Earnings Call Transcript - VREX Q4 2022

Operator, Operator

Hello and welcome to the Varex Fourth Quarter Fiscal Year 2022 Earnings Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Christopher Belfiore, Director of Investor Relations. Please, go ahead.

Christopher Belfiore, Director of Investor Relations

Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the Fourth Quarter of Fiscal year 2022. 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/news. 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 fourth quarter of fiscal year 2022. In addition, unless otherwise stated, quarterly comparisons are made sequentially from the fourth quarter of fiscal year 2022 to the third quarter of fiscal year 2022, rather than to the same quarter of the prior year. 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 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. 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.

Sunny Sanyal, President and CEO

Thank you, Chris, and good afternoon, everyone. I'm pleased to announce a strong finish to another fiscal year with revenues reaching $231 million in the quarter, a new quarterly record for Varex. Global demand for our products was solid during the quarter, and a slowly improving supply chain and our supplier diversification efforts allowed us to convert more orders to sales. As we start a new fiscal year, I feel good about Varex's prospects to grow, despite a high degree of uncertainty in the upcoming year. Revenue in the fourth quarter increased 8% sequentially and 2% year-over-year. Revenue in Medical increased 9% sequentially, while Industrial revenue increased 6%. Non-GAAP gross margin in the quarter was 33%, at the low end of our expectations, primarily due to high semiconductor procurement costs. Adjusted EBITDA was $36 million and non-GAAP EPS was $0.42. Our cash position, including marketable securities, was solid at $113 million at the end of the quarter, up $3 million sequentially. Let me give you some high-level insights into the market environment based on qualitative assessment of demand for different modalities and applications during the quarter. Medical segment revenues increased 9% sequentially and were flat year-over-year. Global demand for CT tubes remained solid, but we saw some softness in Asia Pacific, as some customers experienced delays with their other suppliers. Demand across our other medical modalities was solid, led by fluoroscopy, radiography, dental, and mammography. Oncology shipments were soft in the quarter, primarily due to timing of shipments to one customer. Revenues in our Industrial segment increased 5% sequentially and 9% year-over-year. During the quarter, we saw broad-based demand across various non-destructive inspection applications, including high energy sources for cargo screening at ports and borders. In the past, we have highlighted various products across our medical and industrial segments that we expect to drive future growth. Today, I wanted to take some time to reflect on the progress that we have made over the last year on these products as well as other fronts and our expectations moving forward. The Global CT market remains a significant driver of sales for Varex. This includes new system installations as well as demand for replacement tubes from our growing installed base. During fiscal 2022, we had several new design wins with our CT customers, including local OEMs in China. These new design wins represent future sales opportunities as well as 10 to 15 years of subsequent demand for replacement tubes. We continue to expect China to be a key driver of growth for both CT and Varex, as our local OEM partners continue to gain market share. Turning to nanotubes, to further expand our position in nanotubes, in September we entered into a technology collaboration with Micro-X, a leader in carbon nanotube-based X-ray systems for medical and security markets. This includes an exclusive global license enabling Varex to use Micro-X’s technology in the field of multi-beam X-ray tubes. Varex believes in the future importance of cold cathode X-ray sources, and we're excited to invest in additional nanotube technology to diversify our product portfolio. Earlier this year, we highlighted our high-performance X-ray tubes used for cardiovascular applications. During the year, we continued to ship samples of our new Liquid Metal Bearing based CT and cardiovascular tubes for evaluation by potential customers. Over the upcoming quarters, we expect to