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Varian Medical Systems (NYSE:VAR)

H1 2014 Earnings Call

May 06, 2014 12:00 pm ET

Executives

Dow R. Wilson - Chief Executive Officer, President and Director

Elisha W. Finney - Chief Financial Officer and Executive Vice President of Finance

Kolleen T. Kennedy - Senior Vice President and President of Oncology Systems

Sunny Sanyal - Senior Vice President and President of Imaging Components Businesses

Analysts

David H. Roman - Goldman Sachs Group Inc., Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Jason Wittes - Brean Capital LLC, Research Division

Amit Hazan - SunTrust Robinson Humphrey, Inc., Research Division

Steve Beuchaw - Morgan Stanley, Research Division

Dow R. Wilson

Okay. Welcome, everybody. I'd like to welcome you to Varian's mid-year review. Pleasure to be here in New York, and I'd also like to welcome you folks online with us as well. We are going to have some fun today, usually, of course, start with our forward-looking statements, our agenda. I'll kick things off and then turn it over to Elisha. She'll talk a little bit about first half and what we've seen financially. And then we've got with us today Kolleen Kennedy from the Oncology Systems business, President of Oncology. She'll give you an update on our Oncology business.

And then I'd like to introduce to you as well -- I think first time we've had Sunny here in New York. Sunny Sanyal recently replaced Bob Kluge, who retired. Sunny is based in Salt Lake City. Joins us after 25, 26 years in healthcare with GE and McKesson and others. And I'd like to welcome Sunny. And he'll give us an overview of our Imaging Components business, X-ray tube, flat panel detector, as well as our Security and Inspection business. And then I'll step back up and take you through the long-term outlook and open it up for Q&A.

Our strategic priorities haven't changed. They're the same as you've seen for the last 2 years. Globalization is a big initiative for us. The global markets are growing very, very fast. Our presence in emerging markets is very important, and you'll get an update on that initiative and all of our businesses. Software and services is more and more a significant piece of the business. Our service business, over the next 2 or 3 years, should cross $1 billion, a huge annuity for us, very profitable. Our software businesses are growing nicely, and we'll update you on our initiatives there.

Innovation is the lifeblood of the company. We were looking at the map other day. TrueBeam alone has accounted for $2.5 billion worth of orders on an introduction just less than 4 years ago. And really, innovation continues to be a major driver for the business.

We are spending substantial resources in R&D. And as you know, we've taken that up a little bit this year, and we'll give you some perspective on where those resources are going.

Proton business. I think if anything has changed over the last year, we're seeing a little bit of momentum in the proton business, and I'll give you the proton update after Kolleen and Sunny, and then we'll also update you on our operational excellence. But we'll show those initiatives to you in the context of each of our businesses.

So with that, I'll turn it over to Elisha.

Elisha W. Finney

Thank you, Dow, and thanks for coming, everyone. It's nice to see so many familiar faces in the room. And we were just talking before the meeting that Varian -- we had a milestone a couple of weeks ago when we passed our 15-year anniversary as Varian Medical Systems. And as importantly, Spencer just had his 15-year anniversary with the company as of yesterday. And I actually found 2 or 3 people in the room that have been following us since that time. So we really appreciate the support.

I'm going to quickly review the second quarter and then even quicker, the first half financial results. But before I move into that, I want to just mention on a segment reporting change that we made. We took our Security and Inspection Products business, which has historically been reported under the Other category, moved it into our Imaging Components businesses with the X-ray tube and the flat panel detector products, and those are now all being managed by Sunny. X-ray tubes and panels out of Salt Lake City and our SIP business products continue to be out of Las Vegas.

To just briefly summarize the quarter, I would say we had strong growth orders for the total company. Revenue was slightly better than we had expected for the quarter and -- which I'll come back to. But on the University of Pittsburgh settlement, if you were to exclude that patent lawsuit settlement, we would have had very strong earnings in the quarter as well.

So moving into gross orders and revenue for the quarter ended March, I want to take a moment and just remind everybody of our order booking guidelines. And the reason I'm doing this is the business, both in the U.S. and internationally, is we're seeing it start to change. We're seeing much larger deals, multi-year, multi-unit deals, as we've had a lot of consolidation going on in the U.S. and even outside of the U.S. when we had entire countries, such Algeria and Brazil, coming in with very large tenders. And in those deals, it tends to be a fairly long period of time before all of those deliveries will occur.

What we do is we figure out from the customer what is expected to ship and deliver within a 2-year window and that is the portion of orders that we book at that time. And then as future deliveries roll into that 24-month period, we will have additional orders that we will book into backlog. So a very conservative order booking policy, becoming increasingly more important to understand, just given the shift that we're starting to see.

So if you look at total company, orders were up 16%, with the help of very strong growth out of our Proton Therapy business. Oncology Systems was up 6% in dollars, up 7% in constant currency, with North America up 3% and our international markets up 9%. We saw small growth in Europe. We saw a decline, slight decline in Asia in dollars, but a slight increase in constant currency as the yen has really hurt us year-over-year. And very strong growth in what we've call our Rest of World region, which is primarily Latin America and Australia.

In our Imaging Components businesses, orders were up 14%, and virtually all of that coming from our flat panel products, where we saw 52% growth in flat panel orders in the quarter. Our Security and Inspection Products business, which tends to be very lumpy, we saw declines year-over-year. And then in the Proton Therapy business, we did book 2 orders in the second quarter, a roughly $50 million order for the Cincinnati Children's Hospital. And then there was a $10 million order from Paul Scherrer Institute in Switzerland, and this is for a Gantry that they bought, and they're going to start doing some research collaboration with us on our proton products.

Revenue for the total company increased 1%, with Oncology up 4%, Imaging Components, up 2% with strong growth in panel, and then declines in proton, where again very, very lumpy. We started booking Saudi and Russia projects in the year-ago quarter, and so we saw a year-over-year decline. I should highlight that we are reporting now both gross and net orders. We -- the difference between the 2, this quarter and the second quarter, was $59 million. That is a little higher than what we would typically average in a given quarter. We had a flat panel cancellation in the quarter. We also took some orders out of backlog in Venezuela and in the Ukraine, and we had an FX loss in the quarter. As we move into the current quarter, it had a more normal rate of cancellation than in the year-ago period. So I think the comparison will be a little more even as we move forward for the balance of the fiscal year.

Turning to the profitability in this quarter, I should -- here is a good place to highlight the University of Pittsburgh. We had a $35 million settlement. $5 million of that had previously been booked. We booked $25 million loss in our second quarter, and then $5 million will be booked as a prepayment this quarter and will be capitalized -- amortized over the next 2.5 years. And that's a prepayment of royalty.

So if you -- the numbers are a little skewed here. These numbers are GAAP. They include the University of Pittsburg, which was $0.16 in the quarter. So the gross margin for the total company was up 57 basis points to 42.2%, and that was really largely due to the fact that we had lower Proton Therapy revenues quarter-over-quarter, which has lower gross margins. The operating margin at 16% is where the U Pitt settlement shows up. If you exclude that, our operating margin was at 19.6%. So just down very slightly from the year-ago period. Tax rate was a slight improvement, and earnings per share on a GAAP basis were $0.88, but if you exclude Pitt, was $1.04.

