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Varex Imaging Corporation (NASDAQ:VREX)
Q1 2020 Earnings Call
Feb 11, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Varex Imaging Corporation First Quarter Fiscal Year 2020 Earnings Conference 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 your host, Mr. Howard Goldman, Director of Investor Relations. Please go ahead, sir.

Howard Goldman -- Director of Investor & Public Relations

Good afternoon, and Welcome to our earnings conference call for the first quarter of fiscal year 2020. With me today are Sunny Sanyal, our President and CEO; and Clarence Verhoef, our CFO.

To simplify our discussions, unless otherwise stated, all references to the quarter are comparisons for the first year of 2020 versus the first quarter of fiscal 2019. 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 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.

Outlook 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.

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. 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.

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

Sunny Sanyal -- Chief Executive Officer

Thank you, Howard. Good afternoon and welcome. We started off this fiscal year with strong top-line performance in the first quarter. However, our profitability was below our expectations due to a number of different factors that Clarence and I will review with you.

Revenues in the first quarter were up 8% to $200 million from $186 million in the same quarter a year ago. Direct Conversion contributed $5 million in the quarter. On a segment basis, medical revenues increased 8% and industrial revenues increased 6%. Our revenue growth was driven by higher global sales of CT tubes and products for oncology, dental and airport baggage screening applications. Partially offsetting these gains were lower sales of radiographic digital detectors and mammography products.

Growth in our Industrial segment in the first quarter was once again led by strong demand for our Industrial CT tubes for airport baggage screening applications. To give you some color, according to third party research, the global market for these airport screening systems is projected to grow at the rate of more than 5% compounded annually over the next five years and reached $4.3 billion by 2023. Stringent security regulations and the need for improved throughput has been driving the demand for CT systems for both checked and carry on baggage screening over the coming years. We expect that most airports will replace older systems with more sophisticated next-generation CT systems that offer 3D imaging and automated threat detection capabilities.

In non-destructive testing and inspection, we continue to ship linear accelerators for imaging applications in the aerospace, defense and manufacturing verticals. During the quarter, we also opened a new office in the Houston area to be closer to and better serve customers in the oil and gas vertical. We have several new products for this vertical moving through development phases and expect to talk more about them in the coming quarters.

In our medical segment, we had strong global sales of CT tubes as well as an increase in sales of oncology and dental products, in particular dental detector revenues increased double-digits from the prior year quarter and have grown sequentially over the past four quarters. We also announced this afternoon that Varex has renewed its three-year pricing agreement with Cannon Medical Systems for calendar years 2020 through 2022. This agreement extends our multi-decade long relationship with Cannon Medical through which we continue to supply our CT tubes and heat exchangers for integration into Canon Medical's CT imaging systems for the global market.

We estimate potential product sales during the term of this renewed agreement to be approximately $385 million. In addition, through separate agreements, we also supply Canon Medical with our digital detectors and high voltage connectors. I'm also happy to say that since the beginning of this fiscal year, we have renewed a number of additional multi-year pricing agreements with key customers. To give you a frame of reference, these customers, including Canon, represented more than 50% of our medical segment revenues in fiscal year 2019. These agreements reinforce the long-term nature of our partnerships with our customers.

In China, our local OEM customers continue to make progress in bringing their new CT systems to market, and we expect that our unit volumes will continue to grow this fiscal year. This growth in China, along with the rest of world activity, contributed to overall growth in our global CT tube sales during the quarter. As a reminder, most of the CT systems in China are new placements that expand our global installed base of CT tubes. As the installed base grows, we expect to benefit from sales of both the initial CT tubes that are incorporated into the new systems as well as multiple future replacements over the life of the systems.

During the first quarter, our Wuxi facility manufactured and shipped its first orders of our new locally made radiographic digital detectors for both local Chinese OEMs and global OEMs of factories in China. We shipped a number of prototypes to existing and prospective customers and early feedback has been positive. We also recently signed a multi-year contract with the dental OEM customer based in China and we will be supplying them through detectors from our Wuxi facility. This new customer is just one example of dental OEMs that are launching new systems in China, and we look forward to the prospect of working with more of these potential customers in the future.

While we're talking about China, let me give you an update on how the coronavirus outbreak has impacted us. As a point of reference, our facility in Wuxi is located about 50 miles east of Wuhan and about 90 miles west of Shanghai. Like many other manufacturers in China, we have temporarily put a hold on operations at our facility in Wuxi and shifted manufacturing to other locations to cover current demand. While this has certainly been a concerning time, I'm glad to report that as of today, none of our employees have contracted the virus. We currently anticipate being able to reopen our factory next week and look forward to resuming production.

