to Sunny.

Sunny Sanyal, CEO

Thank you, Chris, and good afternoon, everyone. I’m pleased to report another solid quarter for Varex. Revenue of $232 million in the third quarter of fiscal 2023 is a new quarterly record for us. Non-GAAP gross margin of 34% exceeded our expectations and non-GAAP earnings per share of $0.37 was at the high end of our guidance. These results were helped by continued strength in our industrial business. In addition, we increased cash by $30 million in the quarter, primarily driven by diligent inventory management and increased profitability. Revenue in the third quarter was up 2% sequentially and 8% year-over-year. Revenue in the Medical segment increased 1% sequentially and 5% year-over-year, while Industrial revenue increased 5% sequentially and 20% year-over-year. Non-GAAP gross margin in the third quarter was 34%, which was better than our expectations and up 100 basis points compared to the second quarter. This was primarily due to the higher portion of industrial sales. Adjusted EBITDA in the third quarter was $38 million and non-GAAP EPS was $0.37. We ended the third quarter with $152 million in cash, cash equivalents, and marketable securities on the balance sheet, up $30 million from $122 million in the prior quarter. This was primarily due to higher profitability and a $13 million reduction in inventory in the quarter. Let me give you some insights into sales detailed by modality in the quarter compared to a 5-quarter average, which we will refer to as sales trend. In our Medical segment, global sales of CT tubes were solid in the quarter and remain above their sales trend. Our fluoroscopy and oncology modalities improved in the quarter, but were flat compared to their respective sales trends. Mammography was solid in the quarter and above its sales trend. Dental, which can be lumpy from quarter-to-quarter, remained down in the third quarter, but is trending in a more positive direction, and radiographic continues to grow above its sales trend. Global sales of our industrial products were robust for the second straight quarter, and order intake remained solid. The continued strength was primarily in our nondestructive inspection business across various applications, including cargo screening and oil and gas. We also saw increased adoption of our photon counting technology, with growth in food, battery, and electronics inspection in the quarter. Taking a step back from the quarter, I’d like to provide a brief update on some of our products we introduced over the last year. Our Dynamic Detector platform, Azure continues to make solid progress with our customers who are integrating these detectors into various systems, including those for cardiovascular and surgical applications. The Azure platform is a cost-effective performance dynamic detector technology aimed at enabling us to secure design wins for dynamic applications. These detectors are targeted at expanding our applications footprint with new and existing customers. It offers high resolution and high performance at a lower x-ray dose than its amorphous silicon equivalent and is a cost-effective alternative to CMOS detectors, which become expensive at larger sizes. We expect to see continued adoption of Azure and anticipate that many new system launches by our customers in the coming years will incorporate our Azure detectors. Since its launch in 2022, we have seen strong interest in this platform, and we are pleased with how this technology is performing in the field. At the same time, we are seeing continued uptake of our Lumen detectors. We now have a full portfolio of Lumen detectors used across various modalities, including dental and fluoroscopy. We also recently introduced Lumen detector models made in our factory in China for sale in global markets where there are no political or economic barriers to sales of products made in China. We expect the shipments of Lumen detectors made in our factory in China to start in October of this year. The Lumen platform offers a U.S. design detector for radiographic applications at a globally competitive price and is targeted at expanding our coverage of these applications. Our Industrial business has seen solid growth this year, partly due to strength in our nondestructive inspection applications, which utilize our linear accelerator products, also referred to as linacs. These are high-power X-ray sources used in the inspection of large objects such as cargo containers, automotive parts, jet engines, and rocket motors. We’re excited to say that this technology was used in the manufacturing of India’s Chandrayaan-3 rocket, which is carrying a rover to the moon. Varex Linacs were used to inspect the integrity of the rocket motors, propellant tanks, and to detect voids, cracks, and other abnormalities. Varex is the world leader in high-energy linear accelerators for industrial applications. We work with various rocket manufacturers in the U.S., Europe, and Japan, and now we are proud to support India’s growing space program. In summary, we’re very happy with our performance in the third quarter. And now I will turn over the call to Sam to go over the details of our financial results.