Just very, very briefly on year-to-date. These are our first half numbers. Orders up 9%; with Oncology up 6%; Imaging Components about flat at 1%, as increases in flat panel were offset largely by the Security and Inspection business; and then the $60 million of proton orders. Revenues up 3%; with Oncology up 3%; Imaging Components up 4%; and then again, pretty significant declines in Proton Therapy for the half.

Margin, again, for the first half, also impacted by the patent settlement. It was -- operating margin at 18% on a GAAP basis. If you exclude the impact of Pitt, it's just under 20% for the first half. Tax rate, about flat for the first half versus the year-ago period. And again, $1.79 on GAAP EPS, at $1.97 if you exclude the settlement.

Moving to the balance sheet. Continue to have a very conservative balance sheet. Just under $1 billion of cash and cash equivalents. Virtually all of that, at least 90% of that, offshore. $79 million in short-term investment. This is the Scripps loan, where we are part of a debt facility for our first Proton Therapy installation in San Diego, $469 million of debt.

DSO at 95 days is up 8 days from the year-ago quarter. Our collections continue to be very good. The proton business does impact our DSO by about 10 days, and that's because under percentage of completion, we take revenue as we incur our costs over the term of the project. But particularly with San Diego being our first installation, we gave deferred payment terms. We include both billed and unbilled AR in our DSO calculations, so it has a pretty significant impact on DSO when you include that.

Very strong cash flow from operations. You could see there $126 million in the quarter for the first half. We're at $169 million of cash flow from operations, up $66 million from the same period in the year-ago.

And $159 million, bought back 2 million shares in the second quarter. Year-to-date, we've spent roughly twice of that with just over $300 million, and have repurchased 4 million shares. There are an additional 4 million shares remaining that runs through the end of this calendar year.

And then finally, on the outlook. I should say that the outlook from the prior quarter essentially remained unchanged except for the Pittsburgh settlement. So these numbers are GAAP that we're showing you here. For the 2014 revenue growth of 6% to 8%, our core businesses, meaning Oncology Systems and Imaging Components, together should grow in the mid-single digit.

We're going to get a bump from the Proton Therapy business, and this assumes that the University of Maryland project will get booked in this fiscal year. We have the signed contract. They're out securing financing as we speak. We believe that they will be successful, but I just don't know the exact timing, if that will be Q3 or Q4. So we are assuming that this is going to be in Q4 because I'd rather give you the good news and surprise you if in fact it comes in in Q3. And as soon as their financing is complete, then we will book the order and a significant amount of revenue associated with that project. My assumption is that Proton revenue for the full year will be about $125 million, assuming that project gets done.

And then EPS at $4.06 to $4.18 with the $0.16 impact from Pittsburgh. And then you can see third quarter there, 5% to 6% on revenue, $1.06 to $1.10 on EPS.

Just the last thing I will highlight and looking at first call right now, when you look at it, you're going to say, "Wow, it's ranging from here to here." It appears that about half the numbers are GAAP, including University of Pittsburg, and about half the numbers are non-GAAP excluding it. So I just make a plea that when you look at the estimates, it's going to be a little confusing this year on whether they're looking at GAAP or if they're excluding the impact from that settlement.

And with that, I'm going to turn it over to Kolleen. Thank you.

Kolleen T. Kennedy

Great. Thank you, Elisha, and good morning, everyone, if it's still morning. Good afternoon. I'm here to talk to you about Oncology Systems and give you really an idea of where we're focusing in Oncology Systems to help support the big 5 initiatives that you've heard from Dow for the last few years. Really moving on growing our business globally, building our software and services organization. Our Services business is about 40% of Oncology Systems at this point in time. We want to make sure that as we invest in innovation. It's helping us to grow into those emerging and frontier markets, and that we're getting an appropriate return on that innovation investment. And finally, making sure that we have the right level of focus on operational excellence and driving additional profit for the company with those -- with that focus.

So looking first to going global, I'll start with North America. We think in the first half, we had a strong orders growth number at 8%. Q1 was exceptionally strong. We think there was a little bit of pent-up demand that slowed down a little bit in Q2, but overall for the first half, I think some terrific performance with 8% orders growth. We're -- as Elisha said, we really are starting to see on a global basis these large multi-hospital networks make major commitments for both equipment and services that are multi-year in length. And we, of course, book them as the deal plays out over that term so that as we have planned on what the sites are going to be for installation, we'll go ahead and book that within our 2-year booking window. So as I -- I'll talk about some of those, what the impact is to our financials, you'll see. But it's a very conservative approach, and that's what we're going to continue doing in terms of these large, multi-year deals.

Hospitals are still 90% of our markets in North America, and we think that the second half looks very promising in terms of our sales funnel.

EMEA, stable markets, perhaps with the exception, of course, of Eastern Europe and watching what's happening in the Ukraine and Russia. We did have 3% growth, service growth in the first half of 2014, with some very nice performance in India, with some large system wins in Algeria. I'll talk about that a little bit more, our big MOH win there. Southern Europe had a little bit of a comeback year-on-year, Spain and Italy. I think Northern and Western Europe, we had a very strong year in FY '13. So we are seeing that slow down a little bit in terms of government tenders, but overall, we're seeing some stability across our EMEA region and we expect to see that continue in the second half.

The big win in Africa you've heard about previously with respect to our Algerian $51 million administrative Ministry of Health award. We've booked about half of that, a little bit less than half of that, $23 million in Q2. There'll be a 5-year rollout for these systems. It's 18 systems with all the associated software across 6 sites in Algeria. We're partnering very closely with the Ministry on the deployment and implementation of this equipment. I should also point out that we'll be creating the Center of Excellence in Algeria as we roll out this equipment because we want to make sure that the clinicians, the physicists are all very properly trained on successful implementation of the equipment for patient care. So lots of good investment going into Algeria as we implement this big tender win.

At ESTRO, we just came back from Vienna, in terms of the European version of ESTRO. So it's a European Society of Therapeutic Radiologists and Oncologists. There were a little over 3,000 clinical attendees that came to this show. Varian had just an outstanding exhibits. We had not only in our booth for the first time our EDGE radiosurgery systems, we also had ARIA and Eclipse Version 13, which included RapidPlan. Really, our game changing knowledge-based treatment planning system. Very, very good reviews from the clinical community over in Europe. There were attendees, of course, from Canada and Australasia as well and India, but overall, just a tremendous performance. We had several symposiums in conjunction with ESTRO, where we had nearly 2,000 attendees across 3 different symposiums, really focusing on radio surgeries, stereotactic body radiation therapy and the implementation of RapidPlan in a clinical environment. So very, very exciting show for us. We think we've had some very positive feedback, and we'll continue to follow up on all the leads that we have there in Vienna.

