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Varex Imaging Corporation  (NASDAQ:VREX)
Q4 2018 Earnings Conference Call
Nov. 13, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to Varex Imaging Corporation Fourth Quarter and Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Howard Goldman, Director of Investor and Public Relations. Thank you. You may begin.

Howard Goldman -- Director of Investor & Public Relations

Good afternoon and welcome to Varex Imaging Corporation's earnings conference call for the fourth Quarter and fiscal year 2018. With me today are Sunny Sanyal, our President and CEO and Clarence Verhoef, our CFO. To simplify our discussion, unless otherwise stated, all references to the quarter are fiscal quarters. Quarterly comparisons are for the fourth quarter of fiscal 2018 versus the fourth quarter of fiscal 2017 unless otherwise stated. Annual comparisons are for fiscal year 2018 versus fiscal year 2017 unless stated otherwise. On today's call, we will discuss certain non-GAAP financial measures. These adjusted measures are not presented in accordance with nor are they a substitute for GAAP financial measures. We've provided a reconciliation of each adjusted financial measure to the most directly comparable GAAP financial measure in our earnings press release, which is posted on our website.

Please be advised that during this call, we'll 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. Additional information concerning factors that could cause actual results to materially differ is contained in our SEC filings, including Item 1A Risk Factors of our Annual Report on Form 10-K for fiscal year 2017 and subsequent quarterly reports on Form 10-Q. 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.

And now I'll turn the call over to Sunny.

Sunny Sanyal -- Chief Executive Officer

Thank you, Howard, and good afternoon, everyone. We ended our second year as a public company with double-digit top line growth. Revenues for fiscal year 2018 increased 11% from the prior year to $773 million. Medical segment revenues increased 8% and Industrial segment revenues increased 21%. We benefited from a full-year contribution of detector revenues from the acquired imaging business, we saw an increase in CT tube revenues including those for OEM customers in China. We also saw continued growth in our connect and control products and software solutions. In addition, revenues grew for mammography and cardiac modalities, as well as, industrial and security applications. Offsetting these improvements was the decline in 3D dental imaging detectors compared to the prior year. While our revenues for the fourth quarter decreased from record revenues in the prior year quarter, revenues increased 7% sequentially from the third quarter, driven by growth in the CT, mammography and industrial markets.

Tariff increases impacted our business in the fourth quarter through direct payments made in the U.S. and China and price concessions given to customers importing our products into China. For the near term, we expect tariffs to continue to affect our revenues. While our customers are often responsible for paying import duties on our products shipped into to China, many Chinese customers have requested price concessions to partially offset their increased expense. Based on this, our projected revenues for fiscal year 2019 includes $10 million to $15 million of impact from currently enacted tariffs. Said another way, the higher tariffs will negate a good amount of the incremental revenues we expect from CT tubes in China in fiscal year 2019.

So let me talk about some of our mitigation efforts with respect to tariffs. We have been talking to our legislators and the Office of the United States Trade Representative to seek an exclusion from certain U.S. import tariffs. We have also petitioned China customs authorities to classify -- to clarify import classification codes for some of our products that are imported into China.

Additionally, we're in the process of leveraging a global footprint to move parts of our manufacturing activities to Varex facilities in China and other locations. We expect to complete these activities over the next 12 months.

Next, I'd like to provide an update on our CT tube expansion in China. We're very encouraged by the progress our OEM customers are making and some of them are now transitioning from product development and regulatory approval to production of CT systems and hospital installations.

In fiscal year 2018, we saw a ramp-up of shipments of CT tubes to our OEMs in China and expect shipments to more than double in fiscal year 2019. Our CT tubes are being incorporated into high end, mid-tier and value segments CT scanners. We continue to be excited about our long-term prospects in the China market, as we see significant growth in the installed base of CT systems. In a recent report, the China National Health Commission noted that more than 3,500 new CT systems of 64 slice and above are planned to be installed in government hospitals by the end of 2020, which would be a 75% increase over the current installed base. In fiscal year 2018, shipments to China accounted for approximately 10% of our revenues.

Looking at our overall medical segment for fiscal year 2018 we had great performance in a couple of niche markets. First of all, strong demand for X-ray tubes and computer aided detection software for mammography applications led to double-digit growth in revenues in this modality.

Second, we continue to expand the portfolio of connect and control products and this business delivered double-digit growth in revenues. We also had steady results from the CT and diagnostic X-ray imaging product lines. This solid performance was overshadowed by a challenging quarter of 3-D dental imaging detector sales. Dental detector revenue slowed significantly in the first quarter of 2018 after having had record revenues in the fourth quarter of 2017.

