-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GiuuSOHpBTWMGFocA6T4pejKNa9xyXSUZ5g13+/TaMgPkA+Qwx0u7yhcodT/+Pmh fVrpLGdAfuhhy0YISyprbg== 0000891618-98-002518.txt : 19980519 0000891618-98-002518.hdr.sgml : 19980519 ACCESSION NUMBER: 0000891618-98-002518 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980403 FILED AS OF DATE: 19980518 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN ASSOCIATES INC /DE/ CENTRAL INDEX KEY: 0000203527 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 942359345 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07598 FILM NUMBER: 98626991 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY STREET 2: MAIL STOP E 224 CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 4154934000 MAIL ADDRESS: STREET 1: 3050 HANSEN WAY STREET 2: MAIL STOP E 224 CITY: PALO ALTO STATE: CA ZIP: 94304-1000 FORMER COMPANY: FORMER CONFORMED NAME: VARIAN DELAWARE INC DATE OF NAME CHANGE: 19761123 10-Q 1 FORM 10-Q FOR PERIOD ENDED APRIL 3, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSISTION PERIOD FROM _______ TO __________ COMMISSION FILE NUMBER: 1-7598 EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER: VARIAN ASSOCIATES, INC. STATE OR OTHER JURISDICTION OF IRS EMPLOYER INCORPORATION OR ORGANIZATION: IDENTIFICATION NO.: DELAWARE 94-2359345 Address of principal executive offices: 3050 Hansen Way, Palo Alto, California 94304-1000 Telephone No., including area code: (650) 493-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] An index of exhibits filed with this Form 10-Q is located on page 19. Number of shares of Common Stock, par value $1 per share, outstanding as of the close of business on May 1, 1998: 29,865,000 shares. 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF EARNINGS UNAUDITED
SECOND QUARTER ENDED SIX MONTHS ENDED ---------------------------- ---------------------------- (AMOUNTS IN THOUSANDS APRIL 3, MARCH 28, APRIL 3, MARCH 28, EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997 ------------ ------------ ------------ ------------ SALES $ 372,819 $ 338,187 $ 717,662 $ 660,146 ------------ ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Cost of sales 237,824 214,266 451,211 424,326 Research and development 28,186 29,200 55,506 55,582 Marketing 48,581 48,684 97,880 97,482 General and administrative 21,857 17,973 46,259 33,868 ------------ ------------ ------------ ------------ TOTAL OPERATING COSTS AND EXPENSES 336,448 310,123 650,856 611,258 ------------ ------------ ------------ ------------ OPERATING EARNINGS 36,371 28,064 66,806 48,888 Interest expense (2,023) (1,945) (3,629) (3,765) Interest income 766 560 2,024 1,287 ------------ ------------ ------------ ------------ EARNINGS BEFORE TAXES 35,114 26,679 65,201 46,410 Taxes on earnings 12,110 9,330 22,490 16,240 ------------ ------------ ------------ ------------ NET EARNINGS $ 23,004 $ 17,349 $ 42,711 $ 30,170 ============ ============ ============ ============ AVERAGE SHARES OUTSTANDING - BASIC 29,971 30,532 30,029 30,619 ============ ============ ============ ============ AVERAGE SHARES OUTSTANDING - DILUTED 30,614 31,590 30,761 31,612 ============ ============ ============ ============ NET EARNINGS PER SHARE - BASIC $ 0.77 $ 0.57 $ 1.42 $ 0.99 ============ ============ ============ ============ NET EARNINGS PER SHARE - DILUTED $ 0.75 $ 0.55 $ 1.39 $ 0.95 ============ ============ ============ ============ Dividends Declared Per Share $ 0.10 $ 0.09 $ 0.19 $ 0.17 Order Backlog $ 578,152 $ 630,949
See accompanying notes to the consolidated financial statements -2- 3 VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
APRIL 3, SEPTEMBER 26, 1998 1997 -------------- -------------- (DOLLARS IN THOUSANDS EXCEPT PAR VALUES) (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents $ 85,350 $ 142,298 Accounts receivable 389,069 418,978 Inventories Raw materials and parts 124,538 97,220 Work in process 50,150 37,431 Finished goods 31,183 24,947 -------------- -------------- Total inventories 205,871 159,598 Other current assets 100,856 92,596 -------------- -------------- TOTAL CURRENT ASSETS 781,146 813,470 -------------- -------------- Property, Plant, and Equipment 481,486 460,251 Accumulated depreciation and amortization (282,078) (264,612) -------------- -------------- NET PROPERTY, PLANT, AND EQUIPMENT 199,408 195,639 -------------- -------------- Other Assets 130,156 95,224 -------------- -------------- TOTAL ASSETS $ 1,110,710 $ 1,104,333 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 41,513 $ 18,668 Accounts payable - trade 68,088 83,771 Accrued expenses 254,981 269,067 Product warranty 41,864 37,620 Advance payments from customers 58,533 55,184 -------------- -------------- TOTAL CURRENT LIABILITIES 464,979 464,310 Long-Term Accrued Expenses 39,688 35,752 Long-Term Debt 67,090 73,186 Deferred Taxes 7,051 6,508 -------------- -------------- TOTAL LIABILITIES 578,808 579,756 -------------- -------------- CONTINGENCIES (Note 4) STOCKHOLDERS' EQUITY Preferred stock Authorized 1,000,000 shares, par value $1, issued none -- -- Common stock Authorized 99,000,000 shares, par value $1, issued and outstanding 29,851,000 shares at April 3, 1998 and 30,108,000 shares at September 26, 1997 29,851 30,108 Retained earnings 502,051 494,469 -------------- -------------- TOTAL STOCKHOLDERS' EQUITY 531,902 524,577 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,110,710 $ 1,104,333 ============== ==============