Opportunities in Asia. Asia-Pac is a bit of a mix, I think is down. Elisha referred to -- we had a bit of a tough first quarter in general, 5% gross order decline. We did have, as you know, some headwinds in China, as I think everyone did probably in Q1. Seems to be balancing out in Q2 and we expect that we'll have a recovery there in the second half of the year based on the information we have at this time. We did have very strong double-digit growth, though, in the rest of Asia, Southeast Asia in particular, and we do think the second half looks strong in terms of our sales funnel overall.

The Rest of the World, Latin America and Australasia. Australasia in particular, we had an order from a large healthcare network called Genesis. 10 Tribune systems along with services that will be installed over the next 3 years. And this, I think, is just another example of those large systems making major commitments over time to a particular vendor. And certainly, we're doing everything we can to make sure that we're positioned properly, not only in terms of clinical capabilities of the systems that we provide, but making sure that we have the right economic proposal for these large systems as well.

Latin America. We are seeing some very strong performance, not only in Brazil, but outside of Brazil. Ecuador, Bolivia and Peru, for example, in Q2, where we booked some very high technology systems order. So we're seeing a bit of a transition in Latin America where it used to be some very basic technology to some more sophisticated systems. And we expect to see that trend continue.

Brazil. As you all know, we won the AD linear accelerator Ministry of Health tender earlier last -- or late last year. And we did have some very strong first-half in Brazil in addition to that MOH tender win. And as I mentioned, we are continuing to see not only the UNIQUE system with RapidArc being deployed into Brazil, but also some higher technology, higher-capability systems. We expect to start booking those linear accelerators -- we have not booked any of those AD systems yet -- in this fiscal year. We expect to start booking some of them in the second half as we learn more from the Ministry of Health about the phase implementation plan, where the systems are going to be put in and what that timing should look like.

Siemens Alliance. As you know, it's just been about 2 years since we signed the strategic alliance with Siemens back in April of 2012. We are seeing, really, I think some great momentum here. We had a little bit of a slow start, I think, as we were working through all the details of the commercialization aspect. However, I will say that our marketing and engineering teams have just been partnering in a really terrific way on a global basis at major trade shows around the world and we are starting to see that commercialization aspect really take hold. So, so far year-to-date, we've had about $80 million of orders come in from conversion of Siemens systems that will be executed then over the next few years. We had a really big win the Philippines, a Greenfield win for 3 Clinacs and we expect these to be going in over the next couple of years. And they are going to be building 5 additional cancer centers in the Philippines, so really starting to see some tremendous benefit in momentum from the strategic Siemens alliance.

As we look at software and services, we did acquire Velocity in the quarter, subsequent to the close of the second quarter. And really, for us, this filled a gap in our portfolio around image management. So Velocity really powers oncology care teams by transforming unconnected, in this particular case, imaging data into clinical knowledge. So it provides a tool kit that allows physicians to track that entire patient care journey from an imaging perspective and it provides them with information and dashboards so that they can make more informed decisions about patient care. So we think this is a real big win for us. It filled a gap in our portfolio, and we've gotten really terrific feedback from the community about this acquisition.

Services continues to roll. In terms of order growth in the first half, they were up 13% gross order growth year-on-year. We'll continue to invest in that business. As I mentioned, it's about 40% of Oncology Systems now. It does help us significantly on the margin perspective, and we're going to continue to grow that business on a global basis.

Innovation. Really excited to say that we've had our first EDGE treatments completed. And when I say first EDGE treatments completed, I just found out from the leads over at Champalimaud, they have now treated over 100 patients on the EDGE system in Lisbon, Portugal. We're very excited about that, and we have taken around $135 million worth of EDGE and EDGE system upgrade orders year-to-date. So just really validating the strategy that the team had for a complete Varian end-to-end radiosurgery and stereotactic body radiation therapy device.

In North America, we just had the grand opening at Henry Ford Hospital in Detroit. And this is -- they have a really great program there called Game on Cancer with the Detroit Lions, and Elisha was there for the recent opening. Some -- a lot of fun. They've started treating their first patients, and just like Champalimaud, they're going after those really complex cases very early. They're not starting with the simple ones. They going after multi-lesion patients and treating them very successfully with the precision that you need for radiosurgery.

When we look at cancer care, I think we've made, on a global basis, tremendous progress with breast and prostate over the years. But those 2 disease sites that are elusive and that remain on the horizon for successful treatments and improved outcomes really are lung and liver, and these are very important in certain geographies around the world. They provide the highest -- unfortunately, the highest level of mortality when you look at disease sites. And here, you can see Dr. Mary Feng from the University of Michigan. She specializes in liver cancer, and they've been really putting together some terrific programs to go after liver, which requires exquisite imaging capabilities on the delivery device. You need to have sophisticated motion management tools and then you have to be able to deliver that treatment very, very precisely. What she is seeing is that she's been able to extend liver patient's a lifetime from what used to be a liver diagnosis at maybe 1 to 2 years prognosis out to 5 and 7 years, which is quite significant for many patients. So really, one of our great partners at Michigan and a real strong focus on 2 of those very challenging disease sites, in this particular case, liver.

And when we close here, taking a quick look at operational excellence, I'm really thrilled to say that our operations, manufacturing operations team had a very aggressive productivity goal, and they are already, this year, 152% of performance towards that productivity goal. Certainly something that we're going to continue to focus on very strongly as we move into emerging markets. It is not as profitable a business in those particular regions, so we're focusing on finding that right balance between growth and then making sure that we maintain that profitability objective that we value so strongly.

With that, I'm going to turn it over to Sunny.

Sunny Sanyal

Good afternoon, everyone. It's great to meet all of you, and I'm really excited to be here. And I hope over the next upcoming months and years, I'll get to know each of you better. While Kolleen makes some beautiful machines, they're really terrific machines, what you see with imaging components is stuff that you don't normally see because they're embedded inside the different machines that the manufacturer sells. So the Imaging Components business is essentially a supplier of critical components for X-ray-oriented machines. So these are your general X-ray equipment, your CT machines, your mammography machines, C-arms, et cetera, and what we provide there are the tubes, the flat panel detectors and software components that are needed by these machines to operate. And so by definition, we work with manufacturers. We will work to get our products designed into their products, and that's how we sell. It's a business-to-business operation.

This year, we're going to try to break $700 million, or it's roughly a $700-million business, but the exciting thing is this business has a lot of opportunities to grow, and over the next few years, we hope to turn this into $1-billion business. Largely, the footprint, as it stands right now, are X-ray tubes, flat panel detectors, image-processing software and workstations. And then on the Security and Inspection side, it's a similar complement of tubes and detectors that go into a variety of imaging applications for cargo screening for security screening, industrial, non-destructive testing. The company is based in Salt Lake City. That's where the overall center of gravity is for these operations.

