<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
COMMISSION FILE NUMBER 000-25393
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VARIAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0501995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3120 HANSEN WAY, PALO ALTO, CALIFORNIA 94304-1030
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 213-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 preceding 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 / /
The number of shares of the Registrant's common stock outstanding as of
July 28, 2000 was 32,553,014.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION................................................................................. 3
Item 1. Financial Statements.................................................................................. 3
Consolidated Statements of Earnings................................................................... 3
Consolidated Balance Sheets........................................................................... 4
Consolidated Condensed Statements of Cash Flows....................................................... 5
Notes to the Consolidated Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk............................................. 19
PART II. OTHER INFORMATION..................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................................... 20
</TABLE>
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
which provides a "safe harbor" for these types of statements. These forward-
looking statements are subject to risks and uncertainties that could cause
actual results of Varian, Inc. (the "Company") to differ materially from
management's current expectations. Those risks and uncertainties include,
without limitation: new product development and commercialization; demand and
acceptance for the Company's products; competitive products and pricing;
economic conditions in the Company's product and geographic markets; foreign
currency fluctuations; market investment in capital equipment; and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission.
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
----------------------- ----------------------
JUN. 30, JUL. 2, JUN. 30, JUL. 2,
2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
SALES......................................................... $ 181,996 $ 149,562 $ 519,258 $ 431,794
Cost of sales................................................. 114,690 91,211 322,609 273,589
----------- ----------- ---------- ----------
GROSS PROFIT.................................................. 67,306 58,351 196,649 158,205
----------- ----------- ---------- ----------
OPERATING EXPENSES
Sales and marketing...................................... 31,302 28,950 92,408 93,226
Research and development................................. 8,265 7,667 23,796 24,107
General and administrative............................... 8,303 10,503 29,319 29,230
Restructuring............................................ -- -- -- 10,974
----------- ----------- ---------- ----------
TOTAL OPERATING EXPENSES................................. 47,870 47,120 145,523 157,537
----------- ----------- ---------- ----------
OPERATING EARNINGS............................................ 19,436 11,231 51,126 668
Interest expense (income), net................................ 353 1,257 1,597 992
----------- ----------- ---------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES........................... 19,083 9,974 49,529 (324)
Income tax expense (benefit).................................. 7,442 4,438 19,316 (144)
----------- ----------- ---------- ----------
NET EARNINGS (LOSS)........................................... $ 11,641 $ 5,536 $ 30,213 $ (180)
=========== =========== ========== ==========
NET EARNINGS (LOSS) PER SHARE:
Basic.................................................... $ 0.36 $ 0.18 $ 0.96 $ (0.01)
=========== =========== ========== ==========
Diluted.................................................. $ 0.34 $ 0.18 $ 0.90 $ (0.01)
=========== =========== ========== ==========
SHARES USED IN PER SHARE CALCULATIONS:
Basic.................................................... 32,159 30,426 31,456 30,424
=========== =========== ========== ==========
Diluted.................................................. 34,136 30,704 33,533 30,424
=========== =========== ========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
<TABLE>
<CAPTION>
JUN. 30, OCT. 1,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents....................................................... $ 48,479 $ 23,348
Accounts receivable, net........................................................ 153,792 151,437
Inventories..................................................................... 97,138 66,634
Deferred taxes.................................................................. 25,343 25,508
Other current assets............................................................ 11,229 8,405
----------- ------------
TOTAL CURRENT ASSETS............................................................ 335,981 275,332
PROPERTY, PLANT, AND EQUIPMENT, NET.................................................. 76,523 83,654
OTHER ASSETS......................................................................... 65,445 66,090
----------- ------------
TOTAL ASSETS......................................................................... $ 477,949 $ 425,076
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt............................................... $ 6,403 $ 6,717
Accounts payable................................................................ 48,394 40,442
Accrued liabilities............................................................. 126,775 116,128
----------- ------------
TOTAL CURRENT LIABILITIES....................................................... 181,572 163,287
LONG-TERM DEBT....................................................................... 45,854 51,221
DEFERRED TAXES....................................................................... 8,438 8,453
OTHER LIABILITIES.................................................................... 11,041 7,453
----------- ------------
TOTAL LIABILITIES.................................................................... 246,905 230,414
----------- ------------
CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY
Preferred stock--par value $.01, authorized--1,000,000 shares;
issued--none.................................................................. -- --
Common stock--par value $.01, authorized--99,000,000 shares;
issued and outstanding--32,265,307 shares at
Jun. 30, 2000 and 30,563,094 at Oct. 1, 1999.................................. 203,302 181,619
Retained earnings............................................................... 43,256 13,043
Other comprehensive income (loss)............................................... (15,514) --
----------- ------------
TOTAL STOCKHOLDERS' EQUITY...................................................... 231,044 194,662
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 477,949 $ 425,076
=========== ============
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
4
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
JUN. 30, JUL. 2,
2000 1999
---------- ----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 31,367 $ 23,011
---------- ----------
INVESTING ACTIVITIES
Purchase of property, plant, and equipment.............................................. (14,430) (13,210)
Proceeds from sale of property, plant, and equipment.................................... 428 --
Purchase of businesses.................................................................. (7,095) --
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES................................................... (21,097) (13,210)
---------- ----------
FINANCING ACTIVITIES
Issuance of stock under stock option and employee
stock purchase plans (including tax benefit of $8,200)............................... 30,284 --
Purchase of common stock................................................................ (9,696) --
Net issuance/(payment) of debt.......................................................... (5,534) 9,622
Net transfers from Varian Associates, Inc./Varian Medical Systems, Inc.................. 1,095 4,359
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................... 16,149 13,981
---------- ----------
Effects of exchange rate changes on cash................................................ (1,288) (423)
---------- ----------
Net increase in cash and cash equivalents............................................... 25,131 23,359
Cash and cash equivalents at beginning of period........................................ 23,348 --
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................................. $ 48,479 $ 23,359
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debt assumed/transferred from Varian Associates, Inc.................................... $ -- $ 77,100
========== ==========
Transfer of property, plant, and equipment.............................................. $ -- $ 9,900
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid....................................................................... $ 5,251 $ 6,307
========== ==========
Interest paid........................................................................... $ 2,844 $ 814
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
5
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements of Varian, Inc. and its
subsidiary companies (collectively, the "Company") have been prepared 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
October 1, 1999 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. These interim consolidated financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's Form 10-K for the year ended October 1, 1999, which has been
filed with the Securities and Exchange Commission. In the opinion of the
Company's management, the interim 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 third
quarter and nine months ended June 30, 2000 are not necessarily indicative of
the results to be expected for a full year or for any other periods.