receive additional feedback on the products and move towards being included in their future system designs. These tubes offer a long-life, noise-free operation, and increased throughput for certain applications. Moving to detectors, we were happy to see that our Dynamic Detector platform called Azure continues to receive high interest from our customers. In fiscal 2022, a number of customers began to design Azure detectors into their systems, and we continue to receive positive feedback. We expect to see further adoption of our Azure platform, as our customers launch their product offerings. We have converted the majority of our radiographic customers to our LUMEN detectors. This is a highly competitive radiographic detector platform targeted at the low-end of the market where we have historically had lower market share. We will be showcasing our current LUMEN detectors as well as a new detector for advanced radiographic applications at RSNA later this November. We also continue to make progress with our Photon Counting technology on both the Medical and Industrial sides. In Medical, our Photon Counting detectors are being used in various applications. Further, we're making progress with our CT customers and are working closely with them to firm up design specifications for integration into their systems. As we have noted in the past, we do not have an offering in the CT detector market space today, making this an entirely incremental market for Varex. Finally, we have been working to establish a local presence in India. We took a similar approach in China, where we have seen our revenue grow to nearly $140 million in fiscal 2022. We believe India and the Southeast Asia region will be on a similar growth trajectory, and this investment in India will establish a new local presence in the region. Later this month, along with many of our customers, we will be attending the Radiological Society of North America, RSNA Conference in Chicago. Varex will be highlighting its product portfolio including some of the products we have talked about today. Turning to Industrial, we expect the cargo security market for ports and borders to continue to be a strong end market for Varex Industrial. Our security business is experiencing growth due to increased demand worldwide for cargo screening systems and our partnership with established OEMs in this space. We expect to see continued growth here, as we head into fiscal 2023, building on the success we saw this past year. Our industrial customers continued to praise the high frame rate imaging capability of Photon Counting detectors, and as a result we are seeing increased adoption across various non-destructive inspection applications such as electronics, battery, and food inspection. These Photon Counting detectors enable faster inspection rates and better image quality through enhanced material discrimination compared to other technologies, thus enabling factories to meet increased demand in these growth industries. Last quarter, we highlighted an exciting area within our industrial market. Specifically, I'm referring to the use of X-ray or e-beam technologies to sterilize consumer-facing products. This is not a new market outside of Varex, but one that we have historically had limited exposure to. We expect irradiation to be a growing market in which our high-power X-ray sources can be used to irradiate food and other consumer-facing products. These solutions are in development and introduction stages, but we expect to have more details in fiscal 2023, as we receive feedback from our customers. At the recent American Society for Nondestructive Testing Conference, ASNT held in Nashville during early November, our OEM systems integration partners indicated strong backlog and future demand for their inspection solutions in the aerospace, defense, and automotive markets. Our customers see value in our ability to integrate new technologies like Photon Counting Detectors, supporting system components, image acquisition workflow software, and AI capabilities for automated inspection. We continue to be excited about the prospect of providing more integrated solutions to our industrial customers. We expect this new approach to be a key growth driver for Varex across several industrial verticals. As we move into a new fiscal year, we're happy with the progress that we have made with supply chain initiatives and look forward to our prospects in fiscal 2023 and beyond. With that, let me hand over the call to Sam.