Somewhat in response to this major health event, we have seen early signs of some increased near-term demand for our CT tubes and radiographic detectors that are incorporated into diagnostic imaging systems used for screening this type of respiratory disease. We will continue to monitor the situation closely. Marketing efforts in our medical segment are paying off. In December, we attended RSNA, the largest trade show event of the year. For the medical imaging industry where we showcased and discussed several new technologies and innovative products. These included our Z platform digital detectors non-Glass flexible substrate detectors, photon counting detectors liquid metal bearing, cardiac and CT tubes and nanotube X-ray tubes.

We also exhibited in the new AI pavilion where our software team demonstrated artificial intelligence capabilities to autonomously detect and discriminate meaningful artifacts in X-ray images for lung screening and liver and dental applications. Overall, RSNA was a busy show for us and we came away with a good number of meetings scheduled with prospective customers that want to discuss ways. Our new technologies can be incorporated into their next-generation X-ray imaging systems. We expect these new technologies to be a significant competitive differentiator for us in the future.

Before I turn over the call to Clarence, let me provide you with some high level comments regarding our gross margin, which was lower than expected in the first quarter. Quarterly variation in gross margins is not unusual for us. Our adjusted gross margin rate has ranged from 33% to 38% over the past eight quarters. This is primarily caused by changes in product mix, volume, our productivity and could also be due to timing of customer pricing changes and product cost reduction activities.

We are in competitive markets that have varying levels of price erosion, particularly with digital detectors. To offset this, we have ongoing programs to lower our cost structure by optimizing our supply chain, redesigning products for cost effectiveness and improving factory productivity and product yields. A separate and significant opportunity for improvement relates to the previously announced closure of our Santa Clara facility and related transfer of operations to Salt Lake City and other Varex locations. We had expected to be able to stop production in Santa Clara by the end of calendar year 2020. Good progress has been made by the team, and we now expect to pull the closure date in by a full quarter with some ramp down of operations in the fourth quarter of fiscal year 2020.

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

Clarence Verhoef -- Chief Financial Officer

Thanks, Sunny, and hello, everyone. Let me follow-up on Sunny's comments about the Santa Clara closure. As we get closer to completion of this project, we now have a better view on the timing of its financial impact. Previously, we indicated that the net annual benefit from the closure would be in the range of $21 million to $27 million beginning in the second quarter of fiscal year 2021. We have already received some of that benefit by closing the glass fab portion of the facility in the first half of fiscal year 2019. By now, pulling in the closure date for the rest of the facility, we expect to receive a full-year benefit in fiscal year 2021.

Last quarter, we indicated that there would be $0.05 to $0.07 of EPS impact in fiscal year 2020 for the overlapping costs of the transition from Santa Clara to Salt Lake City. The pull-in of the closure date allows us to offset these overlapping costs within this fiscal year and help to maintain our gross margin expectations for the full year.

Now, turning to the quarter, we had good revenue performance while both gross and operating margins were weighed down by some one-time events. In particular, we had an additional week in the first quarter. Fiscal year 2020 is a 53-week year for Varex with the first quarter being 14 weeks instead of 13. This impacted a number of items throughout the P&L in the first quarter. The good news is that an added week delivered some additional revenues. However, the extra week contained a number of holidays, which had a negative impact on productivity, while we also had higher operating expenses due to the additional week.

For the first quarter, revenues were $200 million compared to $186 million in the prior-year quarter. Medical revenues for the quarter increased 8% to $156 million and Industrial revenues increased 6% to $45 million. For the first quarter, our gross margin was 31% compared to 32% in the prior-year quarter. Medical segment gross margin declined by about 3 points. During the quarter, we had lower productivity in our factories with the added holidays and a physical inventory in the first week of October. Our digital detector margins declined due to additional costs in Europe related to a customs audit and we increased reserves for warranty and slow moving inventory.

Industrial segment gross margin improved by about 3 points versus the prior year due to a favorable mix of higher margin products. Overall, our adjusted gross margin was 33% compared to 36% in the prior-year quarter. R&D expenses were $22 million in the first quarter, an increase of $3 million from the prior-year quarter. R&D expense increased to about 11% of revenues, primarily due to the additional week in the quarter and the inclusion of Direct Conversion.

