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Varian Medical Systems (VAR - Analyst Report) recorded third quarter fiscal 2012 net earnings of 96 cents a share, beating the Zacks Consensus Estimate of 93 cents a share and surpassing the year-ago earnings of 83 cents a share.

Net earnings improved 10.3% year over year to $108.8 million in the reported quarter.

Revenues & Orders

Revenues for the third quarter moved up almost 9% year over year to $705.3 million. Revenues missed the Zacks Consensus Estimate of $712 million. Order backlog increased roughly 16% year over year to $2.6 billion at the end of the quarter.

Net orders declined marginally 0.3% year over year to $689.4 million. The contagion of global economic problems and volatile fluctuations in European currency affected the net orders in the quarter.

Segment Review

Oncology Systems segment revenues increased 7% year over year to $546.4 million. Net orders for the segment edged up 2% to $562 million. It reflected a 1% decrease in overseas markets and 4% growth in the North American business.

Revenues for X-Ray Products segment came in at $126.7 million, up 5% year over year. Net orders for the products declined almost 1% to $120.1 million. The segment was negatively impacted by a sluggish economy and lower product demand.

Revenues from the Other category doubled from the year-ago period to $32.2 million in the quarter. Revenues were driven by Security and Inspection Products. Net orders for the category declined about 58% year over year to $7.3 million.


Gross margin in the quarter was 43.6%, up 50 basis points year over year. Gross margin was helped by higher sales of X-Ray Products and Oncology Systems. Operating margin edged up 20 basis points year over year to 21.8%.

Balance Sheet

Varian ended the third quarter with cash and cash equivalents of $633.4 million, up 11.5% year over year. Long-term debt (including current maturities) stood at $6.3 million, flat on a year-over-year basis.


Varian revised its expected revenues to grow by 8% (10% earlier) for fiscal 2012. It was based on the fluctuations in currency exchange rates, especially the Euro. Net earnings per share for the fiscal have been projected to rise roughly 8% to 9% (9% to 12% earlier).

Varian is a leading manufacturer of integrated radiotherapy systems for cancer treatment, 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 has meaningfully contributed to its net order oncology growth.

Moreover, Varian enjoys a strong balance sheet marked by low 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 are currently ‘Neutral’ on Varian. The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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