See accompanying notes to the consolidated financial statements. -3- 4 VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
FOR THE SIX MONTHS ENDED ------------------------------ APRIL 3, MARCH 28, (DOLLARS IN THOUSANDS) 1998 1997 -------------- -------------- OPERATING ACTIVITIES Net Cash Provided by Operating Activities $ 20,948 $ 22,266 -------------- -------------- INVESTING ACTIVITIES Purchase of property, plant, and equipment (20,614) (25,640) Purchase of businesses, net of cash acquired (46,948) (25,697) Other, net 6,076 1,044 -------------- -------------- Net Cash Used by Investing Activities (61,486) (50,293) -------------- -------------- FINANCING ACTIVITIES Net borrowings on short-term obligations 22,326 33,673 Proceeds from long-term borrowings -- 25,000 Principal payments on long-term debt (6,096) -- Proceeds from common stock issued to employees 14,026 17,456 Purchase of common stock (43,712) (45,093) Other, net (5,707) (5,274) -------------- -------------- Net Cash (Used)/Provided by Financing Activities (19,163) 25,762 -------------- -------------- EFFECTS OF EXCHANGE RATE CHANGES ON CASH 2,753 5,484 -------------- -------------- Net (Decrease)/Increase in Cash and Cash Equivalents (56,948) 3,219 Cash and Cash Equivalents at Beginning of Period 142,298 82,675 -------------- -------------- Cash and Cash Equivalents at End of Period $ 85,350 $ 85,894 ============== ==============
See accompanying notes to the consolidated financial statements. -4- 5 VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Unaudited NOTE 1: The consolidated financial statements include the accounts of Varian Associates, Inc. and its subsidiaries and have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year ended September 26, 1997 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest Form 10-K annual report. In the opinion of management, the consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the second quarter and six months ended April 3, 1998, are not necessarily indicative of the results to be expected for a full year or for any other periods. NOTE 2: Inventories are valued at the lower of cost or market (net realizable value) using the last-in, first-out (LIFO) cost for the U.S. inventories of the Health Care Systems (except for X-ray Tube Products), Instruments, and Semiconductor Equipment segments. All other inventories are valued principally at average cost. If the first-in, first-out (FIFO) method had been used for those operations valuing inventories on a LIFO basis, inventories would have been higher than reported by $49.4 million at April 3, 1998 and $48.4 million at September 26, 1997. NOTE 3: The Company enters into forward exchange contracts to mitigate the effects of operational (sales orders and purchase commitments) and balance sheet exposures to fluctuations in foreign currency exchange rates. When the Company's foreign exchange contracts hedge operational exposure, the effects of movements in currency exchange rates on these instruments are recognized in income when the related revenue and expenses are recognized. When foreign exchange contracts hedge balance sheet exposure, such effects are recognized in income when the exchange rate changes. Because the impact of movements in currency exchange rates on foreign exchange contracts generally offsets the related impact on the 5 6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 (Continued) underlying items being hedged, these instruments do not subject the Company to risk that would otherwise result from changes in currency exchange rates. Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. Any deferred gains or losses are included in accrued expenses in the balance sheet. If a hedging instrument is sold or terminated prior to maturity, gains and losses continue to be deferred until the hedged item is recognized in income. If a hedging instrument ceases to qualify as a hedge, any subsequent gains and losses are recognized currently in income. At April 3, 1998, the Company had forward exchange contracts with maturities of twelve months or less to sell foreign currencies totaling $124.3 million ($42.2 million of Japanese yen, $21.0 million of French francs, $14.9 million of Italian lira, $10.7 million of Canadian dollars, $9.1 million of German marks, $8.2 million of Spanish pesetas, $4.5 million of British pounds, $3.6 million of Belgium francs, $3.3 million of Norwegian krone, $2.0 million of Dutch guilders, $1.5 million of Australian dollars, $1.1 million of Korean won, $1.0 million of Mexican pesos, $0.8 million of Taiwan dollars, and $0.4 million of Finnish marks) and to buy foreign currencies totaling $38.6 million ($12.2 million of British pounds, $6.5 million of Australian dollars, $6.4 million of Swiss francs, $3.1 million of Japanese yen, $2.3 million of French francs, $2.2 million of Swedish krona, $1.8 million of Spanish pesetas, $1.5 million of German marks, $1.0 million of Italian lira, $0.9 million of Brazilian real, $0.5 million of Dutch guilders, and $0.2 million of Canadian dollars). NOTE 4: In February 1990, a purported class action was brought by Panache Broadcasting