First quarter SG&A expenses were $35 million and included approximately $5 million of expenses related to acquisition integration, restructuring and other nonoperational costs. SG&A expenses also increased versus the prior year due to the added week in the quarter and higher audit and consulting fees. SG&A expenses for the prior-year quarter were $31 million and included approximately $3 million of expenses related to restructuring and other non-operating costs.

Going forward, we will be adopting a change in our reporting of non-GAAP adjustments. For fiscal years 2018 and 2019 and the first quarter of fiscal year 2020, we treated the expenses associated with the implementation of Sarbanes-Oxley as a non-GAAP adjustment due to its initial setup after our separation from Varian. Now that SOX implementation and monitoring has transitioned to an ongoing activity, any audited consulting costs associated with SOX implementation and monitoring will no longer be treated as a non-GAAP adjustment.

Depreciation and amortization totaled $9 million for the first quarter compared to $14 million in the prior year. The first quarter of last year included $4 million of accelerated depreciation associated with the restructuring of the detector fab operations. Our operating earnings for the first quarter were $5 million compared to $10 million in the year-ago quarter. Our adjusted operating earnings for the first quarter were $15 million compared to $20 million in the year-ago quarter.

Interest expense in the first quarter was $5 million, which is comparable to the year-ago quarter. Tax benefit for the first quarter was near zero compared to tax expense of $1 million in the prior year quarter. We recorded a net loss of $1 million or $0.03 per diluted share in the first quarter compared to net earnings of $3 million or $0.08 per diluted share in the prior year quarter. Adjusted net earnings for the quarter were $8 million or $0.21 per diluted share compared to $10 million or $0.26 per diluted share in the prior year quarter. Diluted shares outstanding were 39.1 million shares versus 38.3 million shares in the prior year quarter.

Looking at our working capital, accounts receivable decreased by $18 million during the quarter, days sales outstanding was 55 days compared to 65 days in the prior year quarter. Inventory increased $21 million in the first quarter to $269 million. We ended the first quarter with cash and cash equivalents of $30 million. During the quarter, we reduced debt by $14 million and end of the quarter with total debt outstanding of $381 million. During the first quarter, we completed the implementation of the new accounting standard for leasing. The impact on the P&L was immaterial, but it increased our assets and liabilities by roughly equal amounts of $25 million and $26 million respectively.

We are still completing some of the work related to this new accounting standard and, as a result, we will not file our 10-Q for the first quarter by its deadline tomorrow but plan on filing it in the near future. Even though the first quarter gross operating margins were lower than usual, we anticipate that our overall financial performance will be in line with our expectations for the year.

Lastly, I would like to announce that after more than 14 years with Varex and Varian, I intend to retire from Varex later this year. I will stay on to assist through the transition to a new CFO, so I look forward to continuing to work with all of you over the next few quarters.

Sunny Sanyal -- Chief Executive Officer

So, before we move on to Q&A, this is Sunny Sanyal, I just want to take a moment to acknowledge the tremendous contributions that Clarence has made to the company. Clarence has been an integral part of our company for many, many years and an inspirational leader through the spin-off from Varian three years ago. During his time as a finance leader for Varian and later Varex, the Imaging Components business grew revenues from under $100 million to over $780 million. And with his help and guidance, we established a global finance team and the corporate infrastructure that will lead us into the future. His in-depth knowledge of the industry and our operations have been a tremendous asset, and we've been very fortunate to have Clarence in our management team.

With that, let's open up the call for your questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Anthony Petrone with Jefferies. Please proceed with your question.

Anthony Petrone -- Jefferies -- Analyst

Thanks. And Clarence, congratulations and best of luck to you in the future. I hope to cross paths again as time goes on. Maybe just to stay on the topic of CEO, just to address this transition, expectation for timing on transition and just what the approach is going to be there and then I'll have a few follow-ups. Thanks.

Sunny Sanyal -- Chief Executive Officer

Yeah. Hey, Anthony. So, Clarence, as we said, has expressed his intent to retire. So, with that, we are just beginning to process -- we didn't really start until -- how we will get going? We expect to do this expeditiously but Clarence will stay on for a significant portion of the year and he'll assist in transition through that.