Sam Maheshwari, CFO

Thanks, Sunny and hello, everyone. As a reminder, unless otherwise indicated, I will provide a sequential comparison of our results for the fourth quarter of fiscal year 2022 with those of our third quarter of fiscal 2022. We are pleased with our ability to grow both revenues and earnings this year, despite supply chain challenges that constrained our sales and inflationary pressure from raw materials and logistics that compressed our gross margins. Revenues for the year grew 5% year-over-year to $859 million and non-GAAP EPS grew 9% to $1.43 for the year. Adjusted EBITDA increased 5% year-over-year to $140 million and we finished the year with cash and securities of $113 million. Turning now to the fourth quarter. Our supply chain initiatives enabled us to ship more in the quarter leading to sales of $231 million, above the midpoint of guidance. Non-GAAP gross margin was 33%. Non-GAAP EPS was near the top of our guidance at $0.42. Fourth quarter revenues increased 8% compared to the third quarter. Medical revenues were $181 million and Industrial revenues were $50 million. Sequentially, Medical sales increased 9% and Industrial sales increased 6%. Medical revenues were 78% and Industrial revenues were 22% of our total revenues for the quarter. Looking at revenue by region, Americas increased 26% sequentially, while EMEA increased 5% and APAC declined 4%. The increase in the Americas was primarily driven by sales into our radiographic and fluoro markets, while the decline in APAC was primarily the result of some softness in CT as customers saw delays with their other suppliers. Sales to China finished the year strong at approximately $140 million in revenue or 16% of total Varex sales. Let me now cover our results on a GAAP basis. Fourth quarter gross margin was 32%, down 200 basis points from the previous quarter. Operating expenses held steady at $50 million and operating income was $25 million, up $2 million sequentially. Net earnings were $13 million and GAAP EPS was $0.32 based on fully diluted 41 million shares. Moving on to non-GAAP results for the quarter. Gross margin of 33% was down 200 basis points from the previous quarter and at the low end of our guidance. There were two primary drivers of the lower gross margin. First, higher semiconductor-related material costs which we expect to continue through fiscal 2023. And second, our industrial business mix was somewhat unfavorable. R&D spending in the fourth quarter was $20 million flat compared to the prior quarter and represented 9% of revenue. SG&A was $27 million, also flat compared to the prior quarter and represented 12% of revenue. As a result, operating expenses were $47 million in line with the prior quarter and represented 20% of revenue. Operating income was $29 million and operating margin was 13% of revenue, similar to the previous quarter. Tax expense in the fourth quarter was $4 million or 17% of pretax income compared to $6 million or 29% in the previous quarter. The lower tax rate in the fourth quarter was primarily the result of favorable US tax items and international valuation allowances. Net earnings were $17 million or $0.42 per diluted share, up $0.05 from the third quarter. Average diluted shares for the quarter on a non-GAAP basis were $40 million. Please note that ASU 2020-06, related to the accounting for convertible instruments became effective for us from Q1 of fiscal 2023 onwards. Under this accounting standard, the EPS calculation adds back the after-tax convertible loan interest expense to net income and adds shares underlying our convertible notes and associated bond hedge to the diluted shares outstanding. For Varex, on an annual basis, we add back approximately $6 million of after-tax interest expense to net income and approximately 8 million shares to otherwise outstanding diluted shares. For an illustrative view on potential scenarios, please see the appendix of our Q4 earnings slide deck. Now, turning to the balance sheet. Accounts receivable increased by $16 million and DSO increased one day to 68 days in the quarter, primarily due to higher sales in the second half of the quarter. Inventory increased modestly by $3 million as we target to improve inventory turns while balancing supply chain risk. As a result, days of inventory decreased to 176 days. Accounts payable decreased by $5 million. Now, moving to debt and cash flow information. Cash flow from operations was $17 million in the fourth quarter, and we ended the quarter with cash and securities of $113 million, an increase of $3 million from the prior quarter. Gross debt outstanding at the end of the quarter was $450 million, and debt, net of $113 million of cash and securities was $337 million. Adjusted EBITDA for the quarter was $36 million and adjusted EBITDA margin was 16% of sales. Our net debt leverage ratio was 2.4 times at quarter end. Now, moving to the outlook for Q1 of '23. We see demand patterns running higher than pre-COVID levels, but lower than what we experienced six months ago. Given our strong backlog and supply chain initiatives, we expect to grow sales in fiscal 2023 over '22. However, we expect inflation driven higher material and labor costs to keep our gross margin around the 33% level. Moving to guidance for the first quarter of fiscal '23. As a reminder, the first fiscal quarter is generally a seasonally low quarter for shipments for us. With that in mind, our guidance for the first quarter is as follows. Revenues are expected between $195 million and $215 million. At the midpoint of $205 million, this is up 3% from Q1 of fiscal '22; and non-GAAP earnings per diluted share are expected between $0.10 and $0.30. Our expectations are based on a non-GAAP gross margin of about 33%, non-GAAP operating expenses in the range of $46 million to $47 million, tax rate of about 28% to 30% for Q1 and fiscal 2023 non-GAAP diluted share count of about 41 million shares. Please see slide 22 with the title illustrative impact of ASU 2020-06 in our earnings presentation for more details on the various scenarios for non-GAAP diluted shares under this accounting standard. With that, we will now open the call for your questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from Larry Solow from CJS. Your line is now live.

Larry Solow, Analyst

Great, thanks. Just to clarify the guidance quickly, I understand you only provide guidance for one quarter due to the new convertible tax flow accounting rules. For Q1, you're still assuming the 41 million shares, so it's primarily the absence of adding back that non-cash interest expense, correct, just for Q1?

Sam Maheshwari, CFO

Yeah. So Larry, this is Sam. Good to talk to you. The way this accounting standard works, it makes EPS calculation a little bit more complicated. But what happens on a non-GAAP basis, if you're moderately saying less than $0.21, $0.22 you're still using 41 million shares for the diluted share count. But if you are looking at more than $9 million in non-GAAP net income or say about more than $0.21, $0.22 then you'll add back $1.4 million of interest expense, which is after-tax interest expense to the numerator, and then add eight million shares to the denominator. So, essentially beyond $0.21, $0.22 of non-GAAP diluted EPS, you are mentally assuming, as if the convertible has converted. So you no longer have to pay the interest expense. And then the share count goes up by $8 million. So that's the way to think about it. I hope that clears for you.