Sam Maheshwari, CFO

Thanks, Sunny, and hello, everyone. As a reminder, unless otherwise indicated, I’ll provide sequential comparisons of our results for the third quarter of fiscal 2023 with those of our second quarter of fiscal 2023. I’m pleased to report another strong quarter. We exceeded the midpoint of guidance for revenue. Gross margin was above the guided range, and non-GAAP EPS was towards the high end of guidance. The primary driver of the strong performance was the continued execution in our Industrial segment. As a result, we reported sales of $232 million and non-GAAP gross margin of 34%. Non-GAAP EPS was $0.37. Further, we generated $38 million of operating cash flow in the quarter, our second highest cash-generating quarter as a public company. Third quarter revenues increased 2% compared to the second quarter of fiscal 2023. Revenues increased 8% compared to the third quarter of fiscal 2022. Medical revenues were $175 million, and Industrial revenues were $57 million. Due to the ongoing strength of the industrial segment, Industrial revenues climbed to 24% of our total revenues for the quarter, while Medical revenues made up 76%. Looking at revenue by region, Americas increased 8% sequentially, while EMEA increased 10%, and APAC decreased 10%. China comprised 18% of the overall revenue for the quarter. Let me now cover our results on a GAAP basis. Third quarter gross margin was 33%, 100 basis points higher sequentially. Operating expenses were $52 million, down $5 million compared to the second quarter of fiscal 2023, and operating income was $24 million, up $8 million. Net earnings were $9 million, and GAAP EPS was $0.21 based on fully diluted 50 million shares. Please note that GAAP and non-GAAP EPS for the third quarter reflect the adoption of ASU 2020-06. This involves an add-back of $1.4 million of after-tax interest expense for us to a net earnings and adds approximately 10 million shares to the diluted share count. Moving on to the non-GAAP results for the quarter, gross margin of 34% was up 100 basis points sequentially, driven primarily by higher pricing, a higher proportion of sales in the higher-margin industrial segment, and favorable experiences in freight expenses. R&D spending in the third quarter was $20 million, down $3 million compared to the second quarter due primarily to $2 million of payments related to technology milestones made to Micro-X in the second quarter of fiscal 2023. Overall, R&D was 9% of revenues within our targeted 8% to 10% range. SG&A was approximately $29 million, flat compared to the second quarter, constituting 12% of revenues. Operating expenses were $49 million or 21% of revenue. Overall, our operating expenses were slightly above our expectations. Operating income was $29 million, up $6 million sequentially. Operating margin was 13% of revenue compared to 10% in the second quarter of fiscal 2023. Tax expense in the third quarter was $5 million or 21% of pretax income, compared to $4 million or 28% in the second quarter of fiscal 2023. Net earnings were $17 million or $0.37 per diluted share, up $0.11 sequentially. Non-GAAP EPS of $0.37 is calculated by adding after-tax interest expense of $1.4 million to net earnings of $17 million, and the result is then divided by 50 million shares. Now turning to the balance sheet. Accounts receivable increased by $3 million from the prior quarter, and DSO held steady at 64 days. Inventory decreased by $13 million in the third quarter, and days of inventory decreased by 8 days to 174 days. We are pleased with the progress in reducing inventory and expect this to continue in the fourth quarter of fiscal 2023. Accounts payable increased by $1 million and days payable stood at 44 days. Now moving to debt and cash flow information. Net cash flow from operations was $38 million in the third quarter, driven primarily by profitability and $13 million reduction in inventory. We ended the quarter with cash, cash equivalents, and marketable securities of $152 million, an increase of $30 million from the second quarter of fiscal 2023. Gross debt outstanding at the end of the quarter was $449 million, and debt net of $152 million of cash and marketable securities was $297 million. Adjusted EBITDA for the quarter was $38 million or 16% of sales. Our net debt leverage ratio was 2.3x trailing 12 months of adjusted EBITDA at the quarter end. Now moving on to guidance. At the beginning of the second half of fiscal 2023, we provided guidance for sales growth for the year of 3% to 5%, and we expect to be in that range. Here is the guidance for the fourth quarter: revenues are expected between $220 million and $240 million, and non-GAAP earnings per diluted share are expected between $0.20 and $0.40. Our expectations are based on non-GAAP gross margin in a range of 33% to 34%, non-GAAP operating expenses in the range of $49 million to $50 million, and a tax rate of about 25% for the fourth quarter with non-GAAP diluted share count of about 50 million shares per ASU 2020-06. With that, we’ll now open the call for your questions.

Operator, Operator

Our first question comes from Suraj Kalia with Oppenheimer & Company. Please go ahead with your question.

Suraj Kalia, Analyst

Hi, Sunny, Sam, can you hear me alright?

Sunny Sanyal, CEO

Yes, we can, Suraj. How are you?