Anthony Petrone -- Jefferies -- Analyst

Okay. And then, maybe just to shift to the numbers for the quarter and just going to adjusted operating margin and guidance and just to bridge. So, I understand that some of the costs are non-recurring and allocated to the first quarter. But maybe just as you look out over the next three quarters, what -- where is the comfort level in sort of getting back the $0.07 deficit that we've seen here in the first quarter? And specifically what are the drivers there? Is it mix? Is it the expectation for order flow from whether it be China OEMs or newly signed customer, etc? So just a little bit of help in bridging from the first quarter numbers to the guidance for the full year.

Sunny Sanyal -- Chief Executive Officer

Sure. So, I'd say that -- I mean, I think you touched on a couple of things. First of all, that you have some onetime events in the quarter, but that also have made the margin rates both operating profit and gross margin to be at a little lower level than would be for the full year. The key item is actually going to be all around the Santa Clara closure. By pulling that in by a quarter, I think that makes a significant benefit because before we had built into the numbers the overlap cost of ramping up operations in Salt Lake City and a little bit in some other locations, and with none of the benefit happening in the fiscal year and really fundamentally not happening till mid-2021. So now as we pull that in, we get a little bit of that benefit or some amount of that benefit in the fourth quarter already. And that has a good impact for us.

I would say that the other element is as we've seen the good demand on for CT tubes going forward for the year, that helps us a little bit on the product mix side. So I think that's going to be the other element that is going to make a bit of a difference there.

Anthony Petrone -- Jefferies -- Analyst

It's helpful. And maybe trying to shift gears just to top line outlook and specifics, Sunny, to your comments in China. So we've seen so far this earning season just a mixed view as it relates to coronavirus you mentioned in your prepared comments that potentially there's some higher than expected demand due to coronavirus. Just trying to get a sense of installation cycle specifically for CT machines in China. Siemens for instance sort of announced that it's not necessarily orders but timing on installations that could be impacted. So just maybe a little bit on CT installation cycles in China. Thanks. And then I'll have one last follow-up.

Sunny Sanyal -- Chief Executive Officer

Yeah. So, Anthony, it's -- we don't get good visibility to what it takes for our OEMs from the point where they order our tubes, how long it sits in their facility versus how long it gets -- how long -- what -- how much that elapsed time is to install the systems. From our perspective, when a customer places an order, we typically ship [Indecipherable]. So the point where they pick up the tubes is when we consider as having shipped to them.

Now, that said, these -- the reference I made to slight uptick in demand for the tubes, these are for immediate shipments. I mean the customers are standing on top of us to try to get these tubes from us ASAP. These are over and above what they had ordered. So we're doing our best to get these out to them ASAP and try to cover as much of that in sort of with urgency. And these systems will get shipped out by our customers ASAP out of their facilities. So that's -- I don't know if that answers your question, but these are -- we expect to fulfill a bulk of that extra demand in this current quarter.

Anthony Petrone -- Jefferies -- Analyst

Okay. And last one for me and I will get back in here. It's just in tariffs there was a deadline that was upcoming in December, some other capital providers specifically intuitive financing [Phonetic] with some pull forward of orders ahead of that potential deadline. Of course, it never happened. But just wondering if there was any sort of tariff dynamics in the quarter? Thanks again.

Sunny Sanyal -- Chief Executive Officer

No. We did not see any change in our customers ordering patterns or any other behavior change one way or another due to the tariffs.

Anthony Petrone -- Jefferies -- Analyst

Thanks.

Operator

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

Larry Solow -- CJS Securities -- Analyst

Great. Thanks a lot. Just a couple of questions, Sunny, you mentioned and you had a separate release on the Canon agreement, and you actually mentioned that you've up that sounds like greater than 50% of your medical contracts. Can you give us any feel for pricing volume changes? Are these contracts basically just rolling over at similar levels? Any color there would be great.

Sunny Sanyal -- Chief Executive Officer

Yeah. Hey, so Larry, couple of -- first, the background on the reason for my comment about the other contracts. So, first of all, it's great to always see our largest customer Canon continue on this with decades long relationship with us, so we're excited about this. We're into the second month of the calendar year, and I thought just as a frame of reference just give you that example of how we're doing with the rest of our customers and it's just a representative.

