<PAGE> 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 DECEMBER 27, 1996
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: 1-7598
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER:
VARIAN ASSOCIATES, INC.
STATE OR OTHER JURISDICTION 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:
(415) 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 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
----- -----
An index of exhibits filed with this Form 10-Q is located on page 14.
Number of shares of Common Stock, par value $1 per share, outstanding
as of the close of business on January 24, 1997: 30,597,000 shares.
<PAGE> 2
PART 1. FINANCIAL INFORMATION
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS DECEMBER 27, DECEMBER 29,
EXCEPT PER SHARE AMOUNTS) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
SALES $ 321,959 $ 351,247
----------- -----------
OPERATING COSTS AND EXPENSES
Cost of sales 210,060 218,115
Research and development 26,382 24,517
Marketing 48,798 46,724
General and administrative 15,895 23,205
----------- -----------
TOTAL OPERATING COSTS AND EXPENSES 301,135 312,561
----------- -----------
OPERATING EARNINGS 20,824 38,686
Interest expense/(income), net 1,093 (1,220)
----------- -----------
EARNINGS BEFORE TAXES 19,731 39,906
Taxes on earnings 6,910 14,370
----------- -----------
NET EARNINGS $ 12,821 $ 25,536
=========== ===========
AVERAGE SHARES OUTSTANDING INCLUDING
COMMON STOCK EQUIVALENTS 31,599 32,266
=========== ===========
NET EARNINGS PER SHARE $ 0.41 $ 0.79
=========== ===========
Dividends Declared Per Share $ 0.08 $ 0.07
Order Backlog $ 634,302 $ 725,403
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE> 3
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DECEMBER 27, SEPTEMBER 27,
(DOLLARS IN THOUSANDS EXCEPT PAR VALUES) 1996 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 76,899 $ 82,675
Accounts receivable 332,281 380,330
Inventories
Raw materials and parts 118,375 112,322
Work in process 46,216 53,682
Finished goods 37,193 23,878
----------- -----------
Total inventories 201,784 189,882
Other current assets 92,534 91,010
----------- -----------
TOTAL CURRENT ASSETS 703,498 743,897
Property, Plant, and Equipment 481,006 473,852
Accumulated depreciation and amortization (268,757) (261,766)
----------- -----------
NET PROPERTY, PLANT, AND EQUIPMENT 212,249 212,086
Other Assets 86,157 62,938
----------- -----------
TOTAL ASSETS $ 1,001,904 $ 1,018,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 23,312 $ 4,362
Accounts payable - trade 62,258 75,745
Accrued expenses 217,431 264,565
Product warranty 48,622 49,251
Advance payments from customers 64,377 56,071
----------- -----------
TOTAL CURRENT LIABILITIES 416,000 449,994
Long-Term Accrued Expenses 28,157 29,007
Long-Term Debt 79,258 60,258
Deferred Taxes 11,816 11,753
----------- -----------
TOTAL LIABILITIES 535,231 551,012
----------- -----------
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
30,597,000 shares at December 27, 1996 and 30,646,000 shares at
September 27, 1996 30,597 30,646
Retained earnings 436,076 437,263
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 466,673 467,909
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,001,904 $ 1,018,921
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE> 4
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
- ---------------------------------------------------------------------------------------------------
DECEMBER 27, DECEMBER 29,
(DOLLARS IN THOUSANDS) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided/(Used)by Operating Activities $ 7,305 $ (48,660)
INVESTING ACTIVITIES
Purchase of property, plant, and equipment (15,514) (14,647)
Purchase of businesses, net of cash acquired (25,341) -
Other, net 2,089 (967)
----------- -----------
Net Cash Used by Investing Activities (38,766) (15,614)
FINANCING ACTIVITIES
Net borrowings on short-term obligations 12,950 28,343
Proceeds from long-term borrowings 25,000 -
Proceeds from common stock issued to employees 6,108 10,710
Purchase of common stock (17,705) (23,592)
Other, net (2,460) (2,252)
----------- -----------
Net Cash Provided by Financing Activities 23,893 13,209
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 1,792 (37)
----------- -----------
Net Decrease in Cash and Cash Equivalents (5,776) (51,102)
Cash and Cash Equivalents at Beginning of Period 82,675 122,728
----------- -----------
Cash and Cash Equivalents at End of Period $ 76,899 $ 71,626
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<PAGE> 5
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(Dollars in Millions)
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. 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 first quarter ended December 27, 1996, 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
$47.0 at December 27, 1996, $46.8 at September 27, 1996, $46.5
at December 29, 1995, and $45.6 at September 29, 1995.
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
<PAGE> 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. At December 27, 1996,
the Company had forward exchange contracts with maturities of
twelve months or less to sell foreign currencies totaling
$75.8 million ($22.2 million of French francs, $16.4 million
of Japanese yen, $13.2 million of Canadian dollars, $9.1
million of Italian lira, $4.2 million of Austrian schillings,
$3.4 million of Dutch gilders, $2.4 million of German marks,
$2.0 million of Norwegian krone, $1.8 million of Spanish
pesetas, and $1.1 million of Belgium francs) and to buy
foreign currencies totaling $11.7 million ($4.9 million of
Swiss francs, $4.5 million of Australian dollars, $2.2 million
of British pounds, and $0.1 million of Swedish krona).
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 believes that it has meritorious defenses to the
Panache lawsuit.
