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Leading integrated radiotherapy systems maker Varian Medical Systems (VAR - Analyst Report) reported third-quarter fiscal 2011 earnings per share from continuing operations of 83 cents, matching the Zacks Consensus Estimate and beating the corresponding year-ago earnings of 74 cents. Profit increased 7.3% year over year to $98.6 million, riding on higher sales of oncology systems and X-Ray products.

Revenues & Orders

Sales were up 12% year over year (up 9% on a constant currency basis) to $649 million, beating the Zacks Consensus Estimate of $643 million. Order backlog increased 10% to $2.3 billion at the end of the reported quarter. Growth was led by increase in demand for newer products of both Oncology Systems and X-ray segments.

Segment Results

Oncology Systems’ sales increased 12% year over year to $513 million, boosted by healthy demand for the company’s radiotherapy, brachytherapy and radiosurgery systems. Net orders were up 9% to $553 million with no increase in North America and 18% growth in international markets.

Varian benefited from strong demand for its TrueBeam system, orders for which represented 40% of all systems ordered during the quarter.

Varian’s X-Ray Products business had a robust quarter with revenues climbing 18% year over year to $121 million. Net orders were boosted 17% to $121 million. The company attributed the growth to higher demand for radiographic imaging panels.

Revenues from the Other category slipped 18% year over year to $16 million. Net orders for this business were $17 million, down 12% year over year.

Margins

Gross margin dropped to 43.1% from 44% a year ago while operating margin slipped to 21.6% from 22.6%. Gross margin was adversely affected by a number of factors including retrofits in the Oncology segment and a difficult situation in the Other category.  

Balance Sheet and Cash Flow

Varian finished the quarter with cash and cash equivalents of $567.9 million, down 3.4% year over year, with long-term debt of only $18 million, lower 21.7% year over year.

Outlook and Recommendation

The company has increased its earnings per share target, for fiscal 2011, to a band of $3.42 and $3.45, up about 16%, from its earlier range of $3.39 to $3.45. Further, Varian continues to project revenue growth of 10% to 11% for the year.

Varian is a leading manufacturer of integrated radiotherapy systems for treating cancer and a premier supplier of X-ray tubes for diagnostic imaging applications. The company operates in a technology-driven environment where success depends on the use of new technology, product development and upgrades. In the radiation oncology market, Varian competes with Accuray (ARAY - Analyst Report).

Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted RapidArc and TrueBeam radiotherapy technology, which is meaningfully contributing to its oncology net order growth.

However, Varian aggressively competes with well-funded competitors for a limited pool of sales volume. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, provide headwinds.

We currently have a Neutral long-term rating on Varian supported by a short-term Zacks #3 Rank.

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