Suraj Kalia, Analyst

Doing well. Gentleman, congrats on a really nice quarter. So Sunny or Sam, either one, specifically on medical, Sunny, one of the things that I know you have talked about numerous times, and I know, for example, GE is also talking about photon counting detectors as a key thing being viewed. Sunny, if you could, I’d love to understand how should we adjudicate photon counting adoption and competitive dynamics? And maybe if you could give us some real snapshot of where worldwide photon counting sales are with Varex fits in that pie?

Sunny Sanyal, CEO

Sure, Suraj. So photon counting is an emerging technology, and it’s in the process of gaining traction in the market, and it’s only in the last, let’s say, 18 months or so that in the medical field, it has been publicized quite a bit for CT type of applications. So from our perspective, we’re excited about it because we ventured into photon counting in anticipation of solid capabilities that would bring value in medical CT, and now we’re seeing the industry also starting to move in that direction. We are involved with photon counting in two markets: industrial and medical. The cycle in Industrial has been faster than in medical so far. And part of our – in industrial this quarter was also driven by the use of photon counting detectors in a few applications like food processing, battery inspection, etcetera. So we’re excited to see photon counting gain traction. It’s getting traction in industrial faster. We have some OEMs who are engaged in the use of photon counting and medical applications. More recently, we’ve started gaining fairly good interest from the market with the use of CT. That said, this is a novel platform, and our expected contribution to growth in the medical side is still several years away while the market absorbs these technologies into their newer designs. So that’s where we stand. We’re excited about the technology; it’s moving forward, and we’re glad to see some of the major OEMs also lining up behind it because that’s what drives increased adoption.

Sam Maheshwari, CFO

Yes. And then, Suraj, I’ll add that, as of now, our photon counting and charge integration combined, that business is right now generating about $20 million of sales annualized, and we are seeing growth there. So just wanted to give you that perspective of where we are with this technology as of now revenue-wise.

Suraj Kalia, Analyst

Perfect. Yes. That is really helpful. Sunny, one more question for you and one for Sam. Sunny, if you could, could you provide a status on cold cathodes case and also MIC China 2025, what are the dynamics there currently to the extent that you can share? And Sam, any updates, and forgive me if I missed this, we have multiple calls going on. Just in terms of inventory management and your gross margin, your pace of growth of GAAP gross margins. How should we think about it as we exit this year and going into, let’s say, the first half of ‘24? Gentlemen, thank you for taking my questions. Congrats again.

Sunny Sanyal, CEO

Okay. So Suraj, with respect to cold cathodes, just like I said, with photon counting new technology, it takes time to adopt, and the adoption curve there is further along than with cold cathode nanotube technologies. Nanotubes are much newer, and the industry is trying to figure out what kinds of applications would be applied to it. From our perspective, from a revenue contribution perspective, that’s further out than photon counting, where we are with that technology is that we’re continuing to make progress on the product development and production of tubes with that technology. Our technology transfer for Micro-X has gone very well. We are continuing to work on that, and we’re evolving that technology. We have continued to make prototypes with our joint venture partner, and now we’re working through some commercial aspects of our relationship. In short, from our perspective, we’re making good progress with the technology; we’re happy with the technology, and we’re seeing now customers starting to engage to consider how they might apply this technology.

Sam Maheshwari, CFO

And then coming back to your questions, Suraj, on inventory and gross margin. So in terms of inventories, as you know, we’ve been trying to bring inventories down, and we are very pleased with the progress that we made in this last quarter. We brought inventories down by $13 million, and our focus on that continues. We expect inventories to come down further. We are working in that direction. So in the next three months to six months, we should be bringing inventory further down. We are not guiding by how much the amount that we are targeting to bring down, but I think we have room to bring it down further. In terms of gross margin, we’ve made good progress in this last quarter. I would say that gross margin has benefited from various initiatives of ours. Manufacturing efficiencies have improved, the freight environment has generally been favorable in the last quarter, and as I mentioned, price-cost drag has been minimized. However, we are still experiencing some continued price-cost drag on the P&L, and we have some high-cost components in our inventory, which we expect to fully work their way through the system by December or January timeframe. At that point, I’m anticipating a further pickup of around 100 basis points in gross margin. So that is how the gross margin picture is shaping up, and we remain committed to our target of getting to a non-GAAP gross margin somewhere between 34% and 35%.