The growth drivers for this business is coming from the fact that the industry is moving from analog to digital. There's a big migration, a big push from going from analog modalities to digital modalities. That said, still, the majority of the equipment been shipped is still analog. That means there's a very long runway of opportunity for this business, both in terms of shipping new equipment, new digital modalities and getting our components inside those machines. But then also, there's a huge upgrade opportunity that, down the road, those sockets that have the analog equipment are going to turn over into digital modalities, and we're seeing that on the X-ray machine side. Analog X-rays converting into DR very rapidly. And then as this installed base of components gets out there, there's a steady stream of replacement units that are needed. So we see a very healthy trajectory for potential growth for this business.

We have a complete portfolio of products. You look at our tubes and panels, they cover pretty much every single modality, every single type of size of equipment. There are few things that are very unique to Varian, one of which is our technology on the tube side. We've come up with a technology, what we call is anode end grounded, which allows us to have a very small footprint for very high-power, high X-ray delivery system. And it's very -- this has been very, very successful at CT machines, where you have something that needs to rotate inside a CT and size and weight are very, very critical, at the same time to deliver high power.

We've had a lot of success in mammography. We're seeing some very good traction, very good market demand for software components. And on the flat panel detectors for the high-energy side, we're fairly unique. We can deliver -- these detectors that take a very high beating from very high-power X-rays, and we do very well there. So there's a variety of other products as well, and I intend to go into all of them, but there's some really critical Varian differentiators in both the tubes and panels that makes this components business so successful for us.

As you look at our footprint, where the -- where our business is, we go where the manufacturers go, essentially. So our customers consist of the global OEMs, who take our products into a variety of geographies. Fairly well-balanced all over the globe. Majority of our business still comes from Asia, which all the manufacturers, they're based in Asia. And as you look at where some of the growth opportunities are, as the global OEMs -- the big OEMs continue to grow, we'll see continuous spread of this footprint, more or less, proportionately. But in Asia, there are a number of local OEMs that we're now starting to work with, which is very exciting for us, particularly in China. There are a lot of new OEMs. And so for us, the way we market, the way we sell is we find manufacturers, we get them, we convince them that our products are the best that there can be, and we try to get them to engineer our products into their systems. And we see a good strong opportunity to continue to see growth in Asia, in China, through those manufacturers.

We see quite a few interesting wins around the globe. This is just a small sampling of some of the things that have happened in this geography over the last few months. We've -- first of all, we told you we've renewed our agreement with Toshiba. It's one of our largest customers, actually, the largest customer. We're glad that our relationship with Toshiba continues to remain very, very strong.

In North America, we recently renewed a very large flat panel detector contract with another OEM, and the flat panel detector business is doing incredibly well, and we're seeing very, very strong growth there. There was a lot of interest at RSNA last year with some of the new products we rolled out, particularly around mammography, around dental. And in EMEA, we're seeing successes in almost all of the major OEMs there. And so every OEM, even though they might have their own brand of some of these components, they're still sourcing from us because we make them better and cheaper and they like our quality and reliability.

At ECR, which is the European Congress of Radiology, this year, we introduced this notion of combining software plus our panels, our detectors, together into an integrated suite. That got a lot of attention because some of the newer OEMs that are trying to bring products to the market, it's almost trying to bring a C-arm to market. What they want is time to market. Their competencies, their specialization is in making that C-arm special and making it work. What they would like us to do is give them the other components that would cut down their time-to-market and give them a reliable component that has had years and years of experience behind it. So if you're a new manufacturer, that's a big deal to get a large part of your critical componentry from someone like Varian that has a lot of experience and has hardened it over the last few decades in the field. So we're seeing a lot of attention from this launch of software workstation platform to combine those with our other hardware components.

So as we look at software and services, we've -- we acquired a company called InfiMed a few years ago. With InfiMed, we have now created a workstation called Nexus that ends up being the driver workstation for the modality. So if someone's launching a mammography machine, this workstation can be used then to power that workstation, to power the panels, to power the -- connect with the power generators and other systems to essentially drive that modality. We think we're going to see quite a bit of increased attention in this area in Asia as well, and our initial conversation with the Asian customers around this are going very well.

The way we win is by engineering our products into our customers' products, and that, by definition, means we've got to continue to innovate. We're going to innovate with our customers. I'll give you a few examples, this one in North America. Mobius is a company that introduced a new CT for surgery, and embedded inside that CT machine -- this is a very small footprint. It's a beautiful machine, very small-footprint machine, very narrow Gantry. And they chose us because our technology delivers the right power levels, the right quality inside that small footprint, and it was very important to them. So our anode end grounded technology worked very well here. Mobius won some really good awards for this, and we're very excited about this.

Similarly, in Europe -- by the way, you see these in the forms of FDA approval announcements from the OEMs. We don't have permissions from the OEMs to use their names, because in a lot of places they don't disclose that they have third-party components in there. But from a global OEM globe manufacturer, they found -- we're finding very good traction with surgical C-arms. They're using our detectors in -- for their C-arms. Similarly, in China, we've got a DR manufacturer that recently said they got their products FDA-approved and they would be using our flat panel detectors.

In Japan, we continue to see success. One of our major OEMs also commercialized, and we've got FDA approval for universal RF, radiology and -- radiography and fluoroscopy system and our flat panel detectors, what we call those cone beam detector, embedded in their product. So this type of activity is continuing, and we're seeing ongoing traction in making -- building relationships with the OEMs and innovating and designing products along with them, side-by-side.

We've had very good volume increase in our products. We're in the process of expanding our facilities in Salt Lake City. We have roughly at 360,000 square feet of manufacturing space. We're adding another 120,000 square feet, most of it for flat panels, in order to accommodate the growth of the flat panel detector business.

We also will -- in keeping with our needs to continue to reduce our cost of goods, we're going to backward integrate into our supply chain and take one of the critical components -- and we'll -- which is a coating that we put on the glass, and we will bring it in-house. And we're using this factory expansion as an opportunity to put in the equipment that we need to grow, to deposit caesium iodide on the glass. It's a -- it will be very good for us from a time-to-market, from a lead time perspective in manufacturing, as well as from a costs perspective.

And about cost reduction overall. From an operational excellence perspective, this business depends and thrives on ongoing improvements in our technology platforms to take cost out, as well as in manufacturing -- improving manufacturing processes to bring costs down. And we've essentially planted a flag on Six Sigma and Lean, and saying there are 2 techniques that we will use to continuously improve the quality of our products. So not just the cost of quality, meaning warranty, reduced warranty costs, reduced scrap, but also, take the cost out of the products. And that's done through a combination of both redesigning the products -- so for example, in the case of that tube up there, we went from one version of the tube to another version of the tube and took out about 30% of the costs out by redesigning how the tube operates and all the components that go inside those tubes. And this is the kind of effort that is going daily and regularly in our business to take cost out.

The only way we will really sustain our position as a component supplier with the major OEMs is if we can continue to make these products better and cheaper than they can and make this -- make it a relevant part of their process so that they don't have to bother doing it. Hand it to Varian, and Varian will take care of it with high quality. So cost reduction, quality improvement is a major part of everything we do, and it'll continue to be a top focus.