In our Industrial segment revenues increased double digits from the prior year. You will recall that a major benefit from the acquired imaging business was its strong position in the industrial detector market and this was reflected with higher sales of digital detectors for non-destructive testing applications.

We're looking forward to a greater focus on opportunities in the industrial NDT market following the leadership changes we outlined in our last quarterly call. To further our potential in the NDT space during the fourth quarter, we purchased the business of Virtual Media Integration, VMI. VMI is a leading industrial imaging solutions provider of CR, DR and X-ray film digitizer systems utilizing its proprietary Starrview software. Starrview is specific to the industrial NDT applications and can be used with Varex digital detectors. This acquisition will give us additional opportunities in new markets such as oil and gas, nuclear and aerospace.

With that, let me hand over the call to our CFO, Clarence Verhoef to talk about our financial performance in greater detail.

Clarence Verhoef -- Chief Financial Officer

Thanks, and hello everyone. I'm going to focus the discussion on Q4 results while the fiscal year financials can be found in our press release. I'll follow that up with the details of our FY '19 guidance. The highlights of Q4 were the strong top line performance that exceeded our expectations combined with good expense control. These were more than offset by gross margin challenges due to tariffs and unfavorable manufacturing variances at our Santa Clara glass fab facility. The variances were significantly higher than expected and we anticipate similar difficulties in the first quarter of fiscal year 2019. You will recall that last quarter we announced the shutdown of the Santa Clara fab operations, which is on track for the end of the calendar year.

Tariffs are now having a direct impact on our business. In Q4, our gross margin was reduced by about $2 million due to tariffs with roughly half due to price concessions to Chinese customers importing our products and the other half due to direct payments of supply chain related tariffs in the U.S. and China.

As we look ahead to fiscal year 2019 we expect to incur about 2 to 3 points of negative impact to gross margin due to currently enacted tariffs including price concessions in the range of $10 million to $15 million. Our fourth quarter revenues were down 5% compared to a very strong quarter a year ago, which had all-time high levels of detector sales for the dental and oncology markets. Sequentially, we saw revenues increased 7% from the third quarter with good performance in the Medical segment.

For the fourth quarter, our gross margin was 29% compared to 36% in the prior year quarter. The adjusted gross margin was 33% compared to 38% a year ago. The declines in the gross margin rate reflects the recent changes due to tariffs and detector manufacturing variances. In addition, gross margins for the Industrial segment were lower than the prior year due to unfavorable product mix that we have encountered throughout the year. R&D expenses were $21 million or 10% of revenues in the quarter, which was comparable with the year ago quarter.

Fourth quarter SG&A expenses were $32 million compared to $29 million in the prior year quarter. In the fourth quarter we had approximately $5 million of acquisition integration and restructuring costs compared to $2 million of integration costs in the prior year quarter. Depreciation and amortization totaled $14 million for the fourth quarter compared to $11 million a year ago. The current quarter included $4 million of accelerated depreciation associated with the restructuring of the glass fab operations. Our operating earnings for the fourth quarter were $6 million, down from $27 million in the same quarter a year ago. Our operating margin rate was 3% in the fourth quarter, a decline from 12% in the year ago quarter, reflecting restructuring and acquisition-related costs and a lower gross margin rate.

For the fourth quarter, our adjusted operating earnings were $21 million compared to $35 million in the prior year. The adjusted operating earnings margin was 10% compared to 16% in the prior year. Interest expense in the fourth quarter was $5 million compared to $7 million in the year ago quarter. We had other expense of approximately $1 million in the fourth quarter compared to $2 million in the prior year quarter, primarily due to the results from investments in privately held companies.

Our effective tax rate for the fourth quarter was 25% compared to 18% in the prior year quarter. Net earnings for the fourth quarter were less than $1 million or $0.01 per diluted share compared to $15 million or $0.39 per diluted share in the prior year quarter. For the fourth quarter of fiscal year 2018, adjusted net earnings were $11 million or $0.29 per diluted share compared to $22 million or $0.59 per diluted share in the prior year. Diluted shares outstanding were $38.4 million shares versus $38.0 million shares in the prior year. Looking at our working capital, accounts receivable increased by $22 million during the quarter. Day sales outstanding was 68 days compared to 72 days in the prior year.

Inventory decreased $11 million in the fourth quarter to $235 million. We ended the fourth quarter with cash and cash equivalents of $52 million. For the full fiscal year, we had cash flow from operations of approximately $86 million. We spent $20 million for property, plant and equipment and $5 million for an acquisition while reducing debt by $96 million.

