Varian Medical Systems
) posted third-quarter fiscal 2013 net earnings of $1.03 per
share beating the Zacks Consensus Estimate by a couple of cents.
The result was also significantly better than the year-ago net
earnings of 96 cents and the company's previously announced
guidance of net earnings in the range of 98 cents to $1.02 per
share for the reported quarter.
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Net earnings improved 3.7% year over year to $112.8 million in
the third fiscal quarter.
Revenues & Orders
In the third quarter, revenues increased 3% year over year to
$726.2 million, well short of the Zacks Consensus Estimate of
$753 million. It also missed Varian's expectations of 7% sales
growth in the quarter.
Order backlog rose 4% year over year to $ 2,752.8 million at the
end of the reported quarter. Net orders grew 5.4% year over year
to $726.5 million.
Revenues from Oncology Systems increased 3% year over year to
$561.3 million in the third quarter. Net orders for the core
segment rose 4% (up 6% at constant exchange rate or CER) to $582
million, as 8% order growth outside North America (up 12% at CER)
was partly offset by a 1% downfall in North American orders.
Overseas sales (contributed 57% to net orders for this segment)
were primarily driven by a 21% jump (up 22% at CER) in Europe,
Middle East and Africa (EMEA). The double-digit growth in net
orders was attributed to strong demand from high focus Asian
countries like China and Japan, where orders rose over 20%. The
company also did well in North Africa, Turkey, Poland and UK.
However, Varian faced currency headwinds in the Asian market. On
the other hand, the decline in North American market was due to a
tough capital spending environment due to looming concerns
regarding healthcare reforms and reimbursement scenario.
Revenues for X-Ray Products segment in the quarter came in at
$135.3 million, up 7% year over year. Net orders for the products
inched up 2% to $122.7 million. Despite double-digit growth for
flat panel business, this segment was adversely affected by the
reduction in inventory levels for its X-ray tube by Japanese
Revenues from the Other category decreased about 8% from the
comparable year-ago quarter to $29.6 million in the reported
quarter. Net orders for the category increased almost three-folds
to $21.8 million.
Gross margin in the quarter was 42.8%, down 80 basis points (bps)
year over year. Selling, general and administrative expense
decreased 2.7% from the year-ago quarter to $102.4 million.
Research and development expenditure increased 9.2% year over
year to $53.4 million. Operating margin contracted 50 bps at
Varian exited the quarter with cash and cash equivalents and
short term investments of $825 million compared with $754.3
million at the end of fiscal 2012. Long-term debt (including
current maturities) was nil compared with $6.3 million at the end
of fiscal 2012.
The company generated operating cash flow of $198 million, a
record high for Varian. It repurchased shares worth $95 million
during the quarter.
Following the third quarter, Varian revised its expectations for
fiscal 2013. Moving ahead, the company envisages revenues to grow
by about 5% for fiscal 2013 compared with the prior outlook of 8%
Net earnings for fiscal 2013 was lowered to the band of
$4.00-$4.04 per share compared with the earlier guidance of
$4.09-$4.14. The current Zacks Consensus Estimate of $4.10 lies
above the guided range. Per management, the guidance revision
reflects the sharp downfall in the yen and uncertainty related to
the realization of revenues from the proton therapy project in
Apart from the upbeat earnings that edged past the Zacks
Consensus Estimate, Varian reported an otherwise disappointing
quarter. While sales growth lagged the company's expectations and
the Zacks Consensus Estimate, it also lowered its outlook for the
ongoing fiscal. The revised guidance also trailed the Zacks
Consensus Estimate. Margin contraction was also an area of
concern. As a result, the stock tanked over 5% in after-hours
Varian's Oncology Systems franchise continued to struggle in the
North American market on account of uncertainty emanating from
health care reform and anticipated changes in reimbursement.
Until the overall scenario stabilizes, we prefer to avoid the
stock as Varian carries a Zacks Rank #4 (Sell).
Other medical stocks such as
IDEXX Laboratories Inc.
Globus Medical Inc.
) are likely to do well. These stocks carry a Zacks Rank #2