And then similarly, from a sustainability perspective, while this is great from a green perspective, we've done -- we've got -- the team is all excited about all the things they are doing in order to improve our sustainability track record. This has real material impact on us. Over the last few years, we have realized over $90 million in cost savings. These are in the form of lowered electricity bills; we're saving $0.5 million or more per year now in electricity bills. We're reclaiming components every place that we can. We're reusing our materials, and so there's a very large momentum around recycling, reuse and repurposing our -- everything that we can.

So a lot of effort going in [ph] this business. Everything is directed at becoming the best possible component supplier. And there's a ton of opportunity in this business to add more components and get into new segments in this -- in the imaging space.

Not sure what happened there. Oh, here you go. So with that, let me turn it over to Dow for -- to talk to us about protons.

Dow R. Wilson

Great. I will close up with protons and then open up for Q&A here in a second. If anything's changed in the business over the last year, this is probably the single biggest change. The market continues to make progress. We do see the market in proton therapy growing. 2010 is probably a $300 million market, seeing a -- roughly a doubling of the market and our share is growing. I'll show you that chart in just a second. We do have 510(k) clearance of our product and are doing patients in San Diego. I think that some of our own company-specific momentum, so that's been good to see. And especially there's been very broad acceptance of our technological and clinical advantage, which is intensity-modulated proton therapy. The technology that we put in play there is something called scan beam technology, which gives us the best clinical outcome in proton therapy. But just as importantly, it gives us far and away, the highest throughput in proton therapy. So we feel very good about our relative competitive position.

Scripps has started doing patients, started their first patients in February. We believe that this is the fastest ramp of any proton center in the world. We did 36 patients on 2 Gantries. We still have 2 Gantries yet to commission over the next 6, 7 weeks. It's a 4 Gantry, 1 Fixed Beam center and so we've still got some work to do to complete the other Gantries. But the first 2 Gantries have come up very nicely. And in a single day last week, we did 36 patients. So very glad to see the momentum and volume on patient point of view.

You did read about our press release at Cincinnati Children's Hospital, one of our -- one of the U.S.'s leading children's hospital. A cash deal of about $50 million, not requiring any financing. That's the first order that we booked in protons in a while. Also, this last quarter, we booked a Gantry for Paul Scherrer Institute. The PSI is arguably one of the leading centers in the world in proton therapy. They've been at it about as long as anybody in the world. And they have signed -- they have an existing cyclotron in center and they're adding a Gantry to that center. They have committed to us for that, as well as doing some joint development projects together focused on cost reduction that will be pretty exciting.

When you look at kind of what we've got in the backlog, we've got -- what you're seeing on the left is systems well underway: University of Maryland; Emery, Georgia proton center; and UT Southwestern Medical Center. Both -- we signed agreements on all of those, but they are contingent on financing Maryland. As Elisha said, we should close here this quarter, next quarter. But the other 5 on the left are well underway and in the backlog.

Just a comment on the market. We are seeing, as I said, a pretty substantial uptick in the market, and we feel reasonably confident about our ability to see another order, or 2 or 3, yet this year. We're competing pretty aggressively on 6 to 10 proton centers worldwide. And so it's nice to see that change in the market kind of post-recession, and some of the financing issues that we've struggled with in '08, '09, and '10, those seem to be behind us and the market is picking up. You can see our momentum in the marketplace. Varian's the dark blue. I think the point is from 2012 to 2014, we're the market leader in proton therapy and wins and look forward to taking everything we know about radiation oncology and applying it to proton therapy and widening our lead in this business.

We did introduce late last year, early this year, our probing compact system. This is a one-room system with extremely high throughput. We can do significantly more patients in this system with our capability than our competitors. It leverages our Compaq Cyclotron and Gantry position, as you can see here. A little more expensive than our competitors but clearly, for the patient volume that you can get on our competitor systems, you'd probably need 2 rooms to do what we can do with one on our ProBeam compact system. Just launched that and look forward to see things some momentum out of this product. Probably more next year than this year.

But proton business, I think, we've got some momentum in. We are -- it is in investment mode. At an earnings level, it's costing us about $20-plus million this year. Next year is probably not quite as bad. To break even, probably 3 -- 3 to 4 systems a year is what we need. And we do think that long-term, that this is a very important investment for the company and that proton therapy will be a very significant part of radiation therapy in our lifetimes and in our children's lifetime.

Transitioning to the long-term growth. Kolleen kind of showed you what the market looks like. We are seeing some changes in the market. I'll kind of skim through this and just let you know that we do see, in oncology, a market that's growing about 5% to 8%. In Sunny's business, we see continued momentum. A little bit of a pause this year, but we feel very good about where this business is headed and that we've got a long-term market potential of 10% to 12%. And then in proton therapy, $200 million to $300 million Varian opportunity, as we build that business.

So the investment summary. The company, as we look back on those 15 years, I think one of the highlights is consistency. We've delivered. The cancer business is a very good business for us long-term. The X-ray components business has been rocking, and we see that consistency and top line and earnings growth continuing then with our proton business as a chance to add some growth. More and more, the company is an annuity. As Kolleen said, the service business is 40% of Oncology. A very high profit position there and a good solid business that continues to grow double-digit. We see that continuing, especially outside of the U.S., with -- U.S. is largely a replacement business, but still a huge piece of our o U.S. [ph] business. Our new sockets drives installed base growth and the growth of our service business.

Our team's very much focused on execution, strong balance sheet, as Elisha said, with good cash flow that we'll continue to use a good chunk of that returning shareholder return through stock buybacks and a great record of performance. And with that, I'll kind of modulate here -- moderate, and we'll take questions. And please go ahead. Sal [ph]?

Question-and-Answer Session

Dow R. Wilson

So the question was the University of Pittsburgh settlement, what was the basis of it, was it a record for us? Short answer to that is yes. The technology at stake was something called respiratory gating. It was using video imaging to monitor patient motion. We had lost in 2007 at the lower court and the court had found damages to the tune of about $100 million. So we appealed. We thought we had a very good chance on appeal. We were frankly a little bit disappointed in the result. But it was a lot less than what had happened at lower court. So I'd say most of all, we're thrilled that this is behind us. It did have an impact on the quarter. Yes, it is the largest -- it may not be the largest single intellectual property deal we've done. I think we've had other technologies that have been worth as much or more, but certainly in a lawsuit basis, it's the most we've ever paid.

Unknown Analyst

[indiscernible]

Dow R. Wilson

The panel ruled in favor of the University of Pittsburgh on intellectual property infringement and that they had some prior art on the basis of doing this video, use of video in monitoring patient motion and translating it to where the tumor was. David?

David H. Roman - Goldman Sachs Group Inc., Research Division

David Roman from Goldman Sachs. A question maybe for you or Kolleen. Normally at these meetings you do show the slide that breaks down replacements, number of units by age in the U.S. install base, but I was hoping you could give us some perspective on how consolidation among providers influences that replacement cycle? Like how should we think about new units sold? Should I think about that as natural replacement minus the impact of consolidation, plus-or-minus any change in market share, such that the U.S. business is kind of flattish? Like, I go -- like, what are the inputs among those moving parts?

