Leading integrated radiotherapy systems maker Varian Medical Systems (VAR) reported second-quarter fiscal 2011 (ended March) earnings per share from continuing operations of 86 cents, just beating the Zacks Consensus Estimate of 85 cents and exceeding the corresponding year-ago earnings of 73 cents. Profit climbed 13.2% year over year to $103.1 million, riding on higher sales of oncology systems and X-Ray products.
Revenues & Orders
Revenues were up 11% year over year (up 9% on a constant currency basis) to $648 million, beating the Zacks Consensus Estimate of $640 million. Order backlog rose 11% to $2.2 billion at the end of the reported quarter. Growth was led by increase in net orders for TrueBeam system, Oncology services, X-Ray tubes and panels as well as security systems.
Segment Results
Oncology Systems’ revenues grew 9% year over year to $508 million, boosted by healthy demand for the company’s radiotherapy, brachytherapy and radiosurgery systems. Net orders rose 9% to $520 million with a 12% increase in North America and 7% growth in international markets. Double-digit growth in orders from Europe and Rest of the World more that offset a drop in Asia where the year-ago comparison was skewed by unusually high orders related to the last quarter of a government stimulus program in Japan.
Varian’s X-Ray Products business had a strong quarter with revenues cruising 15% year over year to $118 million aided by some recovery in the global imaging market. Net orders spiked 18% to $124 million. The company attributed the growth to higher demand for X-Ray tubes and flat panel detectors.
Revenues from the Other category increased 20% year over year to $23 million. Net orders for this business increased $25 million year over year to $38 million due to growth in the Security and Inspection Products business, which booked a sizeable order from the U.S. government for border protection items.
Margins
Gross margin improved to 44.6% from 43.4% a year ago while operating margin rose to 23.3% from 23.1%. Margins were supported by higher sales, favorable mix in the oncology business coupled with higher shipments in the X-Ray Products franchise.
Balance Sheet and Cash Flow
Varian exited the quarter with cash and cash equivalents of $584.4 million, down 10.7% year over year, with long-term debt of only $12.5 million, down 46.3%.
Outlook and Recommendation
The company has maintained its earnings per share target for fiscal 2011 in a band of $3.39 to $3.45. Further, Varian continues to project revenue growth of 10% to 11% for the year.
The company expects earnings per share in the range of 80 cents to 83 cents for the third quarter. Varian forecasts total revenues to grow about 11% to 12% year over year in the quarter.
Varian is a leading manufacturer of integrated radiotherapy systems for treating cancer 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).
Varian is poised to increase its market share in radiation oncology. It is currently enjoying a healthy demand for its coveted RapidArc and TrueBeam radiotherapy technology, which is meaningfully contributing to its oncology net order growth.
However, Varian aggressively competes with well-funded competitors for a limited pool of sales volume. Further, uncertainties stemming from health care reform and a still weak hospital capital spending environment across many developed countries, especially in Europe, provide headwinds.
We currently have a Neutral recommendation on Varian over the long term. The stock currently has a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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