Varian Medical Systems (VAR) reported fourth quarter and fiscal year 2010 (ended September 30) earnings per share from continuing operations of 87 cents and $2.96, beating the Zacks Consensus Estimates of 84 cents and $2.94, respectively, and exceeding the corresponding year-ago figures of 78 cents and $2.65.
Varian posted total sales of $652 million (up 1.6% year over year) and $2.36 billion (up 7.3%) in the fourth quarter and fiscal 2010, respectively, falling short of the Zacks Consensus Estimates of $667 million and $2.37 billion.
Varian’s net orders increased 12% year over year to $777 million for the reported quarter and were up 10% to $2.6 billion for the fiscal year after excluding $62 million order for a proton therapy system that was cancelled.
After eliminating the proton order, the year-ending backlog was up 10% to $2.2 billion. Including the proton order in the year-ago periods, net orders rose 3% in the reported quarter and 5% in the fiscal year, and the year-end backlog increased 7% year over year.
Segment Revenue
Oncology Systems’ revenues in the reported quarter were $512 million, down 3% year over year. Net orders were $657 million, up 15%, with a 24% increase from North American markets and a 7% growth in overseas locations.
Varian received over 60 orders for the TrueBeam radiotherapy and radiosurgery systems during the reported quarter, thereby raising cumulative orders to over 125 units since its inception in the second quarter of 2010. Service continued to grow and constituted almost 30% of revenue and orders in the reported quarter.
X-Ray Products revenues were $107 million in the fourth quarter, up 16% year over year while net orders were $112 million, up 15%. The company stated that flat panel detectors, including its modern panels for digital radiography, were responsible for the spike in sales.
Orders for X-ray tubes also increased smartly during the reported quarter. Record sales volumes and a mix shift toward panel shipments were responsible for robust gross margin and record quarterly operating earnings.
Revenues of the “Other” category, which consisted of the Security and Inspection Products unit, the Varian Particle Therapy segment, and the Ginzton Technology Center, were $33 million, up 47%.
Margins
Varian reported gross margin of 42.4% in the reported quarter, down from 44.4% in the prior-year quarter. Operating margin, at 22.8%, was lower than 23.5% in the year-ago quarter.
Balance Sheet
Varian exited fiscal 2010 with a cash balance of $520 million, down 6% year over year and debt of $43 million, up 16.8%.
Outlook
The company believes that stronger order activity at the Oncology Systems segment in the second half of fiscal 2010 as well as current momentum in the X-Ray Products business will set the stage for better performance in fiscal 2011.
For the first quarter of fiscal year 2011, Varian expects total revenues to grow about 8% year over year. It guides earnings per share from continuing operations of 71 cents to 74 cents, up about 15% year over year.
For fiscal year 2011, the company projects revenues to increase about 10% to 11% and earnings per share from continuing operations to increase about 14% to a band of $3.34 to $3.39.
We currently have a Neutral long-term rating on Varian. The stock currently retains a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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