Varian Medical Systems Misses on Q4 Earnings and Revenues - Analyst Blog

Varian Medical Systems (VAR) posted a 2.8% rise in adjusted earnings per share to $1.11 for the fourth quarter of fiscal 2014 ended Sep 26, 2014 (excluding a 9 cents of negative impact due to a sharp increase in the tax rate for the quarter) from $1.08 for the comparable quarter of fiscal 2013. However, earnings missed the Zacks Consensus Estimate of $1.21 per share as well as the company's own guidance of $1.14 to $1.29 for the quarter.
 

Varian Medical Systems' revenues in the quarter scaled up 5.5% to $812.1 million but lagged the Zacks Consensus Estimate of $838 million. The growth was attributable to strong Oncology Systems segment, partially offset by soft X-ray tube sales that led to sluggish growth in Imaging Components segment.  

Varian Medical Systems had backlog of $3,170.2 million at the end of the fourth quarter, up 10.5% from $2,869.0 million in the comparable quarter a year ago.  

Gross margin rose 3.6% to $340.1 million or 41.9% of revenues from $328.5 million or 42.7% of revenues. Operating earnings slid 1.1% to $159.2 million while adjusted operating margin dipped 130 basis points (bps) to 19.6% from 20.9% a year ago. The decline is attributable to a 8.0% rise in operating expenses to $180.9 million in the quarter.

Fiscal Year Results

For fiscal 2014, adjusted net earnings per share fell 3.8% to $3.83, missing the Zacks Consensus Estimate of $4.24. Adjusted net earnings ebbed 7.9% to $403.7 million in the year.

Revenues in the fiscal year rose 3.6% to $3,049.8 million. It was lower than the Zacks Consensus Estimate of $3,072 million.

Segment Results

Revenues from Oncology Systems segment inched up 6.2% to $578.2 million in the quarter. For the fiscal year, revenues in the segment grew 4.1% to $2,344.2 million. Gross orders in the quarter rose 9% to $918 million. For fiscal 2014, gross orders rose 5% to $2.7 billion.

Gross orders rose 11% in North America and 7% in the international market with gains in Latin America and EMEA offsetting softness in Asia. For the fiscal year, gross orders grew 7% in North America and 4% in the international region.

Revenues from Imaging Components (comprising X-Ray Products and Security and Inspection Products) segment went up 0.5% to $168.2 million in the quarter. For the fiscal year, revenues in the segment grew 2.9% to $660.2 million. Gross orders in the fourth quarter rose 16% to $234 million, and gross orders in the fiscal year rose 8% to $723 million.  

Revenues from the Other segment (comprising Varian Particle Therapy businesses and the Ginzton Technology Center) rose 29.5% to $22.4 million. For the fiscal year, revenues in the segment declined 6.0% to $45.4 million. Gross orders were $3 million for the fourth quarter and $120 million for the fiscal 2014, up significantly from fiscal 2013 when no proton orders were booked.

Financial Position

Varian Medical Systems exited the fiscal year with cash and cash equivalents of $849.3 million as of Sep 26, 2014 compared with $1,117.9 million as of Sep 27, 2013. Total debt (including current maturities) was $437.5 million compared with $506.25 million as of Sep 27, 2013. With this, long-term debt-to-capitalization ratio fell 150 bps to 21.3% compared with 22.8% as of Sep 27, 2013.

Cash flow from operations was $200 million for the quarter and $456 million for the fiscal year. During the fourth quarter, Varian Medical Systems spent $210 million to repurchase 2.5 million shares of common stock.

Guidance

For fiscal 2015, Varian Medical Systems expects revenues for Oncology Systems and Imaging Components businesses as well as proton orders currently in backlog to rise in the range of 5 to 6%.  Including the 9 cents per share of restructuring charge, earnings for the company are expected in the range of $4.16 to $4.26 per share. The Zacks Consensus Estimate for fiscal 2015 of $4.79 lies beyond the guided range.

For the first quarter of fiscal 2015, Varian Medical Systems expects combined revenues from Oncology Systems and Imaging Components businesses as well as proton orders currently in backlog to grow by 0 to 2%. Earnings per share (including the expected 9 cents per share of restructuring charge) are expected in the range of 76 to 80 cents. The Zacks Consensus Estimate for fiscal 2015 of $1.06 lies beyond the guided range.

Zacks Rank

Currently, Varian Medical Systems carries a Zacks Rank #3 (Hold). Some better-ranked medical instrument stocks that are currently worth a look include AngioDynamics Inc. (ANGO), Alphatec Holdings, Inc. (ATEC) and Edwards Lifesciences Corp. (EW). AngioDynamic sports a Zacks Rank #1 (Strong Buy), while both Alphatec Holdings and Edwards Lifesciences carry a Zacks Rank #2 (Buy).