Sunny Sanyal, CEO

Suraj, you also asked about China 2025. I didn’t catch the first word you mentioned regarding MIC; however, as far as China 2025 is concerned, we began our journey to address the need requirements for China 2025 a few years ago. Our approach involved utilizing two different sites we made in China. We started with our facility in Wuxi to manufacture products locally for local demand in China, and that has been successful. We began with tubes, and we’ve expanded to detectors, and now we’re producing a significant number of tubes and detectors in China. A couple of things are happening: our strategy for China 2025 is to get our products registered such that we can obtain the “made in China” label, which is where we currently stand. We will continue to expand the portfolio of products that we sell in China to be made that way and carry that kind of label. Additionally, we’ve been expanding our local commercial relationships in China to collaborate with our Wuxi office to handle both the shipment of new products and warranty service support, along with all the aspects you would expect from a supplier based in China for local manufacturers. Our goal by 2025 is for a vast majority of the products that we sell in China to be supplied from China. We have validated this approach with our global OEMs and local OEMs to gauge their comfort level with what we’re doing, and they seem to be in alignment with our strategy for China 2025.

Suraj Kalia, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Larry Solow with CJS. Please proceed with your question.

Larry Solow, Analyst

Great, thanks. A couple of follow-ups to Suraj’s questions and a couple of new ones as well. Just on Sunny, you mentioned – or I think Sam might have mentioned that the full-time accounting is about $20 million in sales today. So that’s about 2% of sales. Just trying to get a little grasp around like you have a figure of sort of new products or products introduced in the last three years, and how much they represent of your total sales today. I imagine it’s still under 5%. Is that fair to say?

Sam Maheshwari, CFO

Larry, this is Sam. In terms of the revenue related to new products and new products introduced over the last 3 years, I do not have that number off the top of my head. However, I want to qualitatively state that in our business, once we release a product, it goes through a fairly long adoption cycle. The product has been released and customers are testing it before they can integrate it into their own product, and then they eventually launch their product. When that customer’s product picks up volume, that is when we see our volumes increase. Therefore, it’s quite normal and natural in our business that during the first one to two years after the release, we may not see significant revenues. So, from that perspective, for the first three years of product release, we may not see substantial revenues, and so we do not track it in that manner. However, we can make an effort to figure this out for future conversations.

Larry Solow, Analyst

Okay.

Sunny Sanyal, CEO

Larry, I can provide you with one frame of reference.

Larry Solow, Analyst

Yes. Go ahead, Sunny.

Sunny Sanyal, CEO

One frame of reference is: You may recall when we spun off; there were a lot of discussions about China and CT tubes in China and the contribution of revenues from those. It’s been now six years since then. At that time, those tubes were designed, and recall we stated that our OEMs were implementing and designing them in. Now, we are five or six years into that journey, and as you speak with me, you can see what our China revenues are. That serves as a frame of reference for how long it takes for us to launch products and what kind of volume to expect in an active market.

Larry Solow, Analyst

I appreciate the color. Sunny, while I have you on that note, the 18% referenced by you or Sam is coming from China — is the vast majority of that today in CT tubes?

Sunny Sanyal, CEO

It’s in tubes, yes. The majority of that is in CT tubes for us there.

Larry Solow, Analyst

Right. Okay. Right, okay. But then did I cut you off there? I think you were going to say something else?

Sunny Sanyal, CEO

No, that’s it.

Larry Solow, Analyst

Okay. And then just a follow-up on the margin question. I guess early in the year, I think you guys sort of cited price-to-cost lag inflation, or I guess, price-to-cost lag may be tied in as one of the places you were trying to catch up with price raising. But also on supply chain issues. I think you stated you thought there was like a 400 to 500 basis point tailwind on adjusted EBITDA margin. How far along are we? You kind of mentioned you have like another 100 bps on gross margin. If I just look at what you did this quarter versus what you did in Q1, you were sort of 400 bps higher. So does that kind of capture that 400 to 500 bps that you spoke about in Q1? Can we get more as we look out? How should we view that?

Sam Maheshwari, CFO

Yes, Larry. So, six to nine months ago, when we discussed this, several headwinds were impacting us. Slowly, we have been working on resolving them, including freight and manufacturing efficiencies and supply chain-driven issues. A lot of these factors are now back to pre-crisis levels. At this point, I would estimate that there is still a potential for about 100 to 200 basis points of improvement from where we currently are, but likely closer to the 100 to 150 basis points. There may be some variance quarter-to-quarter, but many of the headwinds have diminished, contributing to margin improvement.

Larry Solow, Analyst

Fair enough. So, you sort of said that 100 bps on gross margin. So it feels like once you hopefully get that sometime maybe by the end of the calendar year, and maybe there’s a bit more on the operating end, but going forward beyond that, it would just have to be new products driving higher prices or operating leverage, I guess, right?