Guidance for our net earnings per diluted share is provided on an adjusted basis only. This adjusted financial measure is forward-looking and we are unable to provide a meaningful or accurate compilation of reconciling items to guidance for GAAP net earnings per diluted share due to the uncertainty of the amount and timing of the unusual items.

In summary, for fiscal year 2018, we managed our balance sheet well, but our operating margins did not meet our expectations. Over the past six months, we've been performing a detailed review of our cost structure, focused on reducing the cost of goods sold and SG&A expenses, as well as reprioritizing our R&D portfolio for maximum return on investment. As a result we have taken multiple actions. We've previously talked about the planned closure of the glass fab operations in Santa Clara and London R&D site. But in addition, we have restructured certain management positions, negotiated double digit cost reductions from several of our key suppliers, significantly reduced our spending on outside services and are expediting our in-sourcing plans for key detector manufacturing process.

We are targeting R&D expense to be less than 10% of revenues in fiscal year 2019, compared to 10.7% in fiscal year 2018. We also expect SG&A expense to be less than 13% of revenues in fiscal year 2019, compared to 13.6% in fiscal year 2018, excluding the impact of restructuring and acquisition related costs. In addition to these operating expense reductions we also expect to make sizable gains in reducing our cost of goods sold. Some of these benefits, such as those from the closure of the glass fab operations will not be fully realized until the second half of the year. Unfortunately, these gains will be offset by the negative impact from tariffs. Our expectations is that adjusted gross margins for fiscal year 2019 will be in the range of 34% to 35%, which includes 2% to 3% of tariff headwinds. This compares to an adjusted gross margin of 34.9% in fiscal year 2018.

We expect interest expense to be $18 million to $20 million and the effective tax rate to be 23% to 24%. For fiscal year 2019, we expect revenues to be in the range of $755 million to $780 million and we expect adjusted net earnings per diluted share to be in the range of $1.25 to $1.55. To be clear, this guidance does not assume any changes in currency exchange rates and only includes the estimated impact of tariffs that are currently in place. Our outlook for the first quarter of fiscal year 2019 is that revenues will be similar to the year ago quarter.

Let me hand it back over to Sunny for some closing comments.

Sunny Sanyal -- Chief Executive Officer

Thank you, Clarence. Before we get into Q&A, I'd like to take a few minutes to outline some longer term thoughts for Varex. Looking beyond the current trade war and tariff situation with China, we continue to see large and healthy end-user markets for both our Medical and Industrial segments. We feel secure about our position as a leading innovator in X-ray components and believe our investments in R&D will allow us to both develop new technologies that are ahead of the curve and bring new products to market that will result in widening of the gap between us and our competitors.

In the Medical segment, the conversion to digital is driving demand, not only for our detectors but also for our high-performance X-ray tubes that can enable more advanced 2D and 3D imaging. Mammography, surgery and dental imaging have continued to lead the field with new and advanced imaging applications and we believe these areas will continue to be strong over the next three years. We see ourselves well positioned in these areas of growth.

In addition to developing components to support emerging market product roadmaps of our global OEM customers, our strategy is to build strong R&D relationships with the local OEMs. We're very pleased with our position in China with local OEMs and having our components engineered into their CT systems. While some of them may experience typical delays with product development or regulatory approvals, we're still confident of our prospects in China. As mentioned earlier, China's National Health Commission announced the planned installation of several thousand CT scanners over the next two years, which is in line with our expectations of the adoption of CTs in China.

Our local Chinese OEM customers believe that they are well positioned to win, and this adds another data point to support our expectations of growth trajectory of CT tube business in China. Beyond China, we're in the early stages of developing similar relationships with companies in India and Brazil, where our business in these markets is relatively small, but growing. In the near future, we anticipate India will follow a path similar to China to modernize its healthcare services. The Government of India has given strong indications of initiating sweeping plans to expand access to healthcare.

In the industrial non-destructive testing sector, we are seeing emerging digital imaging opportunities in verticals such as oil and gas, where there are tens of thousands of miles of pipelines that need to be inspected, as well as in food packaging and processing where X-ray based imaging is being used increasingly to identify contaminants and undesirable elements. Increased speed and imaging performance of digital detectors that we are driving is enabling quicker imaging of objects making in line inspection and 3D imaging and manufacturing practical.

Similarly in CT -- in security screening, airports are beginning to adopt CT scanners. In several major airports, checked baggage and increasingly hand-carry items go through CT scanners to be digitally unpacked. We're working with manufacturers. We use our components for these applications to develop more efficient scanners. In fiscal year 2018, we introduced a new platform for linear accelerators in the cargo and security inspection space that has a much smaller footprint, much lighter and suitable for mobile applications. These linear accelerators come with smart technology that can not only detect unwanted objects but can also automatically adjust the imaging to protect the driver from being exposed to high energy X-rays.

