Varian Medical Systems Meets on Earnings but Misses on Revs

Varian Medical Systems (VAR) posted a nearly 5.0% rise in adjusted earnings per share to $1.08 for the third quarter of fiscal 2014 ended Jun 27, 2014 (including a 6 cents impairment charge related to a portion of the company’s existing equity investment in Augmenix – a privately-held company developing minimally invasive hydrogels for radiotherapy) from $1.03 for the comparable quarter of fiscal 2013. With this, earnings met the Zacks Consensus Estimate for the quarter.

VAR’ earnings also lie within its guidance range of $1.06 to $1.10 for the quarter. Adjusted net earnings were $115.1 million in the quarter (including the $8 million impairment charge), up 2.0% from $112.8 million in the third quarter of fiscal 2013.

Varian Medical Systems, Inc - Earnings Surprise | FindTheBest

Revenues in the quarter scaled up 3.0% to $747.7 million, missing the Zacks Consensus Estimate of $766 million. Thanks to strong gross orders in Imaging Components and Particle Therapy businesses, which more than offset t 1% decline in Oncology Systems orders. The fall in Oncology Systems orders is attributable to weakness in Japan that eclipsed double-digit rise in orders in developing markets.

VAR had backlog of $2,869.4 million at the end of the third quarter, up 4.2% from $2,752.8 million in the comparable quarter a year ago.

Operating earnings slid 7.9% to $142.5 million while adjusted operating margin dipped 220 basis points (bps) to 19.1% from 21.3% a year ago. The decline is attributable to a 16.3% rise in operating expenses to $181.2 million in the quarter.

Segment Results

Revenues from Oncology Systems segment inched up 3.0% to $578.2 million in the quarter. Oncology Systems gross orders inched down 1.1% to $620.4 million but net orders rose 1.7% to $591.7 million in the quarter. Gross orders in Oncology Systems registered solid gains in emerging markets including Latin America, China, and Eastern Europe, which helped partially offset weaknesses in Japan and the U.K.

Orders went up 2% in EMEA and almost flat in North America. It went down by 6% in Asia with a sharp decline in Japan. However, orders grew 20% in China, reflecting market share gains. Oncology Service, which comprises 40% of Oncology orders, recorded another quarter of double-digit growth in the quarter with strong performance in North America.

Revenues from Imaging Components (comprising X-Ray Products and Security and Inspection Products) segment went up 2.3% to $161.8 million in the quarter, driven by solid gains in gross orders. Gross orders rose 12.2% to $162.3 million while net orders upped 12.8% to $161.4 million in the quarter, driven by strong X-ray tube and flat panel product lines businesses.

Revenues from the Other segment (comprising Varian Particle Therapy businesses and the Ginzton Technology Center) rose 14.9% to $7.7 million. Gross orders rose significantly to $57.5 million from only $1.3 million a year ago while net orders also rose substantially to $57.4 million from just $1.4 million in the prior-year quarter, all driven by booking of a major order for a ProBeam proton therapy system at the National Taiwan University in Taipei.

FDA Clearance of Calypso Transponder

Just before the earnings release, VAR revealed that it has received the 510(k) clearance from the U.S. Food and Drug Administration (:FDA) for its Calypso soft tissue Beacon transponder. This product is helpful in boosting the precision of radiotherapy and radiosurgery treatments for cancer.

The Calypso transponders can be implanted within soft tissue anywhere in the body, except the lungs. After being implanted, the Calypso GPS for the Body system transponder is capable of continuously tracking and monitoring the position of the transponders, so that the high energy treatment beams can be accurately aimed to minimize exposure of surrounding healthy tissues to it.

Financial Position

VAR exited the quarter with cash and cash equivalents of $926.0 million as of Jun 27, 2014 compared with $1,117.9 million as of Sep 27, 2013. Total debt (including current maturities) was $479.6 million compared with $506.25 million as of Sep 27, 2013. With this, long-term debt-to-capitalization ratio fell 90 bps to 21.9% compared with 22.8% as of Sep 27, 2013.

Cash flow from operations was $86 million for the quarter. During the quarter, VAR spent $103 million to repurchase about 1.3 million shares of common stock.

Fourth Quarter Guidance

For the fourth quarter of fiscal 2014, VAR expects revenues to increase in the range of 7 to 15%. The company also expects earnings per share in the range of $1.14 to $1.29 for the quarter. The current Zacks Consensus Estimate of $1.26 lies above the guided range.

Our Take

We are encouraged by VAR’s earnings beat and stellar performance in the emerging markets. However, we are concerned about rising expenses and weaknesses in some of the developed markets.

Currently, VAR carries a Zacks Rank #3 (Hold). Some better-ranked medical instrument stocks that currently worth a look include Accuray Incorporated (ARAY), Heartware International Inc. (HTWR), and IDEXX Laboratories, Inc. (IDXX). Accuray sports a Zacks Rank #1 (Strong Buy), while rest of the stocks carry a Zacks Rank #2 (Buy).

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