Leading integrated radiotherapy systems maker Varian Medical Systems (VAR) reported third-quarter fiscal 2011 earnings per share from continuing operations of 83 cents, matching the Zacks Consensus Estimate and beating the corresponding year-ago earnings of 74 cents. Profit increased 7.3% year over year to $98.6 million, riding on higher sales of oncology systems and X-Ray products.
Revenues & Orders
Sales were up 12% year over year (up 9% on a constant currency basis) to $649 million, beating the Zacks Consensus Estimate of $643 million. Order backlog increased 10% to $2.3 billion at the end of the reported quarter. Growth was led by increase in demand for newer products of both Oncology Systems and X-ray segments.
Segment Results
Oncology Systems’ sales increased 12% year over year to $513 million, boosted by healthy demand for the company’s radiotherapy, brachytherapy and radiosurgery systems. Net orders were up 9% to $553 million with no increase in North America and 18% growth in international markets.
Varian benefited from strong demand for its TrueBeam system, orders for which represented 40% of all systems ordered during the quarter.
Varian’s X-Ray Products business had a robust quarter with revenues climbing 18% year over year to $121 million. Net orders were boosted 17% to $121 million. The company attributed the growth to higher demand for radiographic imaging panels.
Revenues from the Other category slipped 18% year over year to $16 million. Net orders for this business were $17 million, down 12% year over year.
Margins
Gross margin dropped to 43.1% from 44% a year ago while operating margin slipped to 21.6% from 22.6%. Gross margin was adversely affected by a number of factors including retrofits in the Oncology segment and a difficult situation in the Other category.
Balance Sheet and Cash Flow
Varian finished the quarter with cash and cash equivalents of $567.9 million, down 3.4% year over year, with long-term debt of only $18 million, lower 21.7% year over year.
Outlook and Recommendation
The company has increased its earnings per share target, for fiscal 2011, to a band of $3.42 and $3.45, up about 16%, from its earlier range of $3.39 to $3.45. Further, Varian continues to project revenue growth of 10% to 11% for the year.
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 long-term rating on Varian supported by a short-term Zacks #3 Rank.
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