The key point there for us is that these are multi-year agreement. So that means as our customers have -- not only have faith in us, but also faith in stability of pricing in the market. You might recall a few years ago when we were seeing huge swings in detector pricing, very few customers would agree to any kind of multi-year pricing agreement with us. But we're happy to say that, we're able to get our customers to lock in with three-year pricing agreement, so we're very happy about that. And then coming to your question about any color on pricing and price erosion, etc. Nothing -- there has been no real shift in pricing approach or price erosion since our previous conversations that are noteworthy. Tubes price -- pricing on tubes has continued to be consistent with historical levels. In fact, we get -- in some cases, we were able to hold prices. In some cases, we get some nominal adjustments for volumes. And actually, in some other cases, it's performance-driven. We've started looking at performance-based pricing. So, I think tubes has been fairly consistent. Detectors, this price erosion, and we've said, historically we've seen price erosion in single digits and that has continued. So there's really nothing dramatic that's worth mentioning.

Larry Solow -- CJS Securities -- Analyst

Okay. And just trying to follow up just on Anthony's question about the profitability in the quarter. So, obviously, it was -- yeah, I know you don't guide to the quarter, but it sounds like it was certainly below your numbers on the gross line. And then, I don't -- operating expenses obviously were certainly much higher than your guide was for the full year. Is there any -- you said there was an extra quarter -- excuse me, an extra week in the quarter but that also should, I don't know, obviously benefit revenue. So, I'm just trying to bridge the gap a little bit better. You sort of say, you'll make up for it with a little bit of an earlier closure of the facility but making up for it. But is there -- are we at a lower -- in other words, was it just an aberration or you have to make up for it and then some with other quarters of lower numbers? I'm just trying to get a better grasp of that.

Sunny Sanyal -- Chief Executive Officer

Let me take a shot at that first, Larry, and turn it to...

Larry Solow -- CJS Securities -- Analyst

Yeah. Just sort of -- in summary, trying to figure out why you missed, not how you're going to make it up. You've explained how you're going to try and make it up, but you haven't really explained why you missed.

Clarence Verhoef -- Chief Financial Officer

Yeah. So, I mean, the -- adding an extra week has not an insignificant impact on the operating expenses. You're right. We get a little bit of extra revenue which is what I've mentioned. And we -- and the variability -- your variable costs are going to be running at the same kinds of levels as the revenue. So that's normal. But the OpEx expenses, there's no offset to that. So there's an incremental $4 million, $5 million or something in that kind of a range of additional operating expenses in the quarter just do the extra week. And that's basically in R&D and SG&A. And then the -- within the gross margin, you basically have a few of those unusual or one-time kinds of events not necessarily around -- all around the extra week, but more about relative to the detector business didn't perform quite as well as we wanted it to do in the quarter. And I mentioned customs audit where we set aside some money for that and set aside some money for warranty and slow-moving inventory.

Those are all factors that come into play and are the primary drivers of that. I mean there's -- beyond that, it's kind of business as usual, I would say, in terms of the rest of the...

Larry Solow -- CJS Securities -- Analyst

Okay.

Clarence Verhoef -- Chief Financial Officer

...moving parts in the quarter.

Larry Solow -- CJS Securities -- Analyst

And then, just switching gears a little bit. Sunny mentioned you spoke to the -- some of the closures of the facility in China and hopefully that reopens soon. And then also the coronavirus and maybe you'll actually get a little bit of a benefit from some new diagnostic -- some more diagnostic equipment going toward that. But net-net, are you -- do you think from where you stand today in your guidance does coronavirus have any effect, negative or positive, or is it right now adjusting to that?

Clarence Verhoef -- Chief Financial Officer

So it's too early to tell one way or another.

Larry Solow -- CJS Securities -- Analyst

I mean, just qualitatively on where the [Indecipherable].

Clarence Verhoef -- Chief Financial Officer

Yeah. Qualitatively, on balance, the extra orders of tubes and detectors would be helpful. Those are -- those we hope are incremental versus pull-ins. Again, tough to say, but since these are going to the sites that are specifically impacted by the coronavirus, you can hypothesize that these are incremental to the normal plans that any hospitals might have, but that's still TBD.

Larry Solow -- CJS Securities -- Analyst

Right.

Clarence Verhoef -- Chief Financial Officer

In terms of on the cost side, we carry -- we haven't seen any -- there hasn't been a cost impact to us -- we -- not yet. We carry inventory for materials and purchases and the things that we depend on from China. So, for the rest of the quarter and as we get into all the way through March, we're working off of our current supply chain. So, we haven't felt an impact one way or another. Now, if the situation gets worse and beyond the current projections, then maybe the entire industry and globally, everyone will be impacted in a similar way.

Larry Solow -- CJS Securities -- Analyst

Right.