Sam Maheshwari, CFO

Yes, there will be three factors, Larry: first is new sales volume, the second will be operating leverage, and the third will be new products. These will be major contributors moving forward. Additionally, the segment mix is important; as industrial becomes a higher portion of the business, that has a positive effect on overall margin.

Larry Solow, Analyst

Got it. Okay. And let me just squeeze in one more question. Just on the guidance, sort of I get the gross margin may come down a little bit because you had a nice quarter of mix this quarter. Typically, Q4 medical is seasonally stronger and tends to be a little lower margin. However, I’m trying to determine why we are at the same guidance range; is there anything I am missing there?

Sam Maheshwari, CFO

Yes, sure. Larry, let me take that question for you. If you look at our second half of fiscal 2023 versus the first half of fiscal 2023, we are up around 7%. If you consider the last year’s second half to the first half, we were about 8%. So if you look at it more broadly than the quarter, we are showing a similar pattern. However, within the quarter, minor fluctuations, such as $2 million, $3 million, or $4 million, may occur which can affect the perception of quarter-to-quarter performance. Overall, from our perspective, we are achieving what we set out to do for fiscal 2023. In terms of the full year, we provided guidance of 3% to 5%, and at the midpoint, we are looking at approximately 4.3% growth for the full year. So, the fluctuations between quarters may affect optics, but overall, we are on track.

Larry Solow, Analyst

Got it. Fair enough. I appreciate all the color. Thank you.

Sam Maheshwari, CFO

Thank you, Larry.

Operator, Operator

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

Young Li, Analyst

Alright. Great. Thanks so much for taking our questions. Maybe to start on the industrials performance; good to see the continued growth and margin contribution there. I guess I’m wondering if you can maybe talk a little bit about the sustainability of the growth trend and your visibility into the ordering patterns there? Are we still in the early innings of a multiyear growth cycle for industrials?

Sunny Sanyal, CEO

So, industrial has been strong for us and has consistently grown post-COVID. We are very pleased with that. We are also at a point where certain segments of the market are adopting imaging technology fairly rapidly. Therefore, we continue to benefit from that. Overall, I am optimistic about the long-term prospects because it’s largely a greenfield market and it has been growing faster than medical as well, as we have discussed in the past.

Young Li, Analyst

Okay, very helpful. I guess my follow-up just on China, 18% of revenue implies low single to mid-single digit growth year-over-year, which is below the historical growth trend. It would be great if you can provide some more color on the growth that you saw this quarter. How did it perform relative to your expectations? What’s the outlook for growth in China going forward?

Sam Maheshwari, CFO

Yes, sure, Young. China performed as per our expectations this past quarter. There were neither positive nor negative surprises in this last quarter. In terms of year-over-year growth, our numbers for China are becoming significant. Thus, the law of large numbers is starting to come into play, making it difficult for a region to continuously grow at rates of 15%, 20%, or more. Smaller percentage increases are now still reasonable in terms of the dollar amount. We expect China growth to align more closely with the rest of the world over time, but there is still some room for China to grow faster than elsewhere. Currently, China is behaving as we expected, and sales are occurring as we would expect.

Young Li, Analyst

Got it. Thank you very much.

Operator, Operator

Our next question comes from the line of James Sidoti with Sidoti & Company. Please proceed with your question.

James Sidoti, Analyst

Hi. Good afternoon and thanks for taking the questions. Can you talk a little bit about inventory at your medical OEMs? I know at the beginning of the year, you were worried that because they were having supply chain issues, they might have an oversupply of your components and might be cutting back. Now, six months to eight months down the road, have those supply chain issues subsided? Where is the inventory of your product at the OEMs?

Sunny Sanyal, CEO

Hi Jim, this is Sunny. Generally speaking, a couple of quarters ago, there were acute problems with some of our OEMs in their factories because of supply chain issues, leading to huge backlogs. This resulted in a certain amount of our products being stuck in inventory. Recall that our first quarter faced a lot of stress as a result of that. However, since then, the production flow at our customers has improved remarkably. While we are not declaring complete victory, there are still sporadic supply chain issues, but overall the broad-based issues have eased. The inventory levels of our products with our customers are now lower than where they were a couple of quarters ago.

James Sidoti, Analyst

Okay. And then one of the other concerns you had two quarters ago was about hospital capital spending. You thought it might slow down due to economic uncertainty. Six months down the road, it seems like the recession may not be as severe as initially thought. Have you seen those pressures subside as well? Have you seen hospitals more willing to step up their capital spending?