of Pennsylvania, Inc. on behalf of all purchasers of electron tubes in the U.S. against the Company and a joint-venture partner, alleging that the activities of their joint venture in the power-grid tube industry violated antitrust laws. The complaint seeks injunctive relief and unspecified damages, which may be trebled under the antitrust laws. In February 1993, the U.S. District Court in Chicago granted in part and denied in part the Company's motion to dismiss the complaint. Panache Broadcasting filed an amended complaint in March 1993. In October 1995, the Court affirmed a federal Magistrate's recommendation to grant in part and deny in part the Company's motion to dismiss the amended complaint. Also in October 1995, the Magistrate recommended denial of plaintiff's request to certify the purported class and recommended certification of a different and narrower class than that defined by plaintiff. The Company is appealing that proposed class certification to the District Court, and management believes that the Company has meritorious defenses to the Panache lawsuit. 6 7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4: (Continued) In addition to the above-referenced matter, the Company is currently a defendant in a number of legal actions and could incur an uninsured liability in one or more of them. In the opinion of management, the outcome of the above litigation (including the Panache lawsuit) will not have a material adverse effect on the consolidated financial statements of the Company. The Company has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where the Company is alleged to have shipped manufacturing waste for recycling or disposal. The Company is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, federal, state and/or local agencies at certain current or former Company facilities (including facilities disposed of in connection with the Company's sale of its Electron Devices business during 1995, and the sale of the Company's Thin Film Systems operations during 1997). For certain of these facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of April 3, 1998, the Company nonetheless estimated that the Company's future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $16.9 million to $44.2 million. The time frame over which the Company expects to incur such costs varies with each site, ranging up to approximately 30 years as of April 3, 1998. Management believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range and therefore accrued $16.9 million in estimated environmental costs as of April 3, 1998. The amount accrued has not been discounted to present value. As to other facilities, the Company has gained sufficient knowledge to be able to better estimate the scope and costs of future environmental activities. As of April 3, 1998, the Company estimated that the Company's future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $45.3 million to $70.8 million. The time frame over which the Company expects to incur such costs varies with each site, ranging up to approximately 30 years as of April 3, 1998. As to each of these sites, management determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $52.9 million at April 3, 1998. The Company accordingly accrued $21.6 million, which represents this best estimate of the future costs discounted at 4%, net of inflation. This reserve is in addition to the $16.9 million described above. 7 8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4 (Continued) The foregoing amounts are only estimates of anticipated future environmental related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where the Company is undertaking such investigation and remediation activities. The Company believes that most of these cost ranges will narrow as investigation and remediation activities progress. The Company believes that its reserves are adequate, but as the scope of its obligations becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to management and its best assessment of the ultimate amount and timing of environmental related events, the Company's management believes that the costs of these environmental related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company. The Company evaluates its liability for environmental related investigation and remediation in light of the liability and financial wherewithal of potentially responsible parties and insurance companies with respect to which the Company believes that it has rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. In 1992, the Company filed a lawsuit against 36 insurance companies with respect to most of the above-referenced sites. The Company received certain cash settlements during 1995 and 1996 from defendants in that lawsuit, and has a $0.5 million receivable in Other Current Assets at April 3, 1998. The Company has also reached an agreement with another insurance company under which the insurance company has agreed to pay a portion of the Company's past and future environmental related expenditures, and the Company therefore has a $5.5 million receivable in Other Assets at April 3, 1998. Although the Company intends to aggressively pursue additional insurance recoveries, the Company has not reduced any liability in anticipation of recovery with respect to claims made against third parties. NOTE 5 The Company adopted SFAS 128, "Earnings per Share" during the first quarter of fiscal year 1998. Accordingly, net earnings per share were computed under two methods, basic and diluted, and prior periods were restated to conform to the new presentation and calculation. The impact of restatement was not significant. 8 9 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5 (Continued) Basic net earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing earnings available to common stockholders by the sum of the weighted average number of common shares outstanding and potential common shares (when dilutive). A reconciliation of the numerator and denominator in the earnings per share calculation is presented as follows:
Second Quarter Ended April 3, 1998 Second Quarter Ended March 28, 1997 ------------------------------------------- ------------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ----------- ----------- ----------- ----------- ----------- BASIC EPS $ 23,004 29,971 $ 0.77 $ 17,349 30,532 $ 0.57 EFFECT OF DILUTIVE SECURITIES Employee Stock Options 643 (0.02) 1,058 (0.02) ----------- ---------- ----------- ----------- ----------- ----------- DILUTED EPS $ 23,004 30,614 $ 0.75 $ 17,349 31,590 $ 0.55 =========== =========== =========== =========== =========== ===========
Options to purchase 963,323 shares and 37,500 shares at average exercise prices of $58.19 at $60.99, respectively, were outstanding during the quarters ended April 3, 1998 and March 28, 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the shares.
Six Months Ended April 3, 1998 Six Months Ended March 28, 1997 ------------------------------------------- ------------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ----------- ----------- ----------- ----------- ----------- BASIC EPS $ 42,711 30,029 $ 1.42 $ 30,170 30,619 $ 0.99 EFFECT OF DILUTIVE SECURITIES Employee Stock Options 732 (0.03) 993 (0.04) ----------- ----------- ----------- ----------- ----------- ----------- DILUTED EPS $ 42,711 30,761 $ 1.39 $ 30,170 31,612 $ 0.95 =========== =========== =========== =========== =========== ===========
Options to purchase 694,994 and 42,595 shares at average exercise prices of $58.27 and $60.10, respectively, were outstanding during the six months ended April 3, 1998 and March 28, 1997, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the shares. 9 10 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 6: Non-cash investing activities for the six months ended April 3, 1998 included deferred payments of $7.0 million, net present value, as additional purchase price of a business not yet settled in cash. Non-cash investing activities for the six months ended April 3, 1998 also included the acquisition of a business in exchange for $5.2 million of accounts receivable. NOTE 7: Included in other assets at April 3, 1998 and September 26, 1997 is goodwill of $91.9 million and $45.9 million, respectively (net of accumulated amortization of $8.0 million and $6.5 million, respectively), which is the excess of the cost of acquired businesses over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. Goodwill is amortized on a straight-line basis over periods ranging from 10 to 40 years. Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets and goodwill related to those assets may not be recoverable, the Company would estimate the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual disposition. If the sum of the future cash flows is less than the carrying amount of those assets, the Company would recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On April 23, 1998, the Company reported higher sales and earnings for the second quarter of fiscal 1998. Orders for the period were below the year-ago's total; however, the decline was due entirely to slower demand in the semiconductor equipment industry. The Company's Health Care Systems and Instruments businesses posted higher bookings for the quarter. Second-quarter orders amounted to $333 million compared to $376 million in 1997's second period. Sales for the quarter rose 10% to $373 million from the year-ago's $338 million, and increased 20% after adjustments for the sale of the Company's Thin Film Systems (TFS) business last June. Net earnings for the second quarter increased to $23 million from the prior year's $17.3 million. Diluted earnings per share of $0.75 were up 36% from $0.55 in the year-ago period, and rose 39% after the TFS adjustment. (All earnings per share amounts represent diluted earnings per share as defined within Statement of Financial Accounting Standards No. 128.). Second quarter backlog declined 8% from the previous year to $578 million and declined 2% from the prior year's level after adjusting for the TFS sale. For the first six months of fiscal 1998, net earnings of $42.7 million rose 42% above the prior year's $30.2 million, while diluted earnings per share of $1.39 were up 46% from last year's $0.95. First-half orders of $718 million were 1% below the year-ago period, but increased 6% after the TFS adjustment. Sales for the first six months were up 9% to $718 million from the prior year's $660 million, but increased 20% over 1997 on a TFS-adjusted basis. All three of the Company's businesses contributed to the