Clarence Verhoef -- Chief Financial Officer

But that's wait and see situation for us.

Sunny Sanyal -- Chief Executive Officer

I think, Larry, though what this does is it introduces a little bit more uncertainty in the year in terms of quarter-to-quarter variation just like we talked about that we already have quarterly variations. Just this is more of the same is what that tells me.

Larry Solow -- CJS Securities -- Analyst

Right, right. Okay. Just last question, any update how Direct is performing? I think you sort of scale back expectation a little bit last quarter from I think initially when you acquired it. You mentioned to $5 million this quarter or perhaps, it's a lot of an inflated number. So any update on how that's progressing?

Sunny Sanyal -- Chief Executive Officer

So, I would say that -- OK, the $5 million is a nice number for us. And you're right that we had backed up a little bit on the timing of when they -- when some of -- we expect some of their deliveries to happen to their customers. And this isn't about them being having challenges with developing product or getting product out the door. But it's more about new applications that Direct is -- Direct's products photon counting is going into. Take time to get to the market and get gone through the market acceptance phases and the development process by their customers. And that's been a little bit where we see there challenges being a little bit around the timing of when their customers will be ramping up their business.

I mean, overall, it's still proving out to be a very strong technology that is being well-received. We have a ton of traffic at the RSNA Trade Show around it. There was a lot of interest in the products. So, I think, it's going to do very well. But it's a question a little bit about near-term versus long-term.

Larry Solow -- CJS Securities -- Analyst

Great. Okay, excellent. Thanks. I appreciate it and Clarence I second those words. The best of luck to you. I'm sure we'll still talk for the next couple of quarters also. Thanks.

Sunny Sanyal -- Chief Executive Officer

Yeah. Thanks, Larry.

Operator

Your next question comes from the line of Suraj Kalia with Oppenheimer. Please proceed with your question.

Suraj Kalia -- Oppenheimer -- Analyst

Good afternoon, gentlemen. Can you hear me all right?

Sunny Sanyal -- Chief Executive Officer

Yeah. We do.

Clarence Verhoef -- Chief Financial Officer

Got you.

Suraj Kalia -- Oppenheimer -- Analyst

All right. Perfect. So first and foremost, Clarence, it's been a pleasure dealing with you and best of luck. I know that we will still be dealing for a couple more quarters I guess, but congrats nonetheless. So, you guys provided a lot of commentary and Clarence, maybe you can or Sunny maybe you guys can fill in the blanks for us. The 8% update in the Medical segment. So when was Sunny your comments about the short-term demand, right? The customers wanted to fill orders ASAP for whatever reason.

The second is, there was an extra selling week and that was offset by holidays. So when I take all these three, can you normalize for us what the medical segment growth would have been year-over-year? If I remove some of these factors. And I guess what in trying to understand is how sustainable is the step-up in this category particularly?

Sunny Sanyal -- Chief Executive Officer

So, Suraj, I'll let Clarence chime in. But let me just clarify. The extra demand that we saw -- that we alluded to for coronavirus was not in Q1. It would be for what we would ship them now. Those are coming in now. So, timing wise that didn't impact our first quarter. The extra week does have positive impact, and I'll let Clarence comment to that.

Clarence Verhoef -- Chief Financial Officer

Yeah. And I mean, it's an extra week of production for us, is the key around that. But it's -- maybe if I kind of walk through a little bit of what -- how I interpret the movers of the increase, OK. So we are at a $186 million and we ended up at $200 million for -- $186 million a year ago and $200 million now. So we talk about direct conversion adding $5 million because that was not in the comparable period a year ago. But the extra week, I'm going to just -- I didn't put specific numbers around it but it's probably something in the order of magnitude of $3 million to $5 million or something like that.

So then you have just overall growth that's going on in our markets. And I think we touched on these a little bit because we've got multiple markets that went up double digits for us as in the CT market, the dental market, the oncology market in particular, those are the biggest drivers, as well as in -- and we're talking about medical but the industrial business did well in addition. So, those markets have got good strong demand going forward. It's nice to actually see that recovery going on in the dental space that we now seem to be more of an ongoing trend as such. But at the end of the day, the big money for us is still in CT tubes. I would say that's the biggest factor.