On the operational front, while the recent trade war with China and the resulting tariffs are creating headwinds for us, this situation has caused us to accelerate our plans for operational consolidation and to drive more local manufacturing at our existing facilities in China and other locations around the world. We expect to be fully prepared to support our local Chinese and global OEM customers to meet their China 2025 plans.

I'm pleased to report that we introduced approximately two dozen new and updated X-ray imaging products for medical and industrial applications in fiscal year 2018. In a couple of weeks at this year's RSNA conference, we will be showing a new digital detector technology platform that has improved performance characteristics and cost effectiveness.

On the X-ray tubes front, we are investing in innovation that will enable OEMs to build lighter systems with fewer moving and rotating parts that we believe will enhance speed, performance and cost effectiveness. Our acquired, meta (ph) software business has unique know-how and expertise in the use of computer aided detection and AI and imaging applications and its engineering team is now working closely with our X-ray tubes and digital detectors R&D teams to enable smart capabilities in our components.

We're at the forefront of innovation in imaging and we expect to continuously redefine the technology landscape to keep us competitively ahead and expand our position as the most innovative and cost-effective X-ray imaging components company.

With that at this time, we'd like to open up the call for your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Anthony Petrone with Jefferies. Please proceed with your question.

Anthony Petrone -- Jefferies -- Analyst

Thanks, and good afternoon. Maybe to start just with the guidance ranges and sort of the implied impacts within there. The ranges are wide here, top line down 2.5% to up slightly for the year and then similarly on the bottom line down 4%-ish (ph) to up 19%. So in particular on the top end of those ranges sort of what needs to, sort of, break in the Company's favor in order to hit those top line forecasts or top of in-range forecasts, and then I'll have a couple of follow-ups? Thank you.

Clarence Verhoef -- Chief Financial Officer

Hey, Anthony. So I guess -- I mean I kind of did a little bit of a walk through. The first question, I think, first part of your question is about the broadness of the range and maybe kind of little address that first and then I'll kind of touch on the kind of the drivers I guess for the high end of it. The first thing is just because of the tariffs already, I would say that's the biggest driver where there's still a fair amount of uncertainty about where is this going to end up. Okay. So we made some assumptions with the current product and the current tariff rates that are in place as to what that is. But we're still -- you're still a little bit at the mercy of how much that mix of products is from the customers themselves in terms of how much that number will change. So it does mean that it's a little bit different than usual in terms of the amount of variation just relative to that. Then the other side of it is is we hear -- you hear us talk a lot about what's going on with China and it's going to be a lot about the timing of the ramp up of activities in China. And this is -- we see this whether it's with the -- where the different OEMs are in their regulatory cycle or where they are in terms of introduction into the market and the volumes that are going on there. We do see sizable increase there in terms of the expectations for the number of CT tubes that we will ship in this next year. And so I think that's probably the biggest other factor that goes into the broadening of the range.

Anthony Petrone -- Jefferies -- Analyst

Very helpful. Maybe just the follow ups would be just the comments on tariffs in particular. So just to review, there was a lot of moving parts on U.S. tariffs, retaliatory tariffs. Which particular schedule of tariffs is baked into the $10 million to $15 million? And then one step further would be , is that exclusively China OEM related tariffs or is this more broad to include multinationals? And then I'll have one last follow-up on the earnings guidance. Thank you.

Sunny Sanyal -- Chief Executive Officer

Yeah. Hey, Anthony, this is Sunny. Let me get it started and then I'll ask Clarence to fill in on more specifics of the numbers. First of all in each -- the first -- if you recall the first wave of tariffs that were introduced didn't impact us in any significant way. And then the subsequent waves introduced additional codes, the tariff codes that then were of impact to us. So this is on the buying side, the US imposed tariffs on parts and products that were imported from China. Correspondingly then there were retaliatory tariffs that China put in place, then that impacted our -- the sales of our products into China, which then were exposed to those tariffs. So tariffs impacts us in three ways. First and foremost, on the buying side. When we buy materials, parts, pieces from China, whether it's us directly or our second tier suppliers that those numbers we know very well. We can quantify them fairly accurately based on our current year's volumes. The second is products that we ship directly to our Chinese customers. We also have fairly good handle on those. We understand volumes and numbers within the range of our forecast and guidance. And on those the uncertainty is that we're negotiating one-on-one with every single one of those customers on splitting the sort of the difference so to say, right. But I'd say it's within the zone of I'd say you can bracket it in terms of upside-downside there and we've done that. The third part which brings bigger uncertainty, which is really not -- hasn't been broad enough yet, but we're being cautious about this is to the extent that any of our other customers that bring products into China that we ship to them, to the extend that those -- they start to be impacted by tariffs. And I know we will -- if they come to us they'll probably want to negotiate with us on sharing some of those costs and that is less defined and not well quantified and those are hypothetical so to say. So that's the three ways in tariffs are impacting us.

