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Varian Medical Systems May See Decline in Net Profit Margins

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Earnings guidance for fiscal 2018

Varian Medical Systems (VAR) has projected its non-GAAP (generally accepted accounting principles) operating earnings to revenue percentage to fall 18%–19%, while its non-GAAP EPS (earnings per share) is estimated to fall $4.24–$4.36 in fiscal 2018. The company also expects its non-GAAP effective tax rate to be 21% and has projected a benefit of $0.11 in non-GAAP EPS related to the reduced tax rate, which is due to the recently passed Tax Cuts and Jobs Act. Varian expects its weighted average diluted shares to be 93 million in fiscal 2018 and its cash flow from operations to be $470 million–$550 million.

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Slight decline in net profit margins

Wall Street analysts have projected Varian Medical Systems’ fiscal 2018 net profit margins to be 8.5%, which is a YoY (year-over-year) decline of 119 basis points.

Its peers Baxter International (BAX), Abbott Laboratories (ABT), and Boston Scientific (BSX) are expected to report net profit margins of 13.6%, 16.3%, and 19.7%, respectively, for 2018.

Tax rate reduction

According to the provisions of the Tax Cuts and Jobs Act, the corporate tax rate in the United States was reduced from 35% to 21%. While this is expected to be beneficial for Varian Medical Systems in the long term, it has also affected the company’s short-term performance. Varian anticipates a negative impact of $47 million attributable to the remeasurement of its deferred tax assets, which was previously recorded based on a future tax rate of 35%. In 1Q18, the company charged $38 million to its income tax expense due to the new law, while the remaining $9 million will be charged in the remaining quarters of fiscal 2018.

In the next part, we’ll look at the performance of Varian Medical Systems’ oncology systems business.

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