Suraj Kalia -- Oppenheimer -- Analyst

You've got it. And Sunny, you guys put out this press release on renewal of the multi-year contract with Canon and there is commentary about other customers. Maybe if I can just kind of peel a layer of the onion here, is that a tiered volume arrangement? Is it on a rolling order basis? How should we think about it Is it just 385 divided by 3? And how does it stack up relative to the comps, let's in the prior contract. Just help us contextualize. Is it just going to provide price stability, but even if I look at that, just on the three-year to three-year or whatever the prior contract was, any color there would be great? Gentlemen, thank you for taking my questions.

Sunny Sanyal -- Chief Executive Officer

Yeah. So, Suraj, I want to try to answer your question without just exposing competitive information in general. Our pricing agreements are based on our customers' forecasts of volume. And generally speaking, our large customers have done a pretty good job historically with their business plans. So, the 385 is an estimate based on what our customers are telling us that they'll do over these next three years. And based on that, we believe that. Based on that, we associate an average price for the different tube models. So 385 is a roll up based on that.

So it's not an ongoing rolling basis. It's based on, they tell us they're going to do X number of tubes per year and we come to an agreement on the price for that. And that goes true -- that's true for other customers as well. And OK. I hope that helps.

Suraj Kalia -- Oppenheimer -- Analyst

Thank you.

Operator

Your next question comes from the line of Mark Strouse with JPMorgan. Please proceed with your question.

Mark Strouse -- JPMorgan -- Analyst

Yeah. Thank you very much for taking our questions and Clarence, I'd like to add my congrats as well.

And so Sunny, I just want to kind of follow up on a couple of questions that have already been asked, but you mentioned a couple of years ago customers not necessarily looking to lock in to pricing over a multi-year term. Really, since the spin, as far as I can recall anyway, you've been kind of targeting long-term growth in that mid-single-digit range. I'm just wondering if there's been any kind of change in that forecast now or reasons to be a bit more optimistic now that the customers seemed to be a bit more comfortable locking in. So does that give you any reason to think that number could potentially be higher?

Sunny Sanyal -- Chief Executive Officer

So, on the -- there's no change in our position. We've said that the medical market is growing at 2% to 3%. Industrial market is growing at 4% to 6%. So blended, we expect our growth to approach and now, we're targeting 5% growth. And it's -- as one of the market leaders where you end up growing more or less with the market, the different -- but we expect to go do slightly better than that and that's how we came to that 5 percentage based on our bottoms-up projections.

These multi-year pricing agreements that we signed with our customers essentially gives us some price stability with the products that they signed agreements with. So, that helps us with our forecasting. It helps us with our planning.

Mark Strouse -- JPMorgan -- Analyst

Okay. That's very helpful. That is all for us. Thank you very much.

Sunny Sanyal -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Jim Sidoti with Sidoti & Co. Please proceed with your question.

Jim Sidoti -- Sidoti & Co. -- Analyst

Good afternoon. Can you hear me?

Sunny Sanyal -- Chief Executive Officer

Yeah. Hi, Jim.

Clarence Verhoef -- Chief Financial Officer

Hi, Jim.

Jim Sidoti -- Sidoti & Co. -- Analyst

Great. Great. Clarence, I feel like I just picked it up. I hope you're not leaving because of me.

Clarence Verhoef -- Chief Financial Officer

No.

Jim Sidoti -- Sidoti & Co. -- Analyst

All right. I just want to be clear, are you reiterating your annual guidance for the year of $1.30 to $1.45 EPS?

Clarence Verhoef -- Chief Financial Officer

We're not making any changes to the guidance both revenue and EPS.

Jim Sidoti -- Sidoti & Co. -- Analyst

Okay. I just want to be clear on that. All right. Now, with the Chinese facility, you said you were able to ship product from other facilities which I assume mean Germany and possibly US. Was that -- did that have an impact on the gross margin in the quarter?

Clarence Verhoef -- Chief Financial Officer

No. It wouldn't have made any difference in reality. I mean, you're right. That's where product did ship from, probably a little more from Germany than from the US via Trussville. And some of that is just because of -- there's still some tariffs in place that impact product that ship from the US.

Jim Sidoti -- Sidoti & Co. -- Analyst

Okay. And then, the last one for me is, you indicated that you're going to start to include the SOX Sarbanes cost -- Sarbanes-Oxley cost in your EPS. Is that a material number?

Clarence Verhoef -- Chief Financial Officer

It was. So, I think the non-GAAP adjustment for last year would have been probably $2 million to $3 million, somewhere in that kind of a range. So it's not an insignificant number.

Jim Sidoti -- Sidoti & Co. -- Analyst

Okay. But your guidance from $1.30 to $1.45 that anticipates that already?

