MAKO Mako Surgical Corp. (MM)

Varian Medical Systems (VAR) posted net earnings of $1.08 per share for the fourth quarter of fiscal 2013, which was flat compared with the prior-year quarter and missed the Zacks Consensus Estimate by 4 cents. In fact, net earnings declined 2.4% to $117.3 million from $120.2 million in the year-ago quarter.  

However, net earnings for fiscal 2013 rose 2.6% to $438.2 million from $427.0 million a year ago, while it increased 5.9% to $3.98 from $3.76 on per share basis, missing Varian’s own expectations of $4.00–$4.04 per share.

Revenues edged up 1.8% year over year to $769.9 million during the quarter, falling short of the Zacks Consensus Estimate of $780 million and missing the company’s growth projection of 5% for the quarter. Revenues for fiscal 2013 grew 4.8% to $2.9 billion.

VAR had backlog of $2.9 billion at the end of the fiscal year, up slightly from $2.8 billion at the end of fiscal 2012.  Due to uncertainty in the U.S. healthcare environment and higher level of cancellations in the quarter relating to orders from small clinic developers whose projects did not move forward, the company adjusted its backlog downward by $156 million.

Segment Results

Revenues from Oncology Systems inched down 1% to $585.3 million in the quarter, but the same rose 3% to $2.3 billion in fiscal 2013. Oncology Systems gross orders inched up 3% to $841.2 million while net orders dipped 13% to $685.0 million including the backlog adjustment.  For fiscal 2013, gross orders scaled up 2% to $2.6 billion while net orders slid 4% to $2.3 billion.

Gross orders in international markets rose 12% in the quarter, more than offsetting a 6% fall in North America.  On a constant currency basis, gross orders in international markets rose 15%, driven by strong growth in Asia and the Rest of the World.  Net orders increased 6% in international markets but plunged 35% in North America, including the backlog adjustment.

Revenues from X-Ray Products segment went up 6% to $137.8 million in the quarter while it rose 11% to $546 million in fiscal 2013. Gross orders escalated 26% to $182.9 million in the quarter and 15% to $584.7 million in the fiscal year.

Revenues from the Other segment (comprising Security and Inspection Products, and Varian Particle Therapy businesses, and the Ginzton Technology Center) rose 30.4% to $46.8 million in the quarter while it rose 15.1% to $143.8 million in the fiscal year. The increase was attributable to ongoing proton projects in San Diego, Saudi Arabia and Russia. Gross orders slid 38.7% to $18.2 million for the quarter and plunged 60.2% to $86.1 million for fiscal 2013.

Financial Position

Varian exited the quarter with cash and cash equivalents and short term investments of $1.2 billion as of Sep 27, 2013 compared with $754.3 million as of Sep 28, 2012. Long-term debt (including current maturities) was $506.3 million compared with $6.3 million as of Sep 28, 2012.

Cash flow from operations was $155 million for the quarter and $455 million for fiscal 2013.  During the quarter, Varian spent $135 million to repurchase 1.9 million shares of common stock.

Outlook

Varian expects revenues to grow by 6–7% and earnings per share between 87 cents and 91 cents for the first quarter of fiscal 2014. For fiscal 2014, VAR anticipates revenues to grow in the range of 6–8% and earnings per share between $4.22 and $4.34.

Our Take

We are disappointed both earnings and revenue misses in the fourth quarter. 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 VAR carries a Zacks Rank #4 (Sell).

Other medical instrument stocks that are currently worth a look include Mindray Medical International Limited (MR) with a Zacks Rank #1 (Strong Buy), and AngioDynamics Inc. (ANGO) and MAKO Surgical Corp. (MAKO), both with a Zacks Rank #2 (Buy).

 
ANGIODYNAMICS (ANGO): Free Stock Analysis Report
 
MAKO SURGICAL (MAKO): Free Stock Analysis Report
 
MINDRAY MEDICAL (MR): Free Stock Analysis Report
 
VARIAN MEDICAL (VAR): Free Stock Analysis Report
 
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