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Varian Medical Systems' CEO Hosts Investor Mid-Year Review (Transcript)

Stocks in this article: VAR

I will tell you that Japan has come back and they’re on a more normal pattern now. This was only reflected in the delivery. So, again, that geographic shift had an impact on Oncology’s margin in the half.

X-Ray Products had very strong margin performance and is up about 50 basis points in the half. I should say that the Proton business dilutes the gross margin by about one full point for the total company. And, again, that’s going to hold true for the first few of these. We ultimately hope to get the Proton business up to about a 30% gross margin product.

And SG&A expenses for the first half were about flat as a percentage of sales, and that’s even with the restructuring charge that we talked about and the dilutive effect from the Calypso acquisition.

Operating earnings down 5%. Net earnings down only 1% as that shift to the geographic Emerging Markets causes the gross margin to be lower. We also get a tax benefit as we move to international markets. And so, the tax rate was down three points from the prior year period.

Backlog of $2.6 billion is up 18% if you include the Proton business. If you exclude the Proton business, the backlog is still up a very healthy 12%. So, again, that gives us, really looking into the next fiscal year, we can see ourselves returning to low double digit growth.

Balance sheet and cash flow. Conservative balance sheet $617 million of cash and equivalents, $32 million short term investments. This is the loan for the APT Scripps project, the Proton project in San Diego. And $162 million of total debt. We have subsequently been paying down that debt and as of the call, I believe the number was around $130 million.

The DSO of 83 days was up four days from the prior year period. It’s a little confusing because the Proton business actually impacted DSO by about five days in the second quarter. And that’s because we are booking revenue in advance of when the actual payment terms are due from the customer. And this is under the project accounting method that we talked about. This being our first installation, it is back-end loaded when the payments are actually due from Scripps, and that had an impact on the DSO. If I look back over the last four quarters and just take a simple average, 83 days is the average. So, collections are quite healthy.

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