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current presentation of the financial statements.
NOTE 2. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Varian, Inc., (the "Company") is a major supplier of scientific
instruments and consumables, vacuum technology products and services, and
electronics manufacturing services. These businesses primarily serve life
science, health care, semiconductor processing, communications, industrial, and
academic customers.
Until April 2, 1999, the business of the Company was operated as the
Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). The interim
consolidated financial statements generally reflect the Company's results of
operations and cash flows for the quarter ended July 2, 1999 and IB's results of
operations and cash flows for the six months ended April 2, 1999. The interim
consolidated financial statements also reflect the Company's results of
operations and cash flows for the quarter and nine months ended June 30, 2000.
The interim consolidated financial results for the six months ended April 2,
1999 were carved out from the interim financial statements of VAI using the
historical results of operations of IB and include the accounts of IB after
elimination of inter-business transactions. These interim consolidated financial
results also include allocations of certain VAI corporate expenses (including
legal, accounting, employee benefits, insurance services, information technology
services, treasury, and other corporate overhead) to IB.
The Company's fiscal years reported are the 52-week periods ending on the
Friday nearest September 30. Fiscal year 2000 will comprise the 52-week period
ending September 29, 2000, and fiscal year 1999 was comprised of the 52-week
period ended October 1, 1999. The fiscal quarters ended June 30, 2000 and July
2, 1999 each comprise 13 weeks, and the nine-month periods ended June 30, 2000
and July 2, 1999 each comprise 39 weeks.
NOTE 3. CHANGE IN FUNCTIONAL CURRENCY
Statement of Financial Accounting Standards ("SFAS") 52 sets forth
guidelines for determining the functional currency to be used for financial
reporting. Subsequent to becoming independent from VAI, the Company made certain
changes in the way it conducts business internationally. A majority of business
transactions are now conducted in the local currencies of the respective
subsidiaries. Accordingly, effective October 2, 1999, the Company changed its
functional currency from the U.S. dollar to the local currencies of the
respective subsidiaries as prescribed by FAS 52. Under FAS 52, when the local
currencies are determined to be the functional currency, assets and liabilities
are translated using current exchange rates at the balance sheet date, and
income and expense accounts are translated at average exchange rates in effect
during the period. Translation of assets and liabilities at a current exchange
rate results in periodic translation gains and losses that are recorded in
stockholders' equity as a component of other comprehensive income. Upon adopting
a local currency functional currency, the Company recorded an initial
translation loss of $6.6 million in the cumulative translation adjustment
component of other
6
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
comprehensive income (see Note 7). This loss principally related to translating
property, plant, and equipment at current exchange rates versus the historical
exchange rates previously used.
NOTE 4. BALANCE SHEET DETAIL
JUN. 30 OCT. 1,
2000 1999
---------- ----------
(IN THOUSANDS)
INVENTORIES
Raw materials and parts...................... $ 51,572 $ 36,149
Work in process.............................. 12,056 5,487
Finished goods............................... 33,510 24,998
---------- ----------
$ 97,138 $ 66,634
========== ==========
Inventories are valued at the lower of cost or market (net realizable
value) using the last-in, first-out (LIFO) cost for certain U.S. inventories.
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 $14.8
million at June 30, 2000 and $14.4 million at October 1, 1999.
NOTE 5. FORWARD EXCHANGE CONTRACTS
The Company's forward exchange contracts generally range from one to 12
months in original maturity. Forward exchange contracts outstanding as of June
30, 2000 that hedge the balance sheet and certain purchase commitments were
effective June 30, 2000, and accordingly there were no significant unrealized
gains or losses associated with such contracts and the fair value of these
contracts approximates their notional values. Forward exchange contracts that
were outstanding as of June 30, 2000 are summarized as follows:
NOTIONAL NOTIONAL
VALUE VALUE
SOLD PURCHASED
(IN THOUSANDS) ---------- ------------
Australian Dollar.............................. $ -- $ 22,049
Japanese Yen................................... 14,021 --
British Pound.................................. 6,705 11,258
Canadian Dollar................................ 3,911 --
Euro........................................... -- 6,340
---------- ------------
Total....................................... $ 24,637 $ 39,647
========== ============
NOTE 6. NET EARNINGS PER SHARE
Basic earnings per share are calculated based on net earnings and the
weighted-average number of shares outstanding during the reported period.
Diluted earnings per share include dilution from potential common stock shares
issuable pursuant to the exercise of outstanding stock options determined using
the treasury stock method.
For periods prior to April 3, 1999, pro forma earnings (loss) per share
were calculated assuming that the weighted-average number of shares outstanding
during the period equaled the number of shares of common stock outstanding as of
the Distribution on April 2, 1999. Also, for computing pro forma diluted
earnings (loss) per share, the additional shares issuable upon exercise of stock
options were determined using the treasury stock method based on the number of
replacement stock options issued as of the Distribution on April 2, 1999.
For the fiscal quarter ended July 2, 1999, options to purchase 3,055,748
potential common stock shares with exercise prices greater than the weighted
average market value of such common stock for the period were excluded from the
calculation of diluted earnings per share for the quarter. For the nine-month
period ended July 2, 1999, all options to purchase common stock were excluded
from the computation of diluted loss per share because their effect was
anti-dilutive.
7
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
JUN. 30, JUL. 2, JUN. 30, JUL. 2,
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
BASIC
Net earnings (loss).............................. $ 11,641 $ 5,536 $ 30,213 $ (180)
Weighted average shares outstanding.............. 32,159 30,426 31,456 30,424
Net earnings (loss) per share.................... $ 0.36 $ 0.18 $ 0.96 $ (0.01)
============== ============= =============== =============
DILUTED
Net earnings (loss).............................. $ 11,641 $ 5,536 $ 30,213 $ (180)
Weighted average shares outstanding.............. 32,159 30,426 31,456 30,424
Net effect of dilutive stock options............. 1,977 278 2,077 --
-------------- ------------- --------------- -------------
Total shares..................................... 34,136 30,704 33,533 30,424
Net earnings (loss) per share.................... $ 0.34 $ 0.18 $ 0.90 $ (0.01)
============== ============= =============== =============
</TABLE>
NOTE 7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is comprised of net income and the currency
translation adjustment. Comprehensive income (loss) was $10.3 million and $5.5
million for the three months ended June 30, 2000 and July 2, 1999, respectively
and $14.7 million and ($0.2) million for the nine months ended June 30, 2000 and
July 2, 1999, respectively.