higher revenues for both the second quarter and the first-half of fiscal 1998. Gross margins improved or were maintained in all three segments in the first half. The Company's Health Care Systems business posted first-half orders of $253 million, up 10% from the level of a year ago. The growth in demand for cancer therapy products from the Company's Oncology Systems unit more than offset a decline in bookings for its x-ray products. Second-quarter orders were up 9% from the 1997 quarter as both operations posted sequential gains. Year-to-date sales rose 12% from the prior year to $229 million with second quarter revenues up 22% from the year-ago quarter and 33% above the previous three months. While both the oncology and x-ray product lines contributed to the gains, the improved performance was driven largely by the oncology unit's new products and particularly its ancillary product offerings which range from patient management software to bolt-on accessories to enhance machine performance. Backlog rose to $353 million at the end of the second quarter from the year-ago period. Margins, while down from the year-ago quarter, improved from the first quarter's level. First-half orders of $262 million for the Company's Instruments business were flat versus the prior year's $263 million. Second-quarter orders of $132 million edged ahead of the year-ago's $129 million. Second-quarter sales of $136 million resulted in first-half revenues of $273 million, up 8% from 1997's first-half. Backlog declined 6% to $114 million. Margins improved over the prior year for both the quarter and the first half. Nearly all of the Company's instrument product lines contributed to the positive 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) results, offsetting the slower business for its printed circuit board contract manufacturing operation. Reduced demand prompted by industry overcapacity and the turmoil in the Asian financial markets tempered second-quarter orders for the Company's Semiconductor Equipment business. Orders for the first six months of fiscal 1998 were $191 million, down 12% from the year-ago period; however, first -half orders rose 11% from fiscal 1997 after the TFS adjustment. Second-quarter orders declined 41% sequentially, and were down 20% from the prior year on a TFS-adjusted basis. Second-quarter sales of $105 million were up 6% from the prior year, and rose 46% on a TFS-adjusted basis. Sales of $215 million for the first-half were up 7% from the year-ago period, but rose 57% on a TFS-adjusted basis. Backlog of $115 million fell 27% from the close of the first quarter. Margins for both the second quarter and the six-month period improved over the previous year due to cost reductions. The Company expects the second-half of the fiscal year to present some challenges, particularly with the weakness in Asia likely to have a somewhat more pronounced effect on the Company's Semiconductor Equipment and Instruments operations. With the likelihood that a full recovery in chip equipment demand will not appear for several more quarters, the Company is tempering its views of total company sales and earnings for the year overall. FINANCIAL CONDITION The Company's financial condition remained strong during the first six months of fiscal 1998. Operating activities provided cash of $20.9 million in the first-half of fiscal 1998 and provided $22.3 million in the same period last year. Investing activities used $61.5 million in the first six months of fiscal 1998, $46.9 million for the purchase of businesses and $20.6 million for the purchase of property, plant and equipment. The purchase of businesses caused Other Assets to increase $34.9 million to $130.2 million, due to the recording of goodwill. Investing activities in the same period last year used $50.3 million, $25.7 million for the purchase of a business and $25.6 million for the purchase of property, plant and equipment. Financing activities used $19.2 million in the first half of fiscal 1998 and included $29.7 million used to buy back shares of the Company's stock, including shares purchased to offset the issuance of stock to employees. Financing activities in the first six months of fiscal 1997 provided $25.8 million, which included $25.0 million in long-term borrowing. Total debt as a percentage of total capital increased to 17.0% at the end of the second quarter of fiscal 1998 as compared with 14.9% at fiscal year end, 1997. The ratio of current assets to current liabilities was 1.68 to 1 at April 3, 1998 compared to 1.75 to 1 at fiscal year end 1997. The Company has $50 million available in unused committed lines of credit. ENVIRONMENTAL MATTERS The Company has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where the 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Company is alleged to have shipped manufacturing waste for recycling or disposal. The Company is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, federal, state and/or local agencies at certain current or former Company facilities (including facilities disposed of in connection with the Company's sale of its Electron Devices business during 1995, and the sale of the Company's Thin film Systems operations during 1997). For certain of these facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of