Anthony Petrone -- Jefferies -- Analyst

Great. Helpful. And then just -- yeah.

Clarence Verhoef -- Chief Financial Officer

Anthony, maybe just one other clarification just because we're talking about an impact of 2 to 3 points on the gross margin line. And in the fourth quarter, we didn't see the last round of changes with tariffs really take effect till middle of the quarter and so we did have some volume of activity that went on with that was not subject to tariffs in the first half of the quarter and then the second half of the quarter had more of an uptick. So overall, we saw about a $2 million impact roughly equally split between price concessions and fees that we paid, but we do anticipate that being higher as you get a normal run rate going forward, in terms of volume of activity.

Anthony Petrone -- Jefferies -- Analyst

Great. And then last one is just in terms of the cost cutting efforts. I know part of this is middle of the year and it's related to Santa Clara. But how much is baked in just for general cost containment efforts out of Santa Clara and I'll hop back in queue? Thanks.

Clarence Verhoef -- Chief Financial Officer

Yeah, I guess I'd define it in multiple ways, right. So the parts that impact the gross margin line in particular is heavily weighted to the activity that's going on with the closing of the Santa Clara fab operations. And so we get a sizable impact out of that somewhere in the range of $7 million to $9 million on an annual run rate basis that we're going to get. Most of that doesn't kick until at least the second quarter and then there is the other side -- then there's the negotiations that we've done with suppliers and the supply chain side to get cost reduction that also has a favorable on the gross margin line. In addition to that we've looked at some of our expenses and that's where I went through reducing R&D and reducing SG&A as a percentage of revenue, that's not -- I mean, obviously, because the top line number is not changing that much, this is not about leverage. This is about actual cost reduction actions that have happened. And so, we're well down that path already. And so those percentage changes 0.5 point to 0.75 point reductions in each of those categories is driven by those cost reduction actions.

Anthony Petrone -- Jefferies -- Analyst

Thanks again.

Clarence Verhoef -- Chief Financial Officer

Sure.

Operator

Our next question is from Larry Solow with CJS Securities. Please proceed with your question.

Larry Solow -- CJS Securities -- Analyst

Great, thank you. Just a couple of follow-up some. So on the tariff specifically, so it sounds like, if we do the math, just on the margin impact you're saying $10 million to $15 million on the revenue side, but -- and the total impact I guess it's about $25 million. Is that -- based on your sort of 2% to 3%, is that a fair estimate?

Clarence Verhoef -- Chief Financial Officer

Yeah, Larry, I mean, I think you can just do the math, 2 to 3 points around the revenue and you get into that range, maybe not quite as high as $25 million, but, yes, you're in that kind of range.

Larry Solow -- CJS Securities -- Analyst

So essentially, it's almost -- you're sort of assuming almost evenly split like it was in Q4 between -- it did impact for you on your materials buying stuff and then the price concessions. Now the third point, the uncertainty, how does that layer into your guidance? Is that just sort of tweaking your overall sales guidance? Could you -- if we sort of remove the tariff impact, you're only growing sort of flat to up 2% which would a year ago, we would probably said coming into this year, we expect more growth than that.

Clarence Verhoef -- Chief Financial Officer

Let me -- can I go back to just for a second (multiple speakers)

Larry Solow -- CJS Securities -- Analyst

Yeah, I am sorry. Go ahead.

Clarence Verhoef -- Chief Financial Officer

Because the split, whether it's price concession or whether it's expense that we incurred is a lot based on how the transaction is done. So if we are at the importer of record as such when we're importing certain products into China, then we're paying directly or when we're buying parts from China, then those are the items that we are paying directly. While a lot of times, our customers are the importer of record and that's why we end up with a higher weighting to the revenue side of it or the price concessions side, but there is also more volatility in that because those are negotiated customer by customer in terms of how much the split is between us and how much they're paying themselves or absorbing themselves. So I think that's kind of a key distinction that happens in this process. And then in terms of the, the variability I guess in the number maybe a little bit is, if you just kind of look back at our year that we just finished we had a fair amount of variation in our quarterly numbers as well. I mean we had a very strong Q4 here at $205 million and our expectation was not as high as that. So we've got that kind of variation just happens in our business inherently. So I want to make sure that we have that accounted for when we're talking about the guidance levels.