NOTE 8. DEBT AND CREDIT FACILITIES
The Distribution Agreement provided for the division among the Company,
VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution
Agreement, the Company was to assume 50% of VAI's term loans and receive an
amount of cash from VAI such that it would have net debt (defined in the
Distribution Agreement as the amount outstanding under the term loans and notes
payable, less cash and cash equivalents) equal to approximately 50% of the net
debt of the Company and VMS, subject to such adjustment as was necessary to
provide VMS with a net worth (as defined in the Distribution Agreement) of
between 40% and 50% of the aggregate net worth of the Company and VMS, and
subject to further adjustment to reflect the Company's approximately 50% share
of the estimated proceeds, if any, to be received by VMS after the Distribution
from the sale of VAI's long-term leasehold interest at certain of its Palo Alto
facilities, together with certain related buildings and other corporate assets,
and the Company's obligation for approximately 50% of any estimated transaction
expenses to be paid by VMS after the Distribution (in each case reduced for
estimated taxes payable or tax benefits received from all sales and transaction
expenses). Since the amounts transferred immediately prior to the Distribution
were based on estimates, these and other adjustments were required following the
Distribution. As a result of these final adjustments, the Company recorded an
increase in stockholders' equity of $1.1 million in the second quarter of fiscal
year 2000. Management believes that no further adjustments are necessary, and
that if any are required, they will not have a material effect on the Company's
financial condition.
NOTE 9. CONTINGENCIES
ENVIRONMENTAL MATTERS. In the Distribution Agreement, the Company and
VSEA each agreed to indemnify VMS for one-third of certain environmental
investigation and remediation costs (after adjusting for any insurance proceeds
and tax benefits recognized or realized by VMS for such costs), as further
described below.
VMS 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
8
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amended, at nine sites where VAI is alleged to have shipped manufacturing waste
for recycling, treatment, or disposal. VMS is also involved in various stages of
environmental investigation, monitoring, and/or remediation under the direction
of, or in consultation with, foreign, federal, state, and/or local agencies at
certain current VMS or former VAI facilities.
For certain of these sites and 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 June 30, 2000, it was nonetheless estimated that the Company's
share of the future exposure for environmental-related investigation and
remediation costs for these sites and facilities ranged in the aggregate from
$4.4 million to $10.5 million (without discounting to present value). The time
frame over which these costs are expected to be incurred varies with each site
and facility, ranging up to approximately 30 years as of June 30, 2000. No
amount in the foregoing range of estimated future costs is believed to be more
probable of being incurred than any other amount in such range, and the Company
therefore accrued $4.4 million as of June 30, 2000.
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of June 30, 2000, it was estimated that the Company's share of
the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of June 30, 2000. As to each
of these sites and facilities, it was 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 $9.4 million at June 30, 2000. The Company therefore accrued $4.0
million as of June 30, 2000, which represents the best estimate of its share of
these future costs discounted at 4%, net of inflation. This accrual is in
addition to the $4.4 million described in the preceding paragraph.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the Company. In addition, an insurance company has agreed to pay a portion of
VAI's (now VMS') future environmental-related expenditures for which the Company
has an indemnity obligation, and the Company therefore has a $1.3 million
receivable in Other Assets as of June 30, 2000 for the Company's share of such
recovery. The Company has not reduced any environmental-related liability in
anticipation of recovery with respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified and
related charges or credits 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 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 Company's financial position or results
of operations.
LEGAL PROCEEDINGS. In the Distribution Agreement, the Company agreed to
reimburse VMS for one-third of certain costs and expenses (after adjusting for
any insurance proceeds and tax benefits recognized or realized by VMS for such
costs and expenses) that are paid after April 2, 1999 and arise from actual or
potential claims or legal proceedings relating to discontinued, former or
corporate operations of VAI. These shared liabilities are generally managed by
VMS, and expenses and losses (adjusted for any insurance proceeds and tax
benefits recognized or realized by VMS for such costs and expenses) are
generally borne one-third each by the Company, VMS, and VSEA. Also, from time to
time, the Company is involved in a number of its own legal actions and could
incur an uninsured liability in one or more of them. While the ultimate outcome
of all of the foregoing legal matters is not determinable, management believes
that these matters are not reasonably likely to have a material adverse effect
on the Company's financial position or results of operations.
9
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. RESTRUCTURING CHARGES
During the second quarter of fiscal year 1999, IB's management approved a
program to consolidate field sales and service organizations in Europe,
Australia and the United States so as to fall within the direct responsibility
of management at principal factories in those countries, in order to reduce
costs, simplify management structure, and benefit from the infrastructure
existing in those factories. This restructuring entailed consolidating certain
sales, service, and support operations. The consolidation resulted in exiting of
a product line, closing or downsizing of sales offices, and termination of
approximately 100 personnel. All restructuring activities are expected to be
completed within one year, except for future lease payments. The following table
sets forth certain details associated with this restructuring:
<TABLE>
<CAPTION>
ACCRUAL AT CASH PAYMENTS ACCRUAL AT
MARCH 31, AND OTHER JUNE 30
(IN THOUSANDS) 2000 REDUCTIONS 2000
----------- --------------- ----------
<S> <C> <C> <C>
Lease payments and other facility expenses..................... $ 1,042 $ 65 $ 977
Severance and other related employee benefits.................. 1,178 806 372
----------- --------------- ----------
Total.......................................................... $ 2,220 $ 871 $ 1,349
=========== =============== ==========
</TABLE>
NOTE 11. INDUSTRY SEGMENTS
The Company's operations are grouped into three business segments:
Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing.