Larry Solow, Analyst

Yeah. So – no, it does I guess. And I looked at some of your charts, I'm just trying to simplify it, because I don't get, how it kind of skews up. So your guidance is kind of then – it's kind of taking in a range of those scenarios.

Sam Maheshwari, CFO

Yeah. So our guidance is $0.10 to $0.30, as we just guided. So, towards the higher end of that guidance, between say $0.22 and $0.30 it would go towards the scenario, where we add back the interest expense and add the dilutive shares and below $0.21, $0.22 we are not.

Larry Solow, Analyst

So, like in theory, hypothetically, if you just on an operating basis reach the high end of your operating profit right, which would in theory put you at the high end of your operating EPS, assuming nothing else changes, you're actually impacting yourself on a quarter-to-quarter basis that's like an $0.08 sequential difference, right? Because you're adding back the $0.03 of interest expense, and like $0.05, $0.06 of – you're adding – your share count is increasing 20%, right? So that's simple math. That's on $0.30 that's $0.06 right? And then –

Sam Maheshwari, CFO

Yeah, Larry on an annual basis –

Larry Solow, Analyst

I'm just trying to make it simple. These charge – you can look at – they don't do anything. They're just – I know you put them up there, but there's so many numbers. I'm just trying to make it simple. So, on a high-end scenario, your guidance could have been $0.38, isn't that right $0.39?

Sam Maheshwari, CFO

That's a little bit high, Larry – yeah, that's a little bit high, Larry. This guidance…

Larry Solow, Analyst

But close to that, right? Directionally, I feel like that's right, right? I mean – or let's ask it this way. If you had the impact in Q4 of this eight million shares and you couldn't add back the interest expense, you would have done $0.50 – you would have done $0.34 correct? $0.33 or $0.32.

Sam Maheshwari, CFO

No, the impact is about $0.04 a quarter, Larry, because the numerator is a positive thing and the denominator is a negative thing that.

Larry Solow, Analyst

Okay. So you're taking away the – you're taking, yeah. Okay.

Sam Maheshwari, CFO

Yeah, so annualized impact is $0.12, $0.13, $0.14 in that range. So for a given quarter, it's about $0.03 to $0.04.

Larry Solow, Analyst

Okay. Okay, I got you. Okay. That's fair. Understood. Okay. And then just a question for Sunny, just switching gears. Everything sounds pretty good. Obviously, you have some supply chain, more macro issues, and some higher semi-cap semiconductor costs and stuff. But just in general, it sounds like things are pretty good. I realize that the macro headwinds in general, the economy is not great, but just trying to see specifically for you what else kind of concerns you? Is it just macro – these macro supply issues that are maybe not impacting you, but your customers and how hospital budget spending look, I know, I think there was some concern a few weeks ago, I think somebody Omnicell maybe reported and they talked about a capital – hospital budgets are not looking as good as maybe some people thought. So, can you just give us sort of a broad brush on – you mentioned just some – a tough environment and I get the macro is tough. But trying to figure out specifically what kind of concerns you? Thanks.

Sunny Sanyal, President and CEO

Yeah. So, Larry our customers had very strong bookings in both our fiscal 2021 and fiscal 2022. So, they all had a very strong year and they're sitting on quite a bit of orders that they've taken that are in their backlog. So as you know for us, then that represents the call-offs that we would get to the extent that they have deliveries in this year. So as I look forward and just looking at where we are from a supply chain perspective, I feel good about that. We've made quite a bit of progress with our supply chain initiatives. You might recall, we jumped on them early. We got going really fast. We qualified a lot of suppliers. So I feel good about our ability to progressively have a good year going forward. I think the risk for me is sitting here not quite fully understanding the situation that our customers might be in with their supply chains and whether they'd be able to get the products out as we would want them to. So that's the risk that we're looking at and that's the unknown here to be fair.

Larry Solow, Analyst

Okay. So your concerns on the revenue side, whether it be the Medical side or even maybe Industrial from customers, it sounds like Industrial up until now is doing great for you guys or a lot better than sequentially over the last few quarters. Does a slow economy necessarily you would think that would curb spending a little bit? Does that concern you?