Kolleen T. Kennedy

So your thought perspective...

Dow R. Wilson

Kolleen, why don't you stand up?

Kolleen T. Kennedy

[indiscernible] trend a little bit -- oh, there were go, microphone. So our perspective is that the -- we have about -- over 1,000 systems in the United States right now that are over 10 years old. Our perspective is that a few of those that are being taken out of service will be balanced out with the replacement cycle that we see coming over the next few years. Just simply based on clinical need for SRS and SBRT capabilities, as well as the fact that the machines are just getting aged and they will need to be replaced over time. So we think it will be a little bit of a wash on the balance.

David H. Roman - Goldman Sachs Group Inc., Research Division

And if I may just follow-up on how that question -- how that dynamic flows into the total growth rate of the company. If I just use the numbers that Dow presented on market growth opportunities and use your business mix as a sort of 7% to 8% if not better top line growth portfolio then I think on gross margins, you said, all the moving parts kind of keeps that flattish going forward and then you can manage your discretionary expenses and buy back stocks. Are you kind of saying this is a 7% to 8% top line and 11% to 13% type bottom line growth business over the longer term? I'm just wondering how we should sort of translate that message into the financial portfolio.

Kolleen T. Kennedy

So let me answer it for the total company, David, and that is that -- the gross margin, we expect going forward, Oncology, the drivers are going to be software and service and operational excellence [ph], cost improvement, offset by the shift to emerging markets. So gross margin for Oncology should be within that 43% to 44% that we've been talking about. We will strive for incremental improvement. Product mix is going to drive that by far more than any other factor in Oncology. So we'll get some incremental improvement. FY '14, as we've been talking about, is the year of investment. We consciously took R&D up by a full percentage point relative to the sales. Going forward, again, we should get some leverage at the operating expense line. So net-net, we will get some top line growth and some incremental improvement on the operating margin line coming a little bit from gross margin and leveraging our SG&A expenses. Did that answer your question?

David H. Roman - Goldman Sachs Group Inc., Research Division

[indiscernible]

Kolleen T. Kennedy

No.

Dow R. Wilson

Tycho?

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Just wondering if you can touch a little bit on clinical data. And with the migration to bundled payments, obviously there's a lot more burden on you and other vendors to kind of make the clinic arguments. So can you talk to the degree on which you're investing there, both for IMRT but SBRT as well? And ultimately, when do we start to see some data on proton as well?

Dow R. Wilson

Yes, and we're making investments in all 3 areas. The good news is that there's a pretty good body of literature on IMRT. So -- but that's accelerating, and we need to show it in lung and liver. The -- there's a lot of studies going on with SBRT. We are investing in lung and liver in frankly all markets. So we've got projects going on in the U.S. and in Asia for research. And then in proton therapy, I'd say our focus at this point in time is really kind of been getting the unit pulled out of the ground -- check. Now on to some clinical data. The good news is -- kind of the exciting thing about building this business from the ground-up is we'd formed a consortium with our users, and they've kind of all agreed to participate in registry-like ability in proton therapy. And I think that will give us a much better capability of providing the kind of outcome data that people are looking for.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And just a follow-up, do you have a sense of the mix that Scripps is doing now? How much is prostate versus more complex...

Dow R. Wilson

I'd say a strong 1/3 is prostate. They kind of started with a lot of the easier-to-do stuff and their director is one of the leading prostate guys on the West Coast. So that's been easy for them. But they've done a lot of head and neck. They've done some breast-cancer already, and really have done a variety of cancers. The only thing that they haven't really taken on yet is pediatrics. They're getting ramped up for that. They do have -- they've signed an agreement with the Children's Hospital in San Diego, and -- so they will be doing pediatric patients, but that has not -- there's more just kind of ramping up and making sure that they were secure with everything that they have in place before they turn that on. But they'll be turning that on in a matter of weeks. Jeremy?

Jason Wittes - Brean Capital LLC, Research Division

Jason Wittes from Brean Capital. So just 2 questions on the growth rates, one on Oncology, one on Imaging. One, the 5% to 8% Oncology rate you gave, I assume most of that growth is outside the U.S. in specifically emerging markets. And I just -- how do you characterize this, the Asian machines and the U.S.? I mean it sounds like that's not something you can just typically time. So it's not really in that number.

Dow R. Wilson

I think the biggest issue for us in the U.S. is reimbursement-related and I mean, it's as much a driver in this whole thing as anything else. We're -- as Kolleen mentioned, we're very pleased at the first quarter. We were very pleased at the second quarter. It's the first time in a while we've strung 2 good quarters together in the U.S. So we have felt some firming up of the U.S. business and we'll do very, very well if the U.S. can be flat to a little bit of growth. With -- as Kolleen mentioned, we've had a slow first half in China, largely due to some kind of structural purchasing decisions that are going on. But the funnel remains very robust and we think that will bounce back. We had a light first quarter in Japan. We had a very good second quarter in Japan. So that was good to see that bounce back. And then as Kolleen mentioned, we had a pretty good performance in the rest of Southeast Asia. So we think Asia will be a double-digit market for us in Oncology.

Kolleen T. Kennedy

International has been good. International has been hovering between 55% and 60% of our overall orders number. We're slowly seeing it inch up more reliably towards that 60%. We fully expect that that's going to continue to grow and certainly a part of that number of growth that you saw earlier is due to the services business as well.

Jason Wittes - Brean Capital LLC, Research Division

And just on the imaging business. The last, I don't know, 10 years, we've seen a huge -- I wouldn't call it a replacement cycle, an upgrade cycle from X-ray tubes to flat panel, X-ray tubes. That's largely, I think, happened already. I think there's a second wave for the lower-cost machines, so that will get you a 10% to 12% growth rate. Can you just -- how much of that is based on the upgrades of the lower-cost X-ray machines and how much is it other growth initiatives that you have planned?

Dow R. Wilson

I think -- if you roughly -- most of the growth is still going to come from placement of new machines in -- both in the North America and in the U.S -- I mean, in Asia. So the upgrades, the U.S. is farther along in terms of upgrades. Asia and Europe is not that far along. There's still a very, very large install base of analog that hasn't happened yet. So yes, there's a huge, remaining opportunity on upgrades, that's mostly in the panels side, not on the tubes. But new placements in Asia are taking the lead in driving the growth, mostly again for panels.

Amit Hazan - SunTrust Robinson Humphrey, Inc., Research Division

Amit Hazan from SunTrust. Just 2 quick ones. First one is for Elisha. The larger deals you've been signing, maybe give us a little bit of a sense of the pricing dynamics there, or more importantly kind of the margin structure we should be thinking about as those deals start to come through.