Scientific Instruments is a supplier of instruments, consumable laboratory
supplies, and after sales support used in studying the chemical composition and
structure of myriad substances and for imaging. These products are tools for
scientists engaged in drug discovery, life sciences, genetic engineering, health
care, environmental analysis, quality control, and academic research. Vacuum
Technologies provides products and solutions to create, maintain, contain, and
measure an ultra-clean environment for complex industrial processes and
research. Vacuum Technologies products are used in semiconductor manufacturing
equipment, analytical instruments, industrial manufacturing, and quality
control. Electronics Manufacturing provides contract manufacturing services for
technology companies with low-volume and high-mix requirements.
Transactions between segments are accounted for at cost and are not
included in sales. Accordingly, the following information is provided for
purposes of achieving an understanding of operations, but may not be indicative
of the financial results of the reported segments were they independent
organizations. In addition, comparisons of the Company's operations to similar
operations of other companies may not be meaningful.
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
-------------------------- ---------------------------
JUN. 30, JUL. 2, JUN. 30, JUL. 2,
2000 1999 2000 1999
------------- ----------- -------------- ------------
PRETAX PRETAX
(IN MILLIONS) SALES SALES EARNINGS EARNINGS
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Scientific Instruments................................ $ 100.4 $ 97.3 $ 10.9 $ 9.5
Vacuum Technologies................................... 35.4 28.7 6.2 3.1
Electronics Manufacturing............................. 46.2 23.6 3.6 1.8
------------- ----------- -------------- ------------
Total industry segments............................... 182.0 149.6 20.7 14.4
General corporate..................................... -- -- (1.2) (3.2)
Interest (exp.)/inc., net............................. -- -- (0.4) (1.2)
------------- ----------- -------------- ------------
Total................................................. $ 182.0 $ 149.6 $ 19.1 $ 10.0
============= =========== ============== ============
</TABLE>
10
<PAGE>
VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INDUSTRY SEGMENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------------
JUN. 30, 2000 JUL. 2, 1999 JUN. 30, 2000 JUL. 2, 1999
-------------- ------------ --------------- ----------------
PRETAX EARNINGS
(IN MILLIONS) SALES SALES PRETAX EARNINGS (LOSS)
-------------- ------------ --------------- ----------------
<S> <C> <C> <C> <C>
Scientific Instruments...................... $ 296.7 $ 284.4 $ 33.2 $ 0.2
Vacuum Technologies......................... 102.1 77.4 16.5 2.7
Electronics Manufacturing................... 120.5 70.0 9.3 4.2
-------------- ------------ --------------- ----------------
Total industry segments..................... 519.3 431.8 59.0 7.1
General corporate........................... -- -- (7.9) (6.5)
Interest (exp.)/inc., net................... -- -- (1.6) (0.9)
-------------- ------------ --------------- ----------------
Total ...................................... $ 519.3 $ 431.8 $ 49.5 $ (0.3)
============== ============ =============== ================
</TABLE>
NOTE 12. STOCK REPURCHASE PROGRAM
The Company repurchases shares of its common stock under a program to
manage the dilution created by shares issued under employee stock plans. During
the second quarter of fiscal year 2000, the Company's Board of Directors
authorized the Company to repurchase up to 1,000,000 shares of its common stock
until September 28, 2001. The stock repurchases are limited by the amount of
cash generated through stock option exercises since October 4, 1999 and sales of
stock under the Company's Employee Stock Purchase Plan.
For the fiscal quarter and nine months ended June 30, 2000, the Company
repurchased 190,000 and 272,500 shares, respectively, for an aggregate cost of
$6.1 million and $9.7 million. All repurchased shares were subsequently retired.
As of June 30, 2000, the Company had remaining authorization for future
repurchases of 727,500 shares.
NOTE 13. EMPLOYEE STOCK PURCHASE PLAN
During the second quarter of fiscal year 2000, the Company's Board of
Directors approved an Employee Stock Purchase Plan for which the Company set
aside 1,200,000 shares of common stock for issuance under the Plan. Beginning
with the first enrollment date of April 3, 2000, eligible Company employees may
set aside for purchases under the Plan between 1% and 10% of eligible
compensation through payroll deductions. The participants' purchase price is the
lower of 85% of the stock's market value on the enrollment date or 85% of the
stock's market value on the purchase date. Enrollment dates occur every six
months and purchase dates occur each quarter.
During the third quarter of fiscal year 2000, employees purchased 20,002
shares for $0.6 million. As of June 30, 2000, a total of 1,179,998 shares
remained available for issuance.
NOTE 14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting and Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS 133 and SFAS 138 require derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for gains
or losses resulting from changes in the fair values of those derivatives would
be dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 and SFAS 138 are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and
SFAS
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
138 in the first quarter of fiscal year 2001. The Company does not believe the
implementation of SFAS 133 and SFAS 138 will have a material effect on its
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
The Company is in the process of determining the impact that adoption will have
on the consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Until April 2, 1999, the business of Varian, Inc. (the "Company") was
operated as the Instruments Business ("IB") of Varian Associates, Inc. ("VAI").
IB included the business units that designed, manufactured, sold, and serviced
scientific instruments and vacuum technologies, and a business unit that
provided contract electronics manufacturing. VAI contributed IB to the Company;
then on April 2, 1999, VAI distributed to the holders of record of VAI common
stock on March 24, 1999 one share of common stock of the Company for each share
of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the
same time, VAI contributed its Semiconductor Equipment business to Varian
Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders
of record of VAI common stock on March 24, 1999 one share of common stock of
VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI
retained its Health Care Systems business and changed its name to Varian Medical
Systems, Inc. ("VMS") effective as of April 3, 1999. These transactions were
accomplished under the terms of an Amended and Restated Distribution Agreement
dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the
"Distribution Agreement"). For purposes of providing an orderly transition and
to define certain ongoing relationships between and among the Company, VMS, and
VSEA after the Distribution, the Company, VMS, and VSEA also entered into
certain other agreements which include an Employee Benefits Allocation
Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a
Transition Services Agreement.
The interim consolidated financial statements generally reflect the
Company's results of operations and cash flows for the quarter ended July 2,
1999 and IB's results of operations and cash flows for the six months ended
April 2, 1999. The interim consolidated financial statements also reflect the
Company's results of operations and cash flows for the quarter and nine months
ended June 30, 2000. The interim consolidated financial results for the six
months ended April 2, 1999 were carved out from the interim financial statements
of VAI using the historical results of operations of IB and include the accounts
of IB after elimination of inter-business transactions. These interim
consolidated financial results also include allocations of certain VAI corporate
expenses (including legal, accounting, employee benefits, insurance services,
information technology services, treasury, and other corporate overhead) to IB.
