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Varian Beats Comfortably; Up Y-Y

VAR ARAY

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Varian Medical Systems (VAR - Analyst Report) posted fourth-quarter fiscal 2012 net earnings of $1.08 per share, beating the Zacks Consensus Estimate of $1.03 per share and surpassing the year-ago earnings of 95 cents a share.

Net earnings surged 19.4% year over year to $120.2 million in the fourth quarter.

For fiscal 2012, Varian reported net earnings of $3.76 per share, edging past the Zacks Consensus Estimate of $3.73 and exceeding the year-ago earnings of $3.44 a share.

Revenues & Orders

Revenues in the fourth quarter increased 5% year over year to $756.1 million, well ahead of the Zacks Consensus Estimate of $747 million. Sales were boosted by healthy growth across the company’s Oncology and X-Ray franchise on the back of higher demand for newer offerings.

For fiscal 2012, revenues improved 8% year over year to $2807 million, also sailing past the Zacks Consensus Estimate of $2801 million.

Order backlog rose 12% year over year to $2,844.3 million at the end of fiscal 2012. Net orders declined marginally 0.4% year over year to $963.6 million in the fourth quarter. However, net orders increased 6.4% year over year to $3,121.9 million at the end of fiscal 2012.

Segment Review

Revenues from Oncology Systems increased 7% year over year to $590.1 million in the fourth quarter. Net orders for the segment climbed 10% (up 12% in terms of constant currency) to $788.6 million in the quarter. Healthy demand for Varian’s latest radiotherapy and radiosurgery offerings and services coupled with robust double-digit growth in the international market were the growth drivers.

Revenues for X-Ray Products segment in the fourth quarter came in at $130.1 million, up 9% year over year. Net orders for the products spurted 15% to $145.3 million. The segment offset the sluggishness in the worldwide X-ray equipment market and witnessed solid growth in orders, contributions from newer products and share gain for panel products.

Revenues from the Other category declined 29.5% from the comparable year-ago quarter to $35.9 million in the reported quarter. Net orders for the category also dipped about 76% year over year to $30 million.

Margins

Gross margin in the quarter was 42.8%, up 100 basis points year over year. Operating margin remained flat on a year-over-year basis at 22.2%.

Selling, general and administrative expenses increased 13.2% year over year to $109.5 million in the quarter while research and development expenditure rose 4.6% to $45.9 million.

Balance Sheet

Varian exited fiscal 2012 with cash and cash equivalents of $704.6 million, up 24.8% year over year. Long-term debt (including current maturities) stood at $6.3 million, flat on a year-over-year basis.

Outlook

Moving ahead, Varian expects revenues to grow by 8%-9% for fiscal 2013. Net earnings for fiscal 2013 have been projected in the band of $4.06 and $4.16 versus the current Zacks Consensus Estimate of $4.09 per share. Varian’s projection includes an impact of 6 cents to 8 cents per share from the pending medical device excise tax.

For first-quarter fiscal 2013, the company envisions sales to grow roughly 8% to 9% year over year. Varian expects net earnings in the range of 83 cents to 88 cents per share, including a restructuring charge of 2 cents to 3 cents for the first quarter. The Zacks Consensus Estimate for the first-quarter fiscal 2013 is 88 cents.

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 posted strong financial results for fiscal 2012 despite the contagion of global economic problems and sustained softness in certain end markets. It enjoys a strong balance sheet marked by low debt and sizeable cash. The company also deploys capital to boost investor confidence via 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 carries a Zacks #3 Rank, which translates into a short-term Hold rating.
 

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