Larry Solow -- CJS Securities -- Analyst

Okay. And then just I guess -- and then the follow-up to that was sort of the growth again I realize this is -- it's not an exact science, but -- so the impact from tariffs on the revenue side may be greater than $10 million to $15 million. But if we simply just take that on the surface, your sales growth would sort of be -- that you're sort of guiding to sort of flat to plus 2% which I think if you told me that at the beginning of last year that your guidance for this year would be that I think we would be disappointed, especially coming off of a down year, or a flat organic year which was partially impacted by timing in Japan. So taking those -- all those (inaudible) into account what, can you sort of give me a little more color on that?

Sunny Sanyal -- Chief Executive Officer

Hey, Larry, this is Sunny. The cautiousness on the top line for us is that even though we see good progress and continued progress made by our Chinese customers, we're just layering in -- putting in a layer of caution on that thing. Let's just be -- there's always some delay sometimes possible for R&D projects and FDA approvals. We're just taking a cautious stance here.

Larry Solow -- CJS Securities -- Analyst

Okay, that's fair enough. I don't really want to look back on Q4 because I think going forward is more important. But it sounds like Q4, obviously you said you -- on the medical side, you actually did somewhat better than you thought. You thought you are going to flat sequentially and you -- I think you said up around 7% or something, maybe that was 12%, but you were certainly upper than that (ph). Was that -- you said -- you mentioned CT. Was that sort of some of the timing in Japan that came back? And then the flipside of that was industrial, although a little bit on -- were the small numbers, but you were down somewhat more on a percentage basis than we thought.

Clarence Verhoef -- Chief Financial Officer

That's fair. I mean I would say that we had a variety of markets that actually did well. I mean, for as much as we are up, we are up $14 million around Q3. So that's not insignificant and it was in CT. So good -- and that's a big part of our business if you think about it. And so that's good to see some good performance in CT or continued good performance in CT. A little bit of variation quarter-to-quarter, but I think all in all, the year was a good year for CT. Mammography, we touched on a couple of different times as an area that has performed well for us. We had a couple other niche spaces just from comparison Q3 to Q4 such as oncology and the veterinary markets that had upticks as well. So I mean it's -- it was a pretty across the board kind of good results on the medical side. And, yes, you're right Industrial was a little bit on the light side. I mean not -- yeah, I mean that's more around just a little bit of the timing of some shipments on the cargo side I would say than anything at all.

John Koller -- Oppenheimer & Co. -- Analyst

That's fair. I mean I would say that we had a variety of markets that actually did well, I mean for as much as much as we are up. We are up $14 million for Q3. So that's not insignificant, and it was in CT so good and that's a big part of our business and if you think about it. And so that's good to see some good performance in CT or continued good performance in CG, a little bit of variation quarter-to-quarter, but I think all in all, the year as a good year for CT, mammography we've touched on a couple of different times as an area that has performed well for us. We had a couple other niche space is just from comparison Q3 to Q4. As such as oncology in the veterinary markets that had upticks as well. So I mean it's, it was a pretty across the board kind of good results on the medical side and yes, you're right Industrial was a little bit on the light side. I mean not but yes, I mean that's more around just a little bit of the timing of some shipments on the cargo side I would say than anything at all.

Larry Solow -- CJS Securities -- Analyst

Okay, I know you don't guide -- you don't breakout by segment, but industrial has been sort of organic base has been growing mid single digits. Do you expect that in '19?

Clarence Verhoef -- Chief Financial Officer

Yeah, without getting very specific, I think the industrial space is probably still going to grow faster than the medical space. I mean, just somewhat of it because of the, the law of small numbers, it's a little easier to do from that perspective. But I mean I think there's a lot of good stuff going on in the industrial side. Sunny kind of talked through some of those things that are going on specifically around security as well as non-destructive testing kinds of applications.

Larry Solow -- CJS Securities -- Analyst

And then the impact on tariffs I imagine is much less or minimal on the industrial piece for you guys, right?

Clarence Verhoef -- Chief Financial Officer

Well, I wouldn't minimize it totally. (multiple speakers)

Larry Solow -- CJS Securities -- Analyst

At least on the revenue side, maybe perhaps not on the cost side.

Clarence Verhoef -- Chief Financial Officer

Yeah, we still have -- we do sell detectors that go into China. And so that's -- they get tariffs charged on those as well. But we have alternative sources in terms of where they come from. So a lot of those may not ship out of the U.S. but rather ship out of Europe. So that's what's helped us a fair amount.