These amounts have been allocated to IB on the basis that is considered by
management to reflect most fairly or reasonably the utilization of the services
provided to or the benefit obtained by IB. Typical measures and activity
indicators used for allocation purposes include headcount, sales revenue, and
payroll expense. The Company's management believes that the methods used to
allocate these amounts are reasonable. However, these allocations are not
necessarily indicative of the amounts that would have been or that will be
recorded by the Company on a stand-alone basis.
The Company's fiscal years reported are the 52-week periods ending on the
Friday nearest September 30. Fiscal year 2000 will comprise the 52-week period
ending September 29, 2000, and fiscal year 1999 was comprised of the 52-week
period ended October 1, 1999. The fiscal quarters ended June 30, 2000 and July
2, 1999 each comprise 13 weeks, and the nine-month periods ended June 30, 2000
and July 2, 1999 each comprise 39 weeks.
RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL YEAR 2000 COMPARED TO THIRD QUARTER OF FISCAL YEAR 1999
SALES. Sales were $182.0 million in the third quarter of fiscal year
2000, an increase of 21.7% from sales of $149.6 million in the third quarter of
fiscal year 1999. Sales by the Scientific Instruments, Vacuum Technologies, and
Electronics Manufacturing segments increased by 3.0%, 23.8%, and 96.1%,
respectively.
Geographically, sales in North America of $111.4 million, Europe of $40.5
million and the rest of the world of $30.1 million in the third quarter of
fiscal year 2000 represented increases (decreases) of 25%, (3%), and 61%,
respectively, as compared to the third quarter of fiscal year 1999. The
significant increase in North America was due to the strong sales growth of the
Electronics Manufacturing and Vacuum Technologies segments. The decrease in
Europe resulted principally from the sharp decline in the European currencies in
the quarter. The significant increase in the rest of the world was primarily due
to the general economic recovery of the Asian markets.
Orders in the third quarter of fiscal year 2000 were $185.1 million,
compared to $164.2 million in the third quarter of fiscal year 1999. Both Vacuum
Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
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<PAGE>
GROSS PROFIT. Gross profit was $67.3 million (representing 37.0% of
sales) in the third quarter of fiscal year 2000, compared to $58.4 million
(representing 39.0% of sales) in the third quarter of fiscal year 1999. The
lower gross profit percent was the result of the revenue shift among the
Company's three segments. The Vacuum Technologies and Electronics Manufacturing
segments, which have lower gross profit percents than the Scientific Instruments
segment, had higher sales growth than the Scientific Instruments segment. The
gross profit percents of each of the three segments in the third quarter of
fiscal year 2000 were the same or higher than the same quarter of fiscal year
1999.
SALES AND MARKETING. Sales and marketing expenses were $31.3 million
(representing 17.2% of sales) in the third quarter of fiscal year 2000, compared
to $29.0 million (representing 19.4% of sales) in the third quarter of fiscal
year 1999. The increase in dollars was required to support the sales growth. The
decrease as a percent of sales was primarily the result of the revenue shift
among the segments noted above, as the faster growing Vacuum Technologies and
Electronics Manufacturing segments have lower operating expenses as a percent of
sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $8.3
million (representing 4.5% of sales) in the third quarter of fiscal year 2000,
compared to research and development expenses of $7.7 million (representing 5.1%
of sales) in the third quarter of fiscal year 1999. The decrease in research and
development expense as a percent of sales was the result of the revenue shift
among the segments noted above. Research and development spending within each
segment as a percent of sales for the third quarter of fiscal year 2000 was
approximately the same as the same quarter of fiscal year 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.3
million (representing 4.6% of sales) in the third quarter of fiscal year 2000,
compared to $10.5 million (representing 7.0% of sales) in the third quarter of
fiscal year 1999. The improvement in general and administrative expenses is
primarily the result of the Company's strategy to control these expenses as
sales increase. Expenses in the third quarter of fiscal year 1999 also included
on-going transition costs related to the spin-off from VAI.
NET INTEREST EXPENSE. Net interest expense was $0.4 million (representing
0.2% of sales) for the third quarter of fiscal year 2000, compared to $1.2
million (representing 0.8% of sales) for the third quarter of fiscal year 1999.
The reduction in net interest expense results mainly from the interest income
earned on the higher cash balance and the repayment of debt.
TAXES ON EARNINGS. The effective income tax rate was 39.0% for the third
quarter of fiscal year 2000, compared to 44.5% for the third quarter of fiscal
year 1999. The fiscal year 1999 rate is higher because the Company realized a
larger proportion of high tax-rate, foreign country income in fiscal year 1999
(due primarily to restructuring and related charges incurred in lower tax-rate
countries) than it anticipates for fiscal year 2000.
NET EARNINGS. Net earnings were $11.6 million ($0.34 diluted net earnings
per share) in the third quarter of fiscal year 2000, compared to net earnings of
$5.5 million ($0.18 diluted net earnings per share) in the third quarter of
fiscal year 1999. The net earnings improvements resulted from higher sales,
operating expenses growing at a lower rate than sales, lower net interest
expense, and the reduction in the income tax rate from the same period in fiscal
year 1999.
SEGMENTS. Scientific Instruments sales of $100.4 million in the third
quarter of fiscal year 2000 increased 3.0% over the third quarter of fiscal year
1999 sales of $97.3 million. NMR product sales experienced healthy growth during
the quarter. Approximately 40% of analytical product sales were in Europe, and
as a result, were affected by the sharp drop in European currencies. Earnings
from operations in the third quarter of fiscal year 2000 of $10.9 million (10.9%
of sales) increased from $9.5 million (9.7% of sales) in the third quarter of
fiscal year 1999, driven primarily by improved financial performance in NMR
products.
Vacuum Technologies sales of $35.4 million in the third quarter of fiscal
year 2000 increased 23.8% above the third quarter of fiscal year 1999 sales of
$28.7 million. The increase was driven principally by increasing shipments of
turbo molecular pumps supplied by the Turin, Italy factory. Earnings from
operations in the third quarter of fiscal year 2000 of $6.2 million (17.4% of
sales) increased from $3.1 million (11.1% of sales) in the third quarter of
fiscal year 1999. The improved earnings from operations were primarily the
result of higher sales and lower expense ratios.