Elisha W. Finney

Yes, so they tend to be multiunit, multiyear deals, as we talked about. So obviously, there's a little better pricing for anyone who comes in and orders 10 machines versus one-off. That is largely offset though by the fact that over these 5-, 7-, 10-year deals we have exclusivity and we're not in there having to battle over every single piece of software, every upgrade, every new machine over the next 5 or 7 years. And so at an operating margin level, I think we're probably about just as good. It obviously really helps us on the sales and marketing side.

Amit Hazan - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And the second question actually for you too, I guess. So it's -- on the revisions to backlog, specifically, Oncology. So if we look at Oncology only for the first half of the year, just give us a sense of where that trend is. Obviously coming off of the 4Q, the big revision, has there been a continuation of revisions on the freestanding side? And if so, where does that stand, in terms of just thinking about that number for the rest of the year?

Elisha W. Finney

Yes. So as you know, in the fourth quarter, we had a 4% backlog reduction from freestanding clinics largely. I think it was just this culmination of year after year of reimbursement cuts. We went out to ask, "When can we deliver this equipment?" It just got really old and so we had a lot of cancellations. We did a very, very deep dive on backlog and took out those orders that were aging and did not appear to be firm at that time. I think going forward, maybe there's a little bit of kind of a hangover, if you will, from that. Again, these freestanding clinics have just been berated year after year after year. We did have cancellations. Every company has cancellations. And don't let them tell you otherwise, because it happens invariably. But there's still was maybe just a little bit of some of these aged orders that we have taken out over the last 2 quarters. Again, as we move into Q3 -- in Q2, in the year-ago period, for whatever reason, cancellations were very, very low and you're going to get huge variability in any given quarter. If I look at Q3, the comparable gets pretty close, as again we had kind of an average rate of cancellation in the year-ago period. So if you look at it in a year, it's going to be 3% to 5% of backlog. You might end up at 6% one year or 2% another, but it's going to be somewhere in that range as a total of backlog that gets taken out either as a cancellation or as a dormancy when it just gets too aged.

Unknown Analyst

How do you get -- what is your strategy in getting around the reimbursement challenge in the U.S.? And what's your exposure in Russia, given the fact that the government -- our government is trying to dissuade U.S. companies from doing business in Russia?

Dow R. Wilson

On the U.S., I mean certainly the number one strategy

[Audio Gap]

pretty significantly outside of the U.S. We have a much stronger sales channel in China, a much stronger sales channel in India. We've invested pretty significantly in Southeast Asia, Eastern Europe, Northern Africa. Kolleen is making some additional investments this year in all of those markets and Africa. Believe it or not, we see continued growth in those markets, especially from kind of oil states and good foreign exchange position countries. In Russia, we have a fairly small position [ph]. Our exposure -- Elisha, you want to make a comment on exposure in Russia?

Elisha W. Finney

About $30 million a year is what we've historically done. Does that sound about right? $30 million to $40 million a year. We took -- there is no backlog in the Ukraine currently. And the second quarter orders were 0 in Russia, so...

Dow R. Wilson

It was one of the dark spots in the second quarter, as we had no volume from Russia in the second quarter.

Elisha W. Finney

We do have a Proton Therapy System that's being installed in Russia and that is continuing, at this point, is continuing.

Dow R. Wilson

In St. Petersburg.

Unknown Analyst

Well, Russia has a high incidence of smoking and cancer, right? So...

Dow R. Wilson

There's a big need. There's a big need. There's other issues standing in the way right now. Yes. David? No? Steve, well, you haven't had a chance yet. We'll let you go first.

Steve Beuchaw - Morgan Stanley, Research Division

It's Steve Beuchaw from Morgan Stanley. A question on software. One, sorry if I missed it, but can you give us a sense for what the growth profile in that businesses look like over the first half of the year? And two, is that still a double-digit grower going forward? And three, I have a funny hunch that this year could be an interesting year for you in software in terms of new product launches. Care to make any comments about what we might see, what's in the pipeline?

Dow R. Wilson

Yes, let me start with the last one. In terms of new launches, RapidPlan is -- has taken the world by storm. As Kolleen mentioned, we launched it in Europe. We continue to see a terrific response from customers to RapidPlan. We think this is going to be transformative to the way radiation therapy is delivered and has a huge impact on the quality of radiation therapy. But especially gets delivered in emerging markets, because they can come right to the most advanced center of the world, educate themselves on how they would do a case of treatment and then be able to provide that level of treatment for our customers because they're able to leverage the community knowledge. So I think in treatment planning, we've continued to grow share. We have a terrific product, our Eclipse product. Our treatment planning business should be a strong double-digit grower. In our oncology information systems, I'd say on the first half, we probably were growing a little less than 10% in the first half in our oncology information systems business. As that world changes to informatics though, we see a big cycle coming. I don't know if we'll execute that second half this year or next year, but Kolleen and the team are investing pretty heavily in informatics. You want to say -- add any color there, Kolleen?

Kolleen T. Kennedy

Yes, just a couple of things. We are seeing that business transition from a license business to an SSA-driven business, kind of as a Software-as-a-Service approach, which is what we would expect over time with software. Which we think is really great overall for the long-term growth of that business. And the other piece is we've done a series of small, sort of IP acquisition, aqua [ph] hires if you call them. Over the last few months, we acquired a tool from the national health system in the U.K. called R-PORT. We're going to use that as a professional services opportunity in our services business to go out and help customers on a global basis take a look at their utilization and determine how to best manage the equipment and the resources that they have. So that was one IP acquisition we did. The second one is a capability from Eurocast which was developed over in the Netherlands along with Siemens, and it really is the framework that we're utilizing from a RapidPlan perspective to take that global. And it already has [indiscernible] users on a global basis, some real luminaries. Velocity, we talked about as well and we also had a small acquisition from an organization called Gamma Basics, which has a cloud-based physics QA tool. So we're really putting in place a series of pieces on our software business to keep us at that double-digit growth level in the long-term, and we're going to continue down that path.

Elisha W. Finney

Let me just make one comment, which is when you read the Q we filed yesterday, you'll see when you're on the product section of oncology systems that software licenses are down for the first half, as Kolleen talked about. That was more than offset by the software service agreements, which was reported in our service organization. So net-net, it's up, but you'll read it in the Q and it'll look like our software business is down when in fact it is not.

Steve Beuchaw - Morgan Stanley, Research Division

That's helpful. And then one follow up on the U.S. market. I guess it was unexpectedly that the smaller player in the market has opted to draw quite a bit of attention here in the last week or so to -- they're gaining position on GPO contracts. I don't think most of us in the room have taken a very hard look at GPO contracts as a driver of the business in North America historically. Can you comment on to what extent GPO contracts are important for the business, and how these developments may or may not impact your thinking on your prospect in the U.S.?

Dow R. Wilson

I signed a lot of GPO contracts when I was at GE that I got 0 from. So an order is an order. And when I get a purchase order, I can book it and tell you about it, and that's kind of where I am parked. I mean, it's an indicator, so you always have to pay attention to it. But I wish I could tell you my track record on GPO execution was 100%. It's not.