April 3, 1998, the Company nonetheless estimated that the Company's future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $16.9 million to $44.2 million. The time frame over which the Company expects to incur such costs varies with each site, ranging up to approximately 30 years as of April 3, 1998. Management believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range and therefore accrued $16.9 million in estimated environmental costs as of April 3, 1998. The amount accrued has not been discounted to present value. As to other facilities, the Company has gained sufficient knowledge to be able to better estimate the scope and costs of future environmental activities. As of April 3, 1998, the Company estimated that the Company's future exposure for environmental related investigation and remediation costs for these sites ranged in the aggregate from $45.3 million to $70.8 million. The time frame over which the Company expects to incur such costs varies with each site, ranging up to approximately 30 years as of April 3, 1998. As to each of these sites, management determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $52.9 million at April 3, 1998. The Company accordingly accrued $21.6 million, which represents this best estimate of the future costs discounted at 4%, net of inflation. This reserve is in addition to the $16.9 million described above. The foregoing amounts are only estimates of anticipated future environmental related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where the Company is undertaking such investigation and remediation activities. The Company believes that most of these cost ranges will narrow as investigation and remediation activities progress. The Company believes that its reserves are adequate, but as the scope of its obligations becomes more clearly defined, these reserves may be modified and related charges against earnings may be made. Although any ultimate liability arising from environmental related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial condition, the likelihood of such occurrence is considered remote. Based on information currently available to management and its best assessment of the ultimate amount and timing of environmental related events, the Company's 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) management believes that the costs of these environmental related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company. The Company evaluates its liability for environmental related investigation and remediation in light of the liability and financial wherewithal of potentially responsible parties and insurance companies with respect to which the Company believes that it has rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. In 1992, the Company filed a lawsuit against 36 insurance companies with respect to most of the above-referenced sites. The Company received certain cash settlements during 1995 and 1996 from defendants in that lawsuit, and has a $0.5 million receivable in Other Current Assets at April 3, 1998. The Company has also reached an agreement with another insurance company under which the insurance company has agreed to pay a portion of the Company's past and future environmental related expenditures, and the Company therefore has a $5.5 million receivable in Other Assets at April 3, 1998. Although the Company intends to aggressively pursue additional insurance recoveries, the Company has not reduced any liability in anticipation of recovery with respect to claims made against third parties. POTENTIAL IMPACT OF THE YEAR 2000 ISSUE The "Year 2000 Issue" refers to computer programs which use two digits rather than four to define a given year and which therefore might read a date using "00" as the year 1900 rather than the year 2000. The Company is still assessing the full potential impact of the Year 2000 Issue on the Company and its products, and the Company has already initiated certain corrective actions. With respect to the Company's internal computer systems and computer systems which are part of current products, management believes that appropriate corrective actions will be accomplished and that the costs of those corrective actions are not reasonably likely to have a material effect on the Company's results of operations or financial condition. There can be no assurance, however, that those costs will not be higher than currently anticipated or that all such corrective actions will be accomplished as scheduled, and if the Company fails to accomplish those corrective actions it could have a material effect on the Company's results of operations. The Company is still assessing what might be the impact of the Year 2000 Issue on previously sold products, what corrective actions might be required to address those products and what might be the costs of implementing those corrective actions. Without further assessment, the Company is unable to conclude that the effect of the Year 2000 Issue on previously sold products is not reasonably likely to have a material effect on the Company's results of operations. The Company is also still assessing whether the Company's key suppliers of goods or services and other relevant third parties are adequately addressing the Year 2000 Issue and