Varian Beats Estimates, Profit Up

Varian Medical Systems ( VAR - Analyst Report ) posted first-quarter fiscal 2013 adjusted (excluding one-time items other than stock based compensation expense) net earnings of 89 cents per share, beating the Zacks Consensus Estimate of 86 cents per share and surpassing the year-ago earnings of 79 cents a share.

Net earnings increased 5.7% year over year to $95.3 million (or 86 cents per share) in the fiscal first quarter. Net earnings include restructuring charges of $4.1 million.

Revenues & Orders

Revenues in the fiscal first quarter increased 8% year over year to $678.4 million, beating the Zacks Consensus Estimate of $676 million. Sales were boosted by healthy growth across the company’s Oncology and X-Ray franchises.

Order backlog rose 11% year over year to $2,785.2 million at the end of the reported quarter. Net orders increased 2.2% year over year to $619.2 million.

Segment Review

Revenues from Oncology Systems increased 8% year over year to $524.3 million in the fiscal first quarter. Net orders for the segment dropped 2% (down 1% in terms of constant currency) to $476.9 million. Overseas sales contributed to 56% of net orders for this segment. Net orders were lower 2% in constant currency ex-U.S.

Revenues for X-Ray Products segment in the fiscal first quarter came in at $132.9 million, up 18% year over year. Net orders for the products spurted 21% to $133.2 million. This segment witnessed solid growth in orders for both flat panel detectors and X-Ray tubes, gains in market share and contributions from newer products.

Revenues from the Other category declined 14.2% from the comparable year-ago quarter to $21.2 million in the reported quarter. Net orders for the category also dipped about 21.6% year over year to $9.1 million.

Margins

Gross margin in the quarter was 42.9%, down 10 basis points (bps) year over year. Operating margin was lower by 30 bps at 20.3%.

Selling, general and administrative expense was 16% of sales in the reported quarter, up 33 bps. Research and development expenditure was 7% of revenues, flat year over year.

Balance Sheet

Varian exited the fiscal first quarter with cash and cash equivalents and short term investments of $807.3 million, up 27.8% 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 continues to expect revenues to grow by 8% to 9% for fiscal 2013. Net earnings for fiscal 2013 have been marginally revised in the band of $4.08 to $4.16 (earlier $4.06 and $4.16) per share.

For second-quarter fiscal 2013, the company envisions sales to grow roughly 5% to 6% year over year. Varian expects net earnings in the range of 98 cents to $1.03 per share, including a restructuring charge for the second quarter.

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 ) .

The company is poised to increase its market share in radiation oncology. It currently enjoys a healthy demand for its coveted TrueBeam technology, which has meaningfully contributed to its net order oncology growth. Varian’s TrueBeam was designed to treat tumors with beams of high speed and precision. It incorporates several technological innovations such as patient positioning and managing his/her motion. Given its high intensity nature, TrueBeam can dispense strong dosage over twice as fast as that possible with earlier equipment.

Moreover, Varian continues to post decent results despite the contagion of economic problems in Europe and sustained softness in certain end markets. It enjoys a strong balance sheet marked by low debt and sizeable cash. The company also periodically 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.

The stock carries a Zacks Rank #3, which translates into a short-term Hold rating. Cantel Medical Corp. ( CMN - Snapshot Report ) and Cyberonics Inc. ( CYBX - Analyst Report ) are Zacks Rank #1 (Strong Buy) stocks which are expected to do well.