Electronics Manufacturing sales in the third quarter of fiscal year 2000
of $46.2 million increased 96.1% from the third quarter of fiscal year 1999
sales of $23.6 million. The increase in sales was principally due to strong
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<PAGE>
demand for outsourced manufacturing services from the telecommunications and
medical equipment industries. The January 31, 2000 acquisition of an electronics
manufacturing operation in Poway, California, added approximately $6.5 million
of revenue in the third quarter. Earnings from operations in the third quarter
of fiscal year 2000 of $3.6 million (7.7% of sales) increased from $1.8 million
(7.7% of sales) in the third quarter of fiscal year 1999. The increase in
earnings from operations was primarily the result of the increased sales.
FIRST NINE MONTHS OF FISCAL YEAR 2000 COMPARED TO FIRST NINE MONTHS OF FISCAL
YEAR 1999
SALES. Sales were $519.3 million in the first nine months of fiscal year
2000, an increase of 20.3% from sales of $431.8 million in the first nine months
of fiscal year 1999. Sales by the Scientific Instruments, Vacuum Technologies,
and Electronics Manufacturing segments increased by 4.3%, 32.0%, and 72.2%,
respectively.
Geographically, sales in North America of $305.4 million, Europe of
$133.6 million and the rest of the world of $80.3 million in the first nine
months of fiscal year 2000 represented increases of 28%, 0%, and 36%,
respectively, as compared to the first nine months of fiscal year 1999. The
significant increase in North America was largely due to the strong sales growth
of the Electronics Manufacturing and Vacuum Technologies segments. The flat
sales in Europe resulted mainly from the strength of the U.S. dollar versus the
European currencies. The significant increase in the rest of the world was
primarily due to the general economic recovery of the Asian markets.
Orders in the first nine months of fiscal year 2000 were $544.4 million,
compared to $456.9 million in the first nine months of fiscal year 1999. Both
Vacuum Technologies and Electronics Manufacturing had particularly strong orders
growth, with Scientific Instruments also contributing to the increase.
GROSS PROFIT. Gross profit was $196.6 million (representing 37.9% of
sales) in the first nine months of fiscal year 2000, compared to $158.2 million
(representing 36.6% of sales) in the first nine months of fiscal year 1999. The
lower gross profit percentage in the first nine months of fiscal year 1999
resulted primarily from actions taken as part of an overall reorganization of
IB, which included actions to prepare IB to separate from VAI and become a
stand-alone company, other organization changes and a comprehensive product
review, which resulted in a decision to accelerate transition from certain older
to newer products necessitating the writedown of certain excess and obsolete
inventories and the lowering of prices to accelerate the liquidation of older
products. The impact on gross profit of these actions was in addition to the
restructuring charges discussed below.
SALES AND MARKETING. Sales and marketing expenses were $92.4 million
(representing 17.8% of sales) in the first nine months of fiscal year 2000,
compared to $93.2 million (representing 21.6% of sales) in the first nine months
of fiscal year 1999. The higher costs as a percentage of sales in the first nine
months of fiscal year 1999 resulted from actions taken as part of the
above-described reorganization, including costs to move people and equipment to
new consolidated locations, writedown of field demonstration equipment following
the accelerated transition to newer products, and other higher than normal costs
related to the reorganization. These changes were in addition to the
restructuring charges discussed below. Sales and marketing expenses in the first
nine months of fiscal year 2000 benefited from the cost savings from the fiscal
year 1999 restructuring and reorganization activities and the overall leverage
of higher sales.
RESEARCH AND DEVELOPMENT. Research and development expenses were $23.8
million (representing 4.6% of sales) in the first nine months of fiscal year
2000, compared to research and development expenses of $24.1 million
(representing 5.6% of sales) in the first nine months of fiscal year 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$29.3 million (representing 5.6% of sales) in the first nine months of fiscal
year 2000, compared to $29.2 million (representing 6.8% of sales) in the first
nine months of fiscal year 1999. General and administrative expenses for the
first nine months of fiscal year 2000 were actual costs of the Company, whereas
general and administrative costs for the first nine months of fiscal year 1999
comprise three months of actual costs of the Company and six months of allocated
costs of VAI.
RESTRUCTURING CHARGES. During the first half of fiscal year 1999, IB's
management approved a program to consolidate field sales and service
organizations in Europe, Australia, and the United States so as to fall within
the direct responsibility of management at IB's principal factories in those
countries in order to reduce costs, simplify management structure and benefit
from the infrastructure existing in those factories. This restructuring entailed
consolidating certain sales, service and support operations. The consolidation
resulted in exiting of a product line, closing or downsizing of sales offices
and termination of approximately 100 personnel.
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NET INTEREST EXPENSE. Net interest expense was $1.6 million (representing
0.3% of sales) for the first nine months of fiscal year 2000, compared to $0.9
million (representing 0.2% of sales) for the first nine months of fiscal year
1999. Prior to the Distribution on April 2, 1999, no debt had been allocated to
the Company. See "Liquidity and Capital Resources" below.
TAXES ON EARNINGS. The effective income tax rate was 39.0% for the first
nine months of fiscal year 2000, compared to 44.5% for the first nine months of
fiscal year 1999. The fiscal year 1999 rate is higher because the Company
realized a larger proportion of high tax-rate, foreign country income in fiscal
year 1999 (due primarily to restructuring and related charges incurred in lower
tax-rate countries) than it anticipates for fiscal year 2000.
NET EARNINGS. Net earnings were $49.5 million ($0.90 diluted net earnings
per share) in the first nine months of fiscal year 2000, compared to the net
loss of $0.2 million ($0.01 diluted net loss per share) in the first nine months
of fiscal year 1999. The first nine months of fiscal year 1999 included IB's
overall reorganizations, which resulted in incremental costs primarily included
in costs of sales, marketing, and restructuring charges.
SEGMENTS. Scientific Instruments sales of $296.7 million in the first
nine months of fiscal year 2000 increased 4.3% from the first nine months of
fiscal year 1999 sales of $284.4 million. Sales were adversely impacted by the
significant drop in European currencies, particularly in the third quarter of
fiscal year 2000. Earnings from operations in the first nine months of fiscal
year 2000 of $33.2 million (11.2% of sales) increased from $0.2 million (0.1% of
sales) in the first nine months of fiscal year 1999. The first nine months of
fiscal year 1999 were significantly impacted by the overall IB reorganization
discussed above.
