Varian's EPS Beats, Profit Drops

Varian Medical Systems (VAR - Analyst Report) posted first-quarter fiscal 2012 (ended December 30) net earnings of 79 cents a share, beating the Zacks Consensus Estimate of 76 cents but missing the year-ago earnings of 80 cents a share.

Net earnings for the quarter slipped 6.5% year over year to $90.2 million (or 79 cents a share).

Revenues & Orders

Sales for the first quarter increased roughly 8% year over year to $625 million, but trailed the Zacks Consensus Estimate of $633 million. Varian experienced delays in orders in the North American oncology segment while sales of X-Ray products were hit by inventory adjustments by Japanese customers. Order backlog increased 14% year over year to $2.5 billion at the end of the quarter.

Segment Review

Revenues from the Oncology Systems unit rose 8% year over year to $488 million, backed by demand for the company’s TrueBeam radiotherapy and radiosurgery system. Net orders went up 6% to $485 million as an 11% decline in North America was more than offset by 22% growth in international markets. Net orders from overseas markets constituted 60% of net orders received during the first quarter. 

Varian’s X-Ray Products business ended the first quarter with sales of $113 million, up just 1% year over year. Net orders slipped 2% to $110 million.

Revenues from the “Other” category shot up about 56.3% year over year to $25 million in the quarter. Sales were driven by revenues from the setting up of the Scripps proton system. Net orders dropped 45.5% to $12 million primarily due to a fall in the security business and a difficult year-over-year comparison.

Margins

Gross margin dipped to 43% from 46% a year ago; gross margin was adversely impacted by difficult comparison, product mix and accounting policies for the Scripps proton system, which has a zero margin.  Operating margin edged down to 20.6% from 23.6%.

Balance Sheet and Cash Flow

Varian ended the quarter with cash and cash equivalents of $606 million, down 13.9% year over year, with long-term debt of roughly $188 million compared with $23 million in the year-ago period.

Outlook

Moving ahead, Varian expects revenues to grow by 10% for fiscal 2012. Net earnings per share for the fiscal have been projected to rise by roughly 15%. The current Zacks Consensus Estimate for earnings per share is $3.96 on sales of $2,845 million.   

For second-quarter fiscal 2012, the company envisions sales to grow roughly 8% year over year. Net earnings per share have been forecast to grow 12% to 13%. The current Zacks Consensus Estimate for earnings per share is $1.00 on sales of $713 million.   

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 TrueBeam technology, which is meaningfully contributing to its net order oncology growth.

Moreover, Varian enjoys a strong balance sheet marked by minimal debt and sizeable cash. The company uses a part of its healthy cash flows for share repurchases.

However, Varian competes with larger players in a technology-intensive industry. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, are significant challenges. We currently have a long-term Neutral rating on Varian supported by a short-term Zacks #3 Rank (Hold).

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