Larry Solow -- CJS Securities -- Analyst

And do you guys find yourselves at least in China, it's only really you I think one primary competitor that's selling into China that's selling to other OEMs at least. Being there they have the European base that they are not being impacted as much or not at all? So there is a competitive disadvantage for you?

Clarence Verhoef -- Chief Financial Officer

I think that's one of the worries that we have with tariffs in general is is that our competitors are not U.S. based. And so that's where we look at our global footprint and we say, OK, where should we be doing some of our manufacturing for some of those, even if it's the final assembly and test steps or some of the kind of the latter parts of the operations, if those are done in a different location we can probably avoid a fair amount of the tariffs and we're heading down that path.

Larry Solow -- CJS Securities -- Analyst

So you -- and you mentioned that you're going opt out of (ph) facilities. So do you think that -- does that actually enable you to sort of avoid a lot of tariffs if you are only doing the final assembly in that or does the Chinese government sort of say that that's a little bit -- that's not maybe (ph) cheating them little bit if you will?

Clarence Verhoef -- Chief Financial Officer

We're not going to, we're not out to cheat anybody.

Larry Solow -- CJS Securities -- Analyst

Right. That's the wrong words. But you know what I'm saying maybe just sort of get that loop hole, getting around then maybe that won't -- then maybe that won't fly.

Clarence Verhoef -- Chief Financial Officer

There are different tariff rates for different product harmonization codes. Okay. So what are the import classification is determines what the rate is, so there definitely and we look at that and understand that and it depends on what that part is that we're importing as to what the tariff is and so we'll take advantage of that. No doubt. Then in addition, obviously where it's sourced from, so if a product is shipping from Germany, there is no tariff at all, or a very small tariff compared to a product that is shipping from the U.S.

Larry Solow -- CJS Securities -- Analyst

Right, OK. Go head I'm sorry.

Sunny Sanyal -- Chief Executive Officer

No, Larry, there are specific rules around what you have to do in different countries, in order to get that manufactured in XYZ-country label and that's what we're tracking with and saying, how can we leverage our presence in Germany and leverage our presence in China to take -- to do the right thing.

Larry Solow -- CJS Securities -- Analyst

Right, OK. And then just last question. I think, myself, and I think some other investors, obviously it's been this year is a little bit rocky and I think since (inaudible) I think you've had some pluses and some minuses. I think one concern that people had had been sort of the guidance and some of it's out of your control, but I think one line item on the P&L that I think upsets some people is that or just has been a little frustrating is on the SG&A side where we would think you have a little more control and a little bit more visibility on that. And you haven't really been able to lower expenses too much. I realize it is so because it's a percent of revenue, but it does seem like just on absolute basis they have been a lot higher than we thought. Do you feel like you're -- you talked about that you've sort of done a bottoms-up and hopefully get better control of that going forward, do you feel that's the case?

Clarence Verhoef -- Chief Financial Officer

I mean I feel like we have done the right things in terms of taking some actions to actually reduce those expenses and you're going to see the impact of that in FY19.

Larry Solow -- CJS Securities -- Analyst

Okay, great, thanks guys. Appreciate it.

Operator

Our next question is from John Koller with Oppenheimer & Co. Please proceed with your question.

John Koller -- Oppenheimer & Co. -- Analyst

Good afternoon, gentlemen. How are you doing?

Sunny Sanyal -- Chief Executive Officer

Good. Hi John.

Clarence Verhoef -- Chief Financial Officer

Hi, John.

John Koller -- Oppenheimer & Co. -- Analyst

Hi. A quick question, I may have missed it, did you give a CapEx number for fiscal year '19?

Clarence Verhoef -- Chief Financial Officer

I think I did, it was $20 million.

John Koller -- Oppenheimer & Co. -- Analyst

$20 million. Okay, great.

Clarence Verhoef -- Chief Financial Officer

Yeah.

John Koller -- Oppenheimer & Co. -- Analyst

Thanks for that. If I look at the $20 million and I look at what you're going to generate in cash flow or expect to generate in cash flow, I'm curious if you would comment on where you see the bulk of that cash going. If you're looking for debt repayment or maybe another use of that cash?

