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Varian Medical Systems (VAR - Analyst Report) posted second-quarter fiscal 2013 adjusted (excluding one-time items other than stock based compensation expense) net earnings of $1.04 per share beating the Zacks Consensus Estimate of $1.01 per share.

Net earnings increased 4.6% year over year to $112.8 million (or $1.02 per share) in the fiscal second quarter. Net earnings include restructuring charges of $2.6 million.

Revenues & Orders

Revenues in the fiscal second quarter increased 7% year over year to $768.4 million, beating the Zacks Consensus Estimate of $765 million.

Order backlog rose 4% year over year to $2,752.6 million at the end of the reported quarter. Net orders dropped 14.7% year over year to $735.8 million.

Segment Review

Revenues from Oncology Systems increased 3% year over year to $581.8 million in the fiscal second quarter. Net orders for the segment dropped 2% (9% drop in North America partly offset by a 4% rise ex-North America) to $555 million. Overseas sales contributed to 58% of net orders for this segment. Total net orders were unchanged in constant currency on a year- over-year basis while net orders ex-North America were higher 7% in constant currency.  Net orders declined on a reported year-over-year basis on account of softness in developed economies, currency issues in Japan and difficult comparisons in Asia.

Revenues for X-Ray Products segment in the fiscal second quarter came in at $140.4 million, up 14% year over year. Net orders for the products spurted 10% to $144 million. This segment witnessed solid growth in orders for both flat panel detectors and X-Ray tubes.

Revenues from the Other category rose about 43.9% from the comparable year-ago quarter to $46.2 million in the reported quarter. Net orders for the category dipped $131 million year-over-year to $37 million.

Margins

Gross margin in the quarter was 41.6%, up 40 basis points (bps) year over year. Operating margin was higher by 30 bps at 20.3%.

Selling, general and administrative expense was 14.7% of sales in the reported quarter, relatively unchanged year-over-year. Research and development expenditure was 6.6% of revenues versus 6.5% a year ago.

Balance Sheet

Varian exited the fiscal second quarter with cash and cash equivalents and short term investments of $795.9 million, up 22.8% on a year-over-year basis. 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 about 8% for fiscal 2013. Net earnings for fiscal 2013 remain unchanged in the band of $4.09 to $4.14 per share.

For third-quarter fiscal 2013, the company envisions sales to grow roughly 7% year over year. Varian expects net earnings in the range of 98 cents to $1.02 per share for the third 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 long-term 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 (Hold). Cyberonics Inc. (CYBX - Analyst Report) and Abiomed, Inc. (ABMD - Analyst Report) are Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy) stocks, respectively, which are expected to do well.

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