Sunny Sanyal, President and CEO

Yes, it does. You mentioned Omnicell as an example. Omnicell manufactures pharmacy cabinets and similar products. They work directly with end users, which is different from our situation where our customers experience longer shipment cycles. Given the substantial volume of business in their backlog, I believe we are in a different position. Our main concern is whether a slowing economy will lead our customers to reduce their order intake, which would likely have an impact towards the end of this year or next year. Therefore, we are unsure how to anticipate that in our current models. For this year, we feel positive about our present situation. As Sam noted, Q1 is historically a weaker quarter for us due to the fiscal year-end of our customers, who tend to purchase a lot of what they need for this quarter in advance. Consequently, Q1 is typically soft, but we usually see improvement as the year progresses. We experienced a similar pattern last year, starting with a weak Q1 followed by steady improvement throughout the year.

Larry Solow, Analyst

Does the CT concern represent one of your major growth drivers? It seems like this is more of a timing issue, but it could also relate to supply chain challenges. In your guidance, do you anticipate recovering most of that through the year, or are you being cautious due to ongoing supply chain issues?

Sunny Sanyal, President and CEO

We're anticipating that we will recover our position throughout the year. However, regarding the risks, in this type of environment, our product mix may shift more towards lower-end CT products. This often occurs as consumers reassess their purchasing decisions during a challenging recession. Therefore, we're uncertain about what the mix will ultimately look like in the second half of the year for CT.

Larry Solow, Analyst

Got it. Okay. Great. I appreciate all that color. Thanks, Sunny.

Operator, Operator

Thank you. Next question is coming from Suraj Kalia from Oppenheimer. Your line is now live.

Suraj Kalia, Analyst

Hi, Sunny, Sam, Chris, can you hear me all right?

Sunny Sanyal, President and CEO

Yes, we do.

Sam Maheshwari, CFO

Yeah.

Suraj Kalia, Analyst

Perfect. Hope everyone is safe and healthy. Hey, Sunny one question for you two for Sam. Let me start out with the partnership with Micro-X, Sunny. Maybe you could talk to us about the complementarity that Micro-X their carbon nanotube offers with your platform, especially the multi-beam. What are the implications? And what gap are you trying to fill with this partnership?

Sunny Sanyal, President and CEO

Our technology work has made good progress, and we feel optimistic about the future prospects of cold cathode technology. Our conviction in this area remains strong, and I want to ensure that this is clear. These are new technologies, and there are various types of cold cathode technologies and methods for creating these emitters. We aimed to secure access to different emitter technologies. One source is through our joint venture VC, and we also wanted to ensure we possess a separate technology ourselves. This involves having access to a distinct type of carbon nanotube-based emitter technology that we can further develop independently. Essentially, this approach serves as a diversification strategy, allowing us to own the technology in addition to our joint venture partnership.

Suraj Kalia, Analyst

Okay, Sam, I have a couple of questions for you. First, regarding GAAP gross margins, they appear to be consistently in the 32 to 34 range. Can you help us understand the specific factors affecting this, such as the impacts of the supply chain, foreign exchange, inflation, or product mix? What are the prominent impacts you're observing, and what efforts are you making to address those? Additionally, could you provide insights on how cargo costs are currently influencing your operating expenses? Any details would be appreciated. Thank you for addressing my questions.

Sam Maheshwari, CFO

Thank you, Suraj. In response to your question regarding GAAP gross margin and its impacts, these effects also apply to non-GAAP gross margin results. The situation is similar for both. Compared to the period before COVID, our freight costs are elevated, affecting our gross margin by 100 to 150 basis points. Costs have increased significantly, up by 7% to 10% compared to three or four quarters ago. We are looking at a total cost increase of about 200 to 300 basis points, which is impacting our gross margin, bringing it down to around 35 or 36 percent. We have been increasing prices gradually to offset these costs; however, our price improvement efforts have been slow, and we haven't been able to fully counteract the cost increases and freight hikes through price adjustments. We are aiming for an improvement of 100 to 200 basis points in gross margin through this pricing strategy. Regarding your second question about freight, it has consistently impacted us by 100 to 150 basis points over the last several months. Recently, we have started to see some improvement in freight costs, but the supply chain situation remains tight. We are not in a critical state anymore, but conditions are still constrained, necessitating the use of higher-cost freight options. It may take another quarter or one to two quarters for freight costs to normalize and begin positively impacting our gross margin.

Suraj Kalia, Analyst

Thank you for the additional color.