Clarence Verhoef -- Chief Financial Officer

Yeah. We knew that already going into this. So I mean that was already built into our plans for the year.

Jim Sidoti -- Sidoti & Co. -- Analyst

Okay. All right. That's it for me. Thank you.

Clarence Verhoef -- Chief Financial Officer

Thank you.

Operator

Your next question is a follow-up from Anthony Petrone with Jefferies. Please proceed with your question.

Anthony Petrone -- Jefferies -- Analyst

Hey. Just a couple of follow-ups to tighten up some of the math here. So, the extra day, I think, Clarence, you mentioned $3 million to $5 million, was that just medical or is that overall? So that will be the first follow-up question just on the extra selling week, the contribution there.

And then, in terms of additional OEM deals, I know Canon here was announced. Everyone you think of the top 10 OEM customers, just where are you on the cycle with those customers and are there any expected to be announced over the next year? And then, the last one, I'll just add in here. Just an update on high level numbers on where China OEM orders stand both on the CT side and maybe to a lesser extent on the flat panel side. Thanks.

Sunny Sanyal -- Chief Executive Officer

So, let me start to those latter two questions. Anthony, we don't announce individual customer renewals or transitions. I mean, historically we've only done that for Canon given the size and the volume of that renewal. So, in general, the conversations are top OEMS, top 10, top 15, big group are actually all proceeding very well. These are -- I'm happy to say that we don't -- we're not -- we haven't seen customer leakages or anything significant that we can point to as a problem. So, I'm very, very happy with the way our long-term relationships are continuing to hold and grow. And then, your...

Clarence Verhoef -- Chief Financial Officer

So maybe to follow on to that I guess as the key point is just that we've got renewed agreements that are multi-year agreements that represent 50% of the medical business. So, this is -- it has to be our larger customers, I mean, to get the math just to be for that to work. So, it puts us in a good place with the major OEMs that are out there and that have been our ongoing customers and it's a good renewal from that perspective and it sends a strong message to us about their commitment to our partnership with them.

Now back to the extra week, basically, if you think about it adds a little bit of production time. Granted it was during a time when you got extra holidays and the like, so it's not super productive from that perspective. But -- so that's how I came to rough number and it's very rough number about how much we get out of that. And so, it's -- but more importantly, I think it's just that, we still -- we had good demand in a variety of other just ongoing applications throughout the quarter. And that's -- that helped us through a strong quarter for the first quarter of the year.

Sunny Sanyal -- Chief Executive Officer

And then, Anthony, your last question about China CT orders and anything else around detectors. So, our China CT customers are the ones who've been working on projects with us. They're continuing to make good progress. And we're seeing good steady and growing demand from them as we had anticipated. And on the mix side, most of what we're seeing currently are their initial CT systems that they rolled out, that there are in the -- where the demand is the highest on the 16 slice. So but we're satisfied and happy with the volumes and the demand and the progress of our customers, CT customers in China.

And on the detector side, frankly the -- we -- last year, we had lost a chunk of the radiographic detectors that we pulled from because it didn't make sense for us to sell those given the tariff situation. The production that we've just begun in China are for those radiographic detectors, and it'll take a bit of time for us to get back in the groove with those detectors, but the initial shipments have begun, we've shipped prototypes to customers. They're really happy with it. These are new models, great detectors, and I'm optimistic that going forward, we will start recouping our -- regaining our position in China with the radiographic detectors.

Now, we've continued to do steady business in China with some of our high-end dynamic detectors for both Chinese OEMs and the global OEMs. And recall, we also sell industrial detectors in China. So, that has continued on with as business as usual. We're happy now to add some incremental business in China with these new dental OEMs. We're very excited that there are dental OEMs that are introducing the high-end applications and we -- as we mentioned, we signed an agreement with one of them for our multi-year agreement, and we are optimistic that this will be a good one for us to continue on with other dental OEMs in China.

Anthony Petrone -- Jefferies -- Analyst

Thanks, again.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. 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 first quarter of fiscal year 2020. A replay of this conference call will be available through February 25th 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. Our replay conference call access code is 13698110. Thank you and goodbye.

Operator

[Operator Closing Remarks]

Duration: 48 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

Suraj Kalia -- Oppenheimer -- Analyst

Mark Strouse -- JPMorgan -- Analyst

Jim Sidoti -- Sidoti & Co. -- Analyst

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