Sunny Sanyal -- Chief Executive Officer

I would say that it starts to fundamentally with debt repayment. That's the default for us and we did a good job of that and in FY '18, we reduced it by $96 million and some of that was we actually reduced our cash balances as well. I mean -- so we got, we had some of the cash was trapped offshore a little bit. So once we got that back to the U.S., we were able to reduce the debt. That isn't to say that you know acquisitions aren't still on our radar. We did the acquisition of VMI in this last quarter, pretty small, $5 million acquisition about one times revenue kind of number. And that's a -- those are the kinds of things where they are good tuck-ins of a technology that -- and access to a market that we haven't had so much before and so there is a lot of value in those kinds of acquisitions.

John Koller -- Oppenheimer & Co. -- Analyst

Okay, great. And does the CapEx budget take into account any plans that you might have to augment non-U.S. manufacturing?

Sunny Sanyal -- Chief Executive Officer

Certainly. Yeah, so we have in our plan certain amounts of expansion in certain locations. It's not huge. And it's basically taken out of our current run rate of CapEx. It isn't something that it's a large incremental.

John Koller -- Oppenheimer & Co. -- Analyst

Okay. I mean, specifically as it relates to tariffs. I guess I should have added.

Unidentified Speaker --

Well, I mean -- yeah, I mean, so if there is -- we've got a global plan in terms of what our footprint is and where we want to, where we want to be doing things and we're executing to that plan. Some of that is expansion in some locations. We have a sizable footprint in the Philippines, for example. We want to have more activities happening there and at the same time we look at what we're doing in China. And there is a few equipment needs that we need to do. I think we have enough factory space or physical space there, but we want to actually finish filling it out with some equipment.

John Koller -- Oppenheimer & Co. -- Analyst

Okay. And then regarding R&D, really quick if I could, is -- can you provide any additional qualifications, as far as, timeline goes whether we're mostly front-end loaded or if these are still longer-term projects that you're working on before you see a boost to the revenue line? Thanks.

Sunny Sanyal -- Chief Executive Officer

Well, I guess, we always have a series of projects that are under way in various stages, OK. So, they're all kind of coming out with products that come to market at different stages and they are in different stages of that release cycle. So yes, I mean certainly we're now seeing the CT products that are specifically for the Chinese OEMs. That's all coming to market now and so we start to see an uptick in the revenues that come from that for example. There are other products like that or other projects like that that have longer cycles in that including a lot of activities that are support of our existing customer base. It isn't all about always necessarily a new customer as much as it is an existing customer, either expanding their portfolio or going through a refresh cycle of their products, of their imaging systems.

John Koller -- Oppenheimer & Co. -- Analyst

Great, thanks.

Sunny Sanyal -- Chief Executive Officer

All right. See you, John.

Operator

(Operator Instructions) Our next question is from Anthony Petrone with Jefferies. Please proceed.

Anthony Petrone -- Jefferies -- Analyst

Just a quick follow-up on the update on where the China OEM order books sits heading into fiscal '19. I think on our last notes we had that total order book was something around 170 (ph). I think a portion of it had slipped into 2019. So maybe just an update on the totality of the order book and what you expect to realize in 2019?

Clarence Verhoef -- Chief Financial Officer

So I think when we talked about our orders, we had said there would be back-end loaded because the first year of that order book, bookings of those five customer contracts that we had, we were anticipating that most of that would go toward supporting their prototyping, FDA, regulatory submissions and testing needs and some limited volume shipments. And what we saw was in Q4 we saw the uptick and there is a good pickup in tube volumes and then going into next year, as I said we are going expect -- we're expecting to do double of what we did in '18. So directly to answer your question that I'd say that the business has moved to the right because of a few delays, but it is still -- it still continues to be back-end loaded. So what were baked into 2019 is our best estimate of -- it's not the one-third, or a third or third (ph) like we had said, it will be more like much smaller than a third.

Anthony Petrone -- Jefferies -- Analyst

Okay, that's helpful.

Operator

We have reached the end of our question-and-answer session. I would like to turn the call back to Howard Goldman for closing remarks.

Howard Goldman -- Director of Investor & Public Relations

Thank you for your questions and participating in our earnings conference call for the fourth quarter and fiscal year 2018. A replay of this quarterly call will be available from today through November 22 and can be accessed at the Company's website or by calling 1877-660-6853 from anywhere in the U.S., or 1-201-612-7415 from non-U.S. locations. The replay has a access code which is 13684105. Thank you and goodbye.

Operator

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

Duration: 45 minutes

Call participants:

Howard Goldman -- Director of Investor & Public Relations

Sunny Sanyal -- Chief Executive Officer

Clarence Verhoef -- Chief Financial Officer

Anthony Petrone -- Jefferies -- Analyst

Larry Solow -- CJS Securities -- Analyst

John Koller -- Oppenheimer & Co. -- Analyst

Unidentified Speaker --

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