Vacuum Technologies sales of $102.1 million in the first nine months of
fiscal year 2000 increased 32.0% from the first nine months of fiscal year 1999
sales of $77.4 million. The increase in sales was primarily due to the recovery
of the Asian economies and the improved demand from semiconductor equipment
manufacturers and users. Earnings from operations in the first nine months of
fiscal year 2000 of $16.5 million (16.1% of sales) were up from $2.7 million
(3.5% of sales) in the first nine months of fiscal year 1999. The first nine
months of fiscal year 1999 were negatively impacted by the overall IB
reorganization discussed above and by the lower sale volume.
Electronics Manufacturing sales in the first nine months of fiscal year
2000 of $120.5 million increased 72.2% from the first nine months of fiscal year
1999 sales of $70.0 million. The increase in sales was primarily due to strong
demand from the communications and medical equipment industries and the general
movement of small- to medium-size manufacturing companies to outsource their
electronics manufacturing. In addition, on January 31, 2000 the Company acquired
an electronics manufacturing operation in Poway, California, which added $10.4
million to revenues since the acquisition. Earnings from operations in the first
nine months of fiscal year 2000 of $9.3 million (7.7% of sales) increased from
$4.2 million (6.1% of sales) in the first nine months of fiscal year 1999. The
increase in earnings from operations was primarily the result of the increased
sales.
LIQUIDITY AND CAPITAL RESOURCES
VAI CASH AND DEBT ALLOCATIONS. The Distribution Agreement provided for
the division among the Company, VSEA, and VMS of VAI's cash and debt as of April
2, 1999. Under the Distribution Agreement, the Company was to assume 50% of
VAI's term loans and receive an amount of cash from VAI such that it would have
net debt (defined in the Distribution Agreement as the amount outstanding under
the term loans and notes payable, less cash and cash equivalents) equal to
approximately 50% of the net debt of the Company and VMS, subject to such
adjustment as was necessary to provide VMS with a net worth (as defined in the
Distribution Agreement) of between 40% and 50% of the aggregate net worth of the
Company and VMS, and subject to further adjustment to reflect the Company's
approximately 50% share of the estimated proceeds, if any, to be received by VMS
after the Distribution from the sale of VAI's long-term leasehold interest at
certain of its Palo Alto facilities, together with certain related buildings and
other corporate assets, and the Company's obligation for approximately 50% of
any estimated transaction expenses to be paid by VMS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from all
sales and transaction expenses). Since the amounts transferred immediately prior
to the Distribution were based on estimates, these and other adjustments were
required following the Distribution. As a result of these final adjustments, the
Company recorded an increase in stockholders' equity of $1.1 million in the
second quarter of fiscal year 2000. Management believes that no further
adjustments are necessary, and that if any are required, they will not have a
material effect on the Company's financial condition.
CASH AND CASH EQUIVALENTS. The Company generated $31.4 million of cash
from operations in the first nine months of fiscal year 2000, which compares to
$23.0 million in the first nine months of fiscal year 1999. The
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increase in cash from operations resulted from improved net earnings and a
reduction in working capital requirements. The Company used $21.1 million of
cash for the acquisition of capital equipment and an electronics manufacturing
operation in Poway, California in the first nine months of fiscal year 2000,
which compares to $13.2 million for the acquisition of capital equipment in the
first nine months of fiscal year 1999. The Company generated $16.1 million of
cash from financing activities in the first nine months of fiscal year 2000
compared to $14.0 million in the first nine months of fiscal year 1999. Proceeds
from exercise of stock options represented a significant amount of the cash
generated from financing activities reduced by scheduled debt payments and the
repurchase of 272,500 shares of the Company's common stock under a recently
approved stock buy-back plan. The Company's current business strategy
contemplates possible acquisitions, further stock buy-backs and/or facility
expansions. Any of these possibilities could utilize cash currently being
generated by the Company.
The Distribution Agreement provides that the Company is responsible for
certain litigation to which VAI was a party, and further provides that the
Company will indemnify VMS or VSEA, as the case may be, for one-third of the
costs, expenses, and other liabilities relating to certain discontinued, former,
and corporate operations of VAI, including certain environmental liabilities
(see "Environmental Matters" and "Legal Proceedings" below).
The Company's liquidity is affected by many other factors, some based on
the normal ongoing operations of the business and others related to the
uncertainties of the industry and global economies. Although the Company's cash
requirements will fluctuate based on the timing and extent of these factors,
management believes that cash generated from operations, together with the
Company's borrowing capability, will be sufficient to satisfy commitments for
capital expenditures and other cash requirements for the foreseeable future.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various foreign, federal, state,
and/or local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. This includes
discharges into soil, water and air, and the generation, handling, storage,
transportation, and disposal of waste and hazardous substances. In addition,
several countries have adopted or are reviewing proposed regulations that would
require manufacturers to dispose of their products at the end of their useful
life. These laws could increase costs and potential liabilities associated with
the conduct of the Company's operations.
In addition, under the Distribution Agreement, the Company and VSEA each
agreed to indemnify VMS for one-third of certain environmental investigation and
remediation costs (after adjusting for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs), as further described below.
VMS 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 nine sites where
VAI is alleged to have shipped manufacturing waste for recycling, treatment, or
disposal. VMS is also involved in various stages of environmental investigation,
monitoring, and/or remediation under the direction of, or in consultation with,
foreign, federal, state, and/or local agencies at certain current VMS or former
VAI facilities.
For certain of these sites and 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 June 30, 2000, it was nonetheless estimated that the Company's
share of the future exposure for environmental-related investigation and
remediation costs for these sites and facilities ranged in the aggregate from
$4.4 million to $10.5 million (without discounting to present value). The time
frame over which these costs are expected to be incurred varies with each site
and facility, ranging up to approximately 30 years as of June 30, 2000. No
amount in the foregoing range of estimated future costs is believed to be more
probable of being incurred than any other amount in such range, and the Company
therefore accrued $4.4 million as of June 30, 2000.