Sunny Sanyal, CEO

What we are seeing is that the labor-related costs are easing. We are increasingly hearing that hospitals are improving their use of temporary labor, which we view as a positive development that enhances profitability. We’ve also observed some degree of continued purchasing by hospitals. Therefore, I would say it’s more positive than it was before. However, it’s hard for us to speculate on what that environment looks like, especially on a global level since it varies by geography.

James Sidoti, Analyst

Okay. Alright. And then I’ll just sneak in one more on the balance sheet. Prepaid expense and other current assets were up about $15 million, $16 million in the quarter. Is that where some of the cash is?

Sunny Sanyal, CEO

Yes, Jim, I want to clarify that you mentioned prepaid and other current assets, correct?

James Sidoti, Analyst

Right.

Sunny Sanyal, CEO

Yes, some of the cash is considered other current assets because it is categorized beyond 90 days. That is where it resides.

James Sidoti, Analyst

Okay. Is there any other reason why that was up so much in the quarter, or is that basically the cash equivalents?

Sunny Sanyal, CEO

That is primarily the cash equivalents. There might be minor fluctuations here or there, but it is mostly the cash equivalents.

James Sidoti, Analyst

Okay. Alright. That’s what I thought; I just wanted to make sure. Alright. Thank you.

Sunny Sanyal, CEO

Thank you.

Operator, Operator

And our next question comes from the line of Anthony Petrone with Mizuho Securities. Please proceed with your questions.

Anthony Petrone, Analyst

Thanks for squeezing me in here. On just manufacturing mix, just kind of want to get an update on what amount is actually being produced at Wuxi versus Salt Lake and how that influences overall gross margins. Looking ahead over the next couple of years, where can that mix trend?

Sam Maheshwari, CFO

So, Anthony, this is Sam. Good to hear your voice. In terms of Wuxi production, Wuxi, in the overall scheme of things, even now, is a smaller site for us. I would say closer to 70% of our value or revenue volume is through Salt Lake City, with the remainder coming from Germany, the Philippines, the Netherlands, and Wuxi. So, that gives you a perspective. Currently, Wuxi accounts for less than 10% of our overall revenue volume. Overall gross margins depend on the type of modality we are shipping; it varies quarter-to-quarter. It’s not solely due to labor differences.

Anthony Petrone, Analyst

And maybe just an update on the mix between tubes and flat panel detectors or other components. Last year, extending maybe even 18 months ago, there was pressure on pricing for flat panel detectors, but CT tubes particularly held price well. Any notable updates on pricing trends for tubes versus flat panel detectors as we look to the back half of the year and into 2024?

Sam Maheshwari, CFO

Yes, in general, a few years ago, our business used to be 45% sources, 45% panels and detectors, and 10% was Connect and Control or C&C and software. As of now, I would say we are around 10% C&C and software. The split is now 90% between sources and panels, with about 50% towards tubes and 40% towards panels, driven by the fact that sources have grown a bit faster than the panel side. Regarding pricing, approximately 18 months ago, we implemented a broad pricing initiative across our entire customer base, which has been successful. Prices have increased; phases have occurred over time, given the spikes in semiconductor prices impacting panels. This allowed us to hike prices on the panel side somewhat. However, on the tubes side, being more mechanical hardware, costs of metals and other materials have increased as well, which helped us raise prices on sources. Overall, our pricing increases on the sources side have been a bit higher than on the panel side over the past 12 to 18 months.

Anthony Petrone, Analyst

Thank you very much.

Operator, Operator

And we have reached the end of the question-and-answer session. I will turn the call back over to Chris Belfiore for closing remarks.

Christopher Belfiore, Host

Thank you. Thank you for your questions. I will now hand the call back to Sunny for some final comments.

Sunny Sanyal, CEO

Thank you, Chris. In closing, we are very pleased with the solid third quarter results and are on track to achieve our target growth rate for the year. As always, I am very proud of our global team and employees who make a difference on a daily basis. Thank you all for taking the time to join us today and for your continued interest in Varex.

Christopher Belfiore, Host

Thank you, Sunny, and thank you all for your questions and participating in our earnings conference call today. The webcast and supplemental slide presentation will be archived on our website. A replay of this quarterly conference call will be available through August 15 and can be accessed on our website, vareximaging.com/investorrelations. Thank you and goodbye.

Operator, Operator

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.