Sam Maheshwari, CFO

Thanks, Suraj.

Operator, Operator

Our next question today is from Anthony Petrone from Mizuho Group. Your line is now live.

Anthony Petrone, Analyst

Thanks, gentlemen and congrats on good execution here in the quarter. I'll start with a few demand questions and Sunny, Sam, you have CT as sort of listed as neutral demand in the quarter just the backdrop in the environment. I mean, how much of that geographically is linked to the United States, Europe, how much of that is linked to China? And then when you, sort of, look at dental that's actually more of a tailwind in 3Q. We're hearing some mixed data points just on the backdrop of dental volumes still being impacted from labor shortages from some of the other publicly traded companies that have solutions in dental. So do you see any risk to dental slowing down in the next couple of quarters? And I'll have a few follow-ups. Thanks.

Sam Maheshwari, CFO

Thank you, Anthony. It’s great to hear your voice again and welcome back to our call. Regarding CT, demand remains strong. When we compare the business this quarter to last quarter, CT has consistently grown over several quarters. Although it's historically performing well, it is not quite as high as it was last quarter. We are optimistic about the CT business. As mentioned, we have qualified several new OEMs in China, indicating strong demand for CT in regions like China and Japan. Overall, CT is doing well, but it has seen a slight decrease compared to the previous quarter. Looking ahead, as Sunny indicated, we need to consider the product mix and whether any recessionary pressures could lead our customers to reduce spending on certain products while maintaining good volume. We will keep an eye on that for CT moving forward, but overall, we feel positive about it. Sunny, would you like to discuss dental next?

Sunny Sanyal, President and CEO

I wasn’t clear on what you meant by labor pressures. Were you referring to something you've mentioned in previous calls, or have you been hearing that elsewhere?

Anthony Petrone, Analyst

So due to labor pressure, yes due to continued labor pressures at the side of carry…

Sunny Sanyal, President and CEO

For the clinic?

Anthony Petrone, Analyst

Correct. Some of the dental companies that have exposure to procedures they talked about a slowdown through this current quarter. I'm wondering if that translates..

Sunny Sanyal, President and CEO

We have strong market share in dental and are fairly diversified across many geographies, so we haven't experienced any issues. I am not seeing any specific softness that I can highlight. Europe continues to perform well for us in dental, so I cannot confirm what you are suggesting.

Anthony Petrone, Analyst

No worries. No worries. A couple of follow-ups would be one on currency. The dollar here is obviously strong year-over-year elevated now for almost six months. It hasn't appeared to have any impact on demand on Varex Solutions. Just wondering what the latest is on the currency discussion as we're just dealing with an elevated dollar here?

Sam Maheshwari, CFO

Yes, let me elaborate on that, Anthony. Annually, about 25% of our sales come from foreign currencies, while 75% are in US dollars. We have assessed the top-line impact since the beginning of our last fiscal year in 2022, which amounts to approximately $18 million to $20 million. The dollar has strengthened against all major currencies, such as the yuan, Japanese yen, and euro, leading to a $20 million impact on our top line. However, considering our operations in Europe for R&D and production, as well as production in China, the gross margin becomes a bit more complex. Although top-line revenue has decreased by about $18 million to $20 million, our costs also decline alongside this revenue impact, so we are reasonably shielded. I would estimate the impact on gross margin percentage for the full year to be less than 50 basis points due to the dollar's strength, likely around 30 to 50 basis points, though I cannot be precise. I have a clear understanding of the top-line effect. I'm not sure if this addresses your question or if you were inquiring from a different angle.

Anthony Petrone, Analyst

No that's clear. And then last one for me just on capital allocation. The company has done tuck-in M&A in the past several years we haven't seen anything on the activity front, although prices in public and private markets have shifted here a bit. So, just the latest thoughts on tuck-in M&A activity? Thanks again.

Sunny Sanyal, President and CEO

Anthony, we've still been focused on strengthening our balance sheet paying down debt and we expect to continue to do that to get to our target leverage levels. So for fiscal 2023 we'll continue down that track of supporting the investments that we need to make in India in our factories and the capital budget deployed in that direction. No particular specific plans for moving off of that trajectory at this time.

