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Varian Medical Systems Beats, Earnings Flat Y/Y

Zacks Equity Research

Varian Medical Systems (VAR) posted flat adjusted earnings per share of $1.04 (including a 16-cent charge related to a previously announced settlement of patent litigation) for the second quarter of fiscal 2014 ended Mar 28, 2014 compared with the same quarter in the prior fiscal year.

However, second quarter earnings edged past the Zacks Consensus Estimate by a couple of cents. With this, VAR also met its own guidance of earnings per share for the quarter in the range of $1.00 to $1.04.

Revenues in the quarter inched up 1.3% to $778.5 million during the quarter, beating the Zacks Consensus Estimate of $775 million. Thanks to the strong gross orders in Imaging Components segment and proton business as well as mid-single-digit growth in Oncology Systems segment.  

VAR had backlog of $2,806.6 million at the end of the second quarter, up roughly 2.0% from $2,752.6 million in the comparable quarter a year ago.  

Adjusted operating earnings (excluding litigation settlement) slid 2.0% to $152.6 million while adjusted operating margin dipped 70 basis points (bps) to 19.6% from 20.3% a year ago.

Segment Results

Revenues from Oncology Systems segment inched up 3.7% to $603.1 million in the quarter, driven by new multi-year agreements with large hospital systems. Oncology Systems gross orders grew 6.3% to $613.0 million while net orders rose 0.7% to $559.1 million.  

Gross orders rose 3% in North America due to strong service growth. Gross orders upped 9% outside North America, driven by strength in Latin America and Australia that offset softness in Asia. Markets outside North America represented 58% of Oncology gross orders in the quarter.

During the quarter, VAR merged its X-Ray Products and Security and Inspection Products businesses into a single Imaging Components segment. Revenues from the segment went up 1.6% to $169.0 million in the quarter, driven by solid gains in gross orders.

Gross orders rose 13.8% to $205.0 million in the quarter while net orders upped 11.4% to $200.6 million in the quarter, driven by strong panel business, partially offset by weakness in the security and tube businesses.

Revenues from the Other segment (comprising Varian Particle Therapy businesses and the Ginzton Technology Center) plummeted 68.3% to $6.4 million, despite a $59.0 million increase in gross orders to $59.7 million and $58.2 million rise in net orders to $58.9 million for the quarter. The segment bagged orders for proton installations at the Cincinnati Children’s Hospital Medical Center in Ohio and at the Paul Scherrer Institute in Switzerland during the quarter.

Financial Position

VAR exited the quarter with cash and cash equivalents of $939.0 million as of Mar 28, 2014 compared with $1,181 million as of Sep 27, 2013. Long-term debt (including current maturities) was $468.75 million compared with $506.25 million as of Sep 27, 2013. With this, long-term debt-to-capitalization ratio fell 10 bps to 21.8% compared with 22.8% as of Sep 27, 2013.

Cash flow from operations was $126 million for the quarter.  During the quarter, VAR spent $159 million to repurchase about 2.0 million shares of common stock.


For fiscal 2014, VAR reiterated its revenues growth in the range of 6 to 8%. The company also retained its earnings per share guidance between $4.22 and $4.34 for the year, including the 16 cents charge for the patent litigation settlement. The current Zacks Consensus Estimate of $4.29 lies within the guided range.

For the third quarter of fiscal 2014, VAR expects revenues to increase in the range of 5 to 6%. The company also expects earnings per share in the range of $1.06 to $1.10 for the quarter. The current Zacks Consensus Estimate of $1.12 lies above the guided range.

Zacks Rank

Currently, VAR carries a Zacks Rank #3 (Hold). Some better-ranked medical instrument stocks that currently worth a look include Delcath Systems, Inc. (DCTH), Accuray Inc. (ARAY), and IDEXX Laboratories, Inc. (IDXX). Delcath Systems sports a Zacks Rank #1 (Strong Buy), while both Accuray and IDEXX Laboratories carries a Zacks Rank #2 (Buy).

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