Kolleen T. Kennedy

Yes, I would agree with you, Dow. We have numerous GPO contracts where either the sole source vendor, preferred vendor, shared vendor status. We take it to the bank when we actually have an order.

Unknown Analyst

Maybe just a follow-up for Elisha. In your presentation -- and this has come up I know several times before. You've had an underlevered balance sheet for at least as long as I've been following [indiscernible], not as long as all 15 years, but certainly -- at what point does that become a negative for the equity holders in this company? And when do you start thinking about something such as a dividend to provide more consistent return of cash to shareholders? Then my follow-up, because I know you're going to make a comment about where your cash is domiciled, is there's been a lot of noise or sort of M&A activity in this space for tax planning purposes over the past couple of months. Maybe just your thoughts on potentially other structures you could look at to get your cash back.

Elisha W. Finney

[indiscernible] as our business becomes more global just by definition, as the profits start to accumulate offshore, we should see the tax rate start trending down. And we are. In fact, we've seen that -- I think at the time it's been, we were 36% or so tax rate, should be roughly about 28% this year. So that is one advantage to the business going -- growing offshore. In terms of the tax holiday, we're not counting on it. I mean, from everything I'm hearing, it's just not happening. We look every single year at tax strategies and what we can do and how can move IP into Switzerland and things like that to optimize the tax rate. But we're not counting on a tax holiday to make that happen. In terms of debt leverage, we did take on $500 million of debt last summer as you know, so that we could continue with a fairly aggressive share repurchase program. We're buying anywhere from 1 million to 2 million shares per quarter. It's accretive. Most importantly, it does allow us more flexibility. Admittedly, if we were to see a great acquisition that came along, it would put us in a position where we could execute on that. We spent a lot of time at the board level talking about dividends versus share repurchase. We have come down on the side of share repurchase programs. And I would just say, we've been consistent. I think with the exception of one, we have actually executed on every single board resolution on repurchase. So we are, in fact, not just announcing it but returning cash to shareholders. Return on invested capital is somewhere north of 25%. When I look at it relative to our peer group, we are putting every single dollar plus some that we generate in the U.S. into our share repurchase program. So we'll continue, as long as interest rates are low, to do that. But obviously with dividend -- diminishes our flexibility, and as we move in to a higher interest rate environment, we would become a serial borrower at that point, and just would like the flexibility.

Unknown Analyst

Dow, I'll ask the obligatory question about July and the physician fee schedule. What are you thinking and hearing from D.C.?

Dow R. Wilson

You gave me a warning on this and I don't know that I have a better answer. The question was relative to reimbursement, what do we see. I guess, 8 weeks ago we would've been pretty bullish. We felt pretty -- there was some -- kind of some indication that last year's reimbursement was going to be a little longer-term. And so we were feeling pretty comfortable about that. I think that maybe there's been a little erosion on that. I don't know that it's any different than our ongoing forecast. Our ongoing forecast has been to kind of count on a 4% reduction every year. Historically, we've done better than that. And I think that's kind of what we were hoping that this year ended up. But I'd say, maybe a little more towards the 4% than at least we were feeling 8 weeks ago. Jason?

Jason Wittes - Brean Capital LLC, Research Division

Just 2 follow-ups. One, you mentioned the single-room proton facility or center. When will that be available for installation? And exactly what is the rough ASP on that?

Dow R. Wilson

We are selling it now. So the usual cycle is if there's, at a minimum, a quarter to 2 for somebody to make a decision -- the reality is most folks are taking longer than that. So I suspect that we probably won't book our first order on this until late this year early next year probably. And that pricing, depending on how it's configured, $30 million to $35 million.

Jason Wittes - Brean Capital LLC, Research Division

And should we assume that in the outer years, especially over the next 2, single-rooms really take over as the focus of the proton market?

Dow R. Wilson

It's going to be interesting to watch. I'm not -- we don't have an offering there. There is definitely a single-room market. The market has kind of drifted back and forth, multi-rooms, single rooms. I think early on, there were a lot of build-it-and-they-will-come kind of mentality in the market. I think it's hedged back off the big 4- and 5-room centers. But I think people are still concerned about the asset richness of the single room center and getting a little bit of scale on that. So I -- we're seeing a lot in the 2- and 3-room market.

Jason Wittes - Brean Capital LLC, Research Division

Okay, great. And then, just a quick follow-up for Kolleen. You mentioned the average size of orders has been increasing. Can you -- care to give us some parameters around that?

Kolleen T. Kennedy

Yes, I mean it's a -- it's got to do with the consolidation of health care networks here in the U.S. I mean, government deals aside, which clearly we're excited about, but they do increase the lumpiness of the business on oncology system. So we're seeing them anywhere from $10 million, sometimes upwards of $30 million, including equipment and services over a period of time. And again, we have a very conservative booking strategy there. We'll continue to follow that policy. But that's sort of the range that we're seeing happening. And we're not doing press releases for all of them. But I think that in many instances, there's a tremendous amount of excitement and enthusiasm on both sides when a decision is made in this particular regard. But it does make it a little bit more like the proton business in terms of it being unpredictable about when these larger deals will close, because it takes longer in the negotiation process.

Jason Wittes - Brean Capital LLC, Research Division

So we're talking [indiscernible]?

Kolleen T. Kennedy

It depends. It depends on the particular deals. Sometimes they're more than that. Sometimes they include software. Sometimes they don't. It just depends on the particular configuration of that network.

Unknown Executive

That was it. We have time...

Dow R. Wilson

One more. Sal, go. You get the last one.

Unknown Analyst

At your components business, is there a risk that you end up putting your customers [indiscernible] with you?

Sunny Sanyal

So most of our customers make their own components as well. So what happens is, at some point, either for new product launch or new product introduction, from a time-to-market perspective, they need a different tube, their internal cycle times tend to be much longer than ours. So what we're finding is, over the years, most of the OEMs, global OEMs, have shifted several of their product lines to us and they keep expanding that. And as time goes by, that momentum keeps growing, because it comes less and less important for them to build their own tubes and rely on us for the tubes, rely on us for the flat panel detectors. So, yes, our customers also make their own components. That's the established ones. The newer OEMs are starting out by saying, "It's not worth it. I'm not going to spend 10 years trying to build a perfect tube when I need to bring this mammography unit to market in the next 6 to 9 months." So they are more systems integrators. So we're seeing a lot of this in Asia. We're seeing some of it in Europe, where the newer OEMs are coming to us directly for our expertise and the track record of having hardened these products and processes.

Unknown Analyst

[indiscernible]

Sunny Sanyal

No.

Dow R. Wilson

Oh, no. No.

Unknown Analyst

So you don't have [indiscernible]. What was your job at GE?

Sunny Sanyal

So GE, I started out -- it was largely in the GE Healthcare IT business. So biomedical PACS, medical imaging, software, clinical information systems. I worked for Dow 12 years ago.

Dow R. Wilson

So thanks for joining us. See you at ASTRO, if not earlier.

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