Sam Maheshwari, CFO

I would like to expand on what Sunny mentioned. Our top priority remains investing in our business organically, primarily through working capital and fully funding R&D along with other essential initiatives. As we look to the upcoming year, we anticipate needing to increase our capital expenditures compared to what we have historically allocated. We are focusing on achieving high capacity utilization at our tubes factory in Salt Lake City, which means we will be investing more there as well as in other locations around the world. Therefore, we expect capital expenditures for fiscal 2023 to be higher than they were in fiscal 2022.

Sunny Sanyal, President and CEO

We have consistently had good visibility into prospects and opportunities in organic growth. We maintain connections with many companies in this space and will continue to do so. However, at this moment, we are not actively pursuing any specific mergers and acquisitions.

Anthony Petrone, Analyst

Thanks.

Operator, Operator

Thank you. Next question today is coming from Jim Sidoti from Sidoti & Company. Your line is now live.

Jim Sidoti, Analyst

Good afternoon. Thank you for the questions. Can you elaborate on pricing? The price increases you implemented earlier and this year appear to be effective. Do you anticipate raising prices again in fiscal 2023 if your costs keep rising?

Sunny Sanyal, President and CEO

Hi, Jim. We have implemented price increases which have had some effect in offsetting certain cost increases. However, the rise in input material costs has been greater than our ability to fully counteract with the price increases we've enacted throughout the year. This is partly due to many of our customers having multiyear contracts and some placing substantial frame orders with us. Until those contracts expire and we reach a renewal phase, we can't fully benefit from those price increases. We plan to continue introducing price increases in fiscal 2023, and the timing of their implementation will influence how much we can benefit from them.

Jim Sidoti, Analyst

And then on the balance sheet a couple of questions. First one, PP&E is up about $5 million from the June quarter. Is that the investments to increase capacity, or what else is in there?

Sam Maheshwari, CFO

Jim, the variation in payment timings caused some inconsistencies. Last year, we indicated that for fiscal year 2022, we expected capital expenditures of approximately $25 million, but it wasn’t a constant amount throughout each quarter. Ultimately, we finished fiscal 2022 with expenditures of around $21 million to $22 million, which was less than we anticipated due to supply chain issues and delays from equipment suppliers. As a result, we could not fully implement our planned capital expenditures for 2022. For 2023, we anticipate spending more than $25 million. The extent of our progress will depend on several initiatives aimed at growth, particularly concerning new machines or more productive equipment, especially at our tube factory.

Jim Sidoti, Analyst

All right. And then just a quick one, on cash. You reported in your presentation $113 million in cash and equivalents. You're always showing $89 million on the balance sheet. So is that other $24 million in other assets?

Sam Maheshwari, CFO

Yes. Jim, thanks a lot for asking that question. Yes. So our cash is really $113 million, but one of the GAAP rules for presenting cash on the balance sheet is that any investments say in fixed deposits or CDs or other securities that we do, which is more than 90 days then we need to present it elsewhere in the balance sheet. Given the interest rate environment obviously, we want to generate some interest income from our cash portfolio. So the balance sheet presented cash is $89 million. But once you add all the other call it securities or fixed deposits and stuff like that that we have invested in commercial paper and all of that added up, that's $113 million. So from my perspective, I look at it as $113 million.

Jim Sidoti, Analyst

Understood. Thank you.

Sam Maheshwari, CFO

Thanks, Jim.

Operator, Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Chris, for any further or closing comments.

Christopher Belfiore, Director of Investor Relations

Great. Thank you for your questions. Sunny, any final comments?

Sunny Sanyal, President and CEO

Yes. Thank you, Chris. Look in closing, we're very happy with the solid results, which we have posted for a consecutive year, with both top line and earnings growth. Our internal efforts to diversify our supply chain was a key enabler for these results and I'm very proud of the effort that our 2,300 employees globally make on a daily basis to make these results possible. Going to that end, I feel that we are well positioned to grow our top line again in fiscal 2023, in what's expected to be a very dynamic environment. Thank you for your continued interest in Varex.

Christopher Belfiore, Director of Investor Relations

Thank you, Sunny. Thank you all for participating in our earnings conference call for the fourth quarter of fiscal year 2022. The webcast and supplemental slide presentation will be archived on Varex' website. A replay of the quarterly conference call will be available through November 29 and can be accessed at the company's website or by calling 877-660-6853 from anywhere in the US or 201-612-7415 from non-US locations. The replay conference call access code is 13733761. Thank you and goodbye.

Operator, Operator

Thank you. You may now disconnect your lines.