As to other sites and facilities, sufficient knowledge has been gained to
be able to better estimate the scope and costs of future environmental
activities. As of June 30, 2000, it was estimated that the Company's share of
the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $8.1 million
to $13.7 million (without discounting to present value). The time frame over
which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 30 years as of June 30, 2000. As to each
of these sites and facilities, it was 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
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$9.4 million at June 30, 2000. The Company therefore accrued $4.0 million as of
June 30, 2000, which represents the best estimate of its share of these future
costs discounted at 4%, net of inflation. This accrual is in addition to the
$4.4 million described in the preceding paragraph.
Claims for recovery of environmental investigation and remediation costs
already incurred, and to be incurred in the future, were asserted by VAI against
various insurance companies and other third parties. VMS is still pursuing
recovery against a final insurance company for the benefit of itself, VSEA, and
the Company. In addition, an insurance company has agreed to pay a portion of
VAI's (now VMS') future environmental-related expenditures for which the Company
has an indemnity obligation, and the Company therefore has a $1.3 million
receivable in Other Assets as of June 30, 2000 for the Company's share of such
recovery. The Company has not reduced any environmental-related liability in
anticipation of recovery with respect to claims made against third parties.
The Company's management believes that its reserves for the foregoing and
certain other environmental-related matters are adequate, but as the scope of
its obligation becomes more clearly defined, these reserves may be modified, and
related charges or credits 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 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 Company's financial position or results
of operations.
LEGAL PROCEEDINGS
In the Distribution Agreement, the Company agreed to reimburse VMS for
one-third of certain costs and expenses (after adjusting for any insurance
proceeds and tax benefits recognized or realized by VMS for such costs and
expenses) that are paid after April 2, 1999 and arise from actual or potential
claims or legal proceedings relating to discontinued, former, or corporate
operations of VAI. These shared liabilities are generally managed by VMS, and
expenses and losses (adjusted for any insurance proceeds and tax benefits
recognized or realized by VMS for such costs and expenses) are generally borne
one-third each by the Company, VMS, and VSEA. Also, from time to time, the
Company is involved in a number of its own legal actions and could incur an
uninsured liability in one or more of them. While the ultimate outcome of all of
the foregoing legal matters is not determinable, management believes that these
matters are not reasonably likely to have a material adverse effect on the
Company's financial position or results of operations.
YEAR 2000
The Company completed a comprehensive assessment of potential Year 2000
problems with respect to the Company's internal systems, the Company's products,
and significant third parties with which the Company does business. The Company
has not experienced any significant Year 2000 problems in its internal systems,
with previously-sold products or with significant third parties. However, there
can be no assurance that the Company will not incur costs with respect to Year
2000 problems not yet experienced or reported. If the Company experiences Year
2000 problems not yet experienced, the Company's operations could be adversely
impacted. However, management does not currently believe that such risks are
reasonably likely to have a material adverse effect on the Company's business,
results of operations, or financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting and Standards Board issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS 133 and SFAS 138 require derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for gains
or losses resulting from changes in the fair values of those derivatives would
be dependent upon the use of the derivative and whether it qualifies for hedge
accounting. SFAS 133 and SFAS 138 are effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133 and
SFAS 138 in the first quarter of fiscal year 2001. The Company does not believe
the implementation of SFAS 133 and SFAS 138 will have a material effect on its
financial statements.
18
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the Securities and Exchange Commission. SAB 101 outlines
the basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB 101 is effective no
later than the fourth quarter of fiscal years beginning after December 15, 1999.
The Company is in the process of determining the impact that adoption will have
on the consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY EXCHANGE RISK. The Company typically hedges its currency
exposures associated with certain assets and liabilities denominated in
non-functional currencies and with anticipated foreign currency cash flows. As a
result, the effect of an immediate 10% change in exchange rates would not be
material to the Company's financial condition or results of operations. The
Company's forward exchange contracts have generally ranged from one to 12 months
in original maturity, and no forward exchange contract has had an original
maturity greater than one year. Forward exchange contracts outstanding as of
June 30, 2000 that hedge the balance sheet and certain purchase commitments were
effective June 30, 2000, and accordingly there were no significant unrealized
gains or losses associated with such contracts and the fair value of these
contracts approximates their notional values.
FORWARD EXCHANGE CONTRACTS OUTSTANDING AS OF JUNE 30, 2000
NOTIONAL
NOTIONAL VALUE
VALUE SOLD PURCHASED
---------- --------------
(IN THOUSANDS)
Australian Dollar.............................. $ -- $ 22,049
Japanese Yen................................... 14,021 --
British Pound.................................. 6,705 11,258
Canadian Dollar................................ 3,911 --
Euro........................................... -- 6,340
---------- --------------
Total..................................... $ 24,637 $ 39,647
========== ==============
INTEREST RATE RISK
The Company has no material exposure to market risk for changes in
interest rates. The Company invests primarily in short-term U.S. Treasury
securities, and changes in interest rates would not be material to the Company's
financial condition or results of operations. The Company primarily enters into
debt obligations to support general corporate purposes, including working
capital requirements, capital expenditures, and acquisitions. At June 30, 2000,
the Company's debt obligations had fixed interest rates.
The estimated fair value of the Company's debt obligations approximates
the principal amounts reflected below on rates currently available to the
Company for debt with similar terms and remaining maturities.
Although payments under certain of the Company's operating leases for its
facilities are tied to market indices, the Company is not exposed to material
interest rate risk associated with its operating leases.
DEBT OBLIGATIONS
PRINCIPAL AMOUNTS AND RELATED WEIGHTED AVERAGE INTEREST RATES BY YEAR OF
MATURITY
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED FISCAL YEARS
SEP. 29, -------------------------------------------------
(IN THOUSANDS) 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL
----------- -------- -------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long term debt
(including current
portion)................. $ 178 $ 6,392 $ 6,433 $ 3,485 $ 3,269 $ 2,500 $ 30,000 $ 52,257
Average Interest
rate..................... 1.5% 6.9% 6.9% 5.4% 5.6% 7.2% 6.8% 6.7%
</TABLE>
19
<PAGE>
PART II.
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
EXHIBIT
NO. DESCRIPTION
------- ----------------------
27.1 Financial Data Schedule.
---------------------
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, INC.
(Registrant)
By /s/ G. EDWARD MCCLAMMY
-------------------------------------------------
G. Edward McClammy
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
PRINCIPAL FINANCIAL OFFICER)
Dated: August 4, 2000
21
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- ----------------------
27.1 Financial Data Schedule.
---------------
22
