Varian Medical Systems reported fairly weak fiscal fourth-quarter results. The company’s performance continues to be affected by tightening U.S. radiology reimbursement for freestanding clinics and the generally weak hospital spending environment.

Our narrow moat and positive moat trend ratings remain intact; we continue to believe Varian is well positioned to capitalize on its strong technological platform and produce strong results over the next decade. We’re also maintaining our fair value estimate for now; while the 2014 environment will probably be more challenging than we previously expected, long-term growth prospects remain attractive.

Overall sales increased just 3% in constant currency. Even more important, the company slashed its backlog severely, reflecting longer selling cycles and concerns about freestanding clinics’ ability and willingness to purchase additional systems in light of reimbursement pressures. These customers now account for less than 5% of the overall backlog.

The uncertainty over health-care reform implementation and implications provided additional headwinds to Varian’s North American operations, as gross orders fell 6% in the quarter. The company was able to partially offset this weakness by expanding its international backlog; orders outside North America were up 12%, driven mainly by Japan, Scandinavia, and emerging markets. The X-ray business fared well in the quarter, up 6%.

Despite the sales weakness, gross margin stayed flat in the quarter. The company did increase its research and development investments, lowering its operating margin by roughly 100 basis points in the quarter. The company’s outlook for 2014 operating margins and earnings was somewhat light, reflecting ongoing challenges in the oncology business, changing product mix, and the device tax.