what might be the possible effects on the Company if those parties are not adequately prepared for the year 2000. The failure of those third parties to address the 14 15 MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED) Year 2000 Issue could have a material effect on the Company's results of operations, but the Company is unable at this time to assess what might be the extent of such effect. FORWARD LOOKING INFORMATION Except for historical information, this Management's Discussion and Analysis contains forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: product demand and market acceptance risks; the effect of general economic conditions and foreign currency fluctuations; the impact of competitive products and pricing; new product development and commercialization; the timing of renewed growth in worldwide health care and semiconductor equipment demand; the impact of managed care initiatives in the U.S. on capital expenditures and resulting pricing pressures on medical equipment; the continued improvement of the various instruments markets the Company serves; the ability to increase operating margins on higher sales; the impact of economic conditions in Korea and other Asian markets on the Company's sales in those areas; successful implementation of corrective actions to address the impact of the year 2000 on the Company; and other risks detailed from time to time in the Company's filings with the Securities and Exchanges Commission. 15 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Varian Associates, Inc.: We have reviewed the consolidated balance sheet of Varian Associates, Inc. and its subsidiaries as of April 3, 1998, and the related consolidated statements of earnings for the quarters and semi-annual periods ended April 3, 1998 and March 28, 1997, and the condensed consolidated statements of cash flows for the semi-annual periods ended April 3, 1998 and March 28, 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the aforementioned financial statements for them to be in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. --------------------------------- COOPERS & LYBRAND L.L.P. San Jose, California April 22, 1998 16 17 PART II. OTHER INFORMATION Item 4 Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders held on February 19, 1998, the stockholders of the Company voted on the election of five directors to the Company's Board of Directors for three-year terms. The voting on each such nominee for director was as follows:
Votes Votes Broker Nominee For Withheld Abstentions Nonvotes(1) - -------- -------- --------- ----------- ----------- John Seely Brown 26,042,211 159,103 0 Robert W. Dutton 26,045,545 155,769 0 Samuel Hellman 26,053,619 147,695 0 Terry R. Lautenbach 26,050,781 150,533 0 David E. Mundell 26,057,611 143,703 0
At the Annual Meeting of Stockholders, the stockholders also voted on a proposal to approve an amendment to the Company's Omnibus Stock Plan. The voting on that proposal was as follows:
Votes Votes Broker Proposal For Withheld Abstentions Nonvotes(1) - --------- ----- -------- ----------- ----------- To approve an amendment to the Omnibus Stock Plan. 25,559,838 487,844 153,632
(1) Pursuant to the Rules of the New York Stock Exchange, this election of directors constituted a routine matter, and therefore brokers were permitted to vote without receipt of instructions from clients. Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 15 Letter Regarding Unaudited Interim Financial Information. Exhibit 27 Financial Data Schedule for the six months ended April 3, 1998 (EDGAR filing only). (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the second quarter ended April 3, 1998. 17 18 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VARIAN ASSOCIATES, INC. ----------------------- Registrant May 15, 1998 ----------------------- Date /s/ Wayne P. Somrak ----------------------- Wayne P. Somrak Vice President and Controller (Chief Accounting Officer) 18 19 INDEX OF EXHIBITS
Exhibit Number - ------ 15 Letter Regarding Unaudited Interim Financial Information. 27 Financial Data Schedule for the six months ended April 3, 1998 (EDGAR filing only).
19 EX-15 2 LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFO 1 EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Varian Associates, Inc. Registrations on Forms S-8 and S-3 We are aware that our report dated April 22, 1998 on our reviews of the interim financial information of Varian Associates, Inc. for the quarters and semi-annual periods ended April 3, 1998 and March 28, 1997 included in this Form 10-Q is incorporated by reference in the Company's registration statements on Forms S-8, Registration Statement Numbers 33-46000, 33-33661, 33-33660, and 2-95139 and Forms S-8 and S-3, Registration Statement Number 33-40460. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ Coopers & Lybrand L.L.P. ---------------------------- COOPERS & LYBRAND L.L.P. San Jose, California May 15, 1998 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS OCT-02-1998 SEP-27-1997 APR-03-1998 85,350 0 389,069 0 205,871 781,146 481,486 282,078 1,110,710 464,979 0 0 0 29,851 502,051 1,110,710 717,662 717,662 451,211 650,856 0 0 3,629 65,201 22,490 42,711 0 0 0 42,711 1.42 1.39
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