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
will not have a material adverse effect on the financial
condition of the Company.
6
<PAGE> 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 (Continued)
The Company has also 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 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. Uncertainty as
to (a) the extent to which the Company caused, if at all, the
conditions being investigated, (b) the extent of environmental
contamination and risks, (c) the applicability of changing and
complex environmental laws, (d) the number and financial
viability of other potentially responsible parties, (e) the
stage of the investigation and/or remediation, (f) the
unpredictability of investigation and/or remediation costs
(including as to when they will be incurred), (g) applicable
clean-up standards,(h) the remediation (if any) that will
ultimately be required, and (i) available technology 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.
Nevertheless, the Company continues to estimate the amounts of
these future costs in periodically establishing reserves,
based partly on progress made in determining the magnitude of
such costs, experience gained from sites on which remediation
is ongoing or has been completed, and the timing and extent of
remedial actions required by the applicable governmental
authorities. As of December 27, 1996, the Company estimated
that the present value of the Company's future exposure for
environmental related investigation and remediation
expenditures, including operating and maintenance costs,
ranged from approximately $31.1 million to $52.5 million. The
time frame over which the Company expects to incur such costs
varies with each site, ranging up to 29 years at December 27,
1996. 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 has
accrued $31.1 million in estimated environmental costs at
December 27, 1996. The Company believes that the amount
accrued is adequate, but as the scope of its obligations
becomes more clearly defined, the accrued amount may be
modified and related charges against earnings may be made.
7
<PAGE> 8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: (Continued)
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, management
believes that the costs of these environmental related matters
are not reasonably likely to have a material adverse effect on
the financial condition 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
settlements during 1995 and 1996 and has a $0.2
million receivable in Other Current Assets at December 27,
1996. Although the Company intends to aggressively pursue
additional insurance recoveries from remaining defendants in
that lawsuit, due to the uncertainty as to ultimate recoveries
from third parties, the Company has neither recorded any asset
nor reduced any liability in anticipation of recovery with
respect to claims made against third parties.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On January 16, 1997, the Company reported lower orders, sales, and
profits for the first quarter of fiscal 1997 compared to the record highs
achieved in all three categories in the first quarter of fiscal 1996.
First-quarter orders of $347 million were 20% below the previous year's $436
million. Sales for the quarter of $322 million were down 8% from last year's
$351 million. Backlog of $634 million was 13% below the year-ago's $725
million , but grew 3% from the prior year's fourth quarter. Net earnings for
the first quarter were $12.8 million compared to $25.5 million in the year-ago
quarter. Earnings per share of $.41 fell below 1996's first quarter of $.79
per share.
The lower first-quarter results reflect the varying conditions
prevailing in the diverse markets served by the Company's three core business
segments. Orders and sales for two of the businesses, Health Care Systems and
Instruments, rose over the prior year's first quarter. However, the gains were
not enough to offset the soft demand for the Company's Semiconductor Equipment
operations where bookings and shipments were sharply below the first quarter of
1996 due to an industry down cycle.
Orders for Varian's Health Care Systems business increased 1% from the
year-ago quarter, with a 13% rise in oncology products bookings offsetting the
lower orders for X-ray tube products. Backlog was up 16% from last year's
first quarter and rose 3% from the prior quarter to a record $351 million.
Sales rose 4% from the prior year with the oncology side of the business
accounting for all of the revenue increase, while operating margins declined
modestly from the year-ago quarter due to lower X-ray tube margins. Orders for
cancer therapy equipment improved in the U.S. market, extending a recovery
which began in the prior quarter.
Orders for the Instruments business rose 4% over the year-ago quarter
to a record $134 million with nearly all product lines contributing to the
gain. The higher bookings pushed backlog to a record $122 million, which was
3% ahead of the prior year and up 11% from the previous quarter. First-quarter
sales of $122 million were up 8% from the year-ago period, with the higher
shipments spread across all product categories, particularly in the analytical
sector which grew at nearly a double-digit rate. Operating margins for the
Instruments business improved from the year-ago quarter, again, with nearly all
product lines contributing to the advance.
In contrast to its other two segments, the Company's Semiconductor
Equipment business had a difficult quarter because of the industry slowdown in
demand for chip-making equipment. First-quarter orders for this segment of
$106 million dropped 50% from the year-ago period, but rose 29% from the prior
quarter. The slow-down in demand was apparent in both the ion implantation and
thin film coating product lines. However, orders for customer support products
rose, as is typical in a downturn when the equipment is run harder than normal.
Backlog was off 36% from fiscal 1996's first quarter, but just 2% below the
level of the prior quarter. Semiconductor Equipment sales of $101 million were
down 30% from the prior year's first quarter,
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
with the ion implant sector accounting for the decline while thin film products
shipments rose modestly. Because of the lower shipments, operating margins for
these activities were well below the year-ago level; however, margins remained
in double-digits.
FINANCIAL CONDITION
The Company's financial condition remained strong during the first
quarter of fiscal 1997. Operating activities provided cash of $7.3 million in
the first quarter of fiscal 1997 and used $48.7 million in the same period last
year. Investing activities used $38.8 million in the first quarter of fiscal
1997, $25.3 million for the purchase of a business and $15.5 million for the
purchase of property, plant and equipment. Investing activities in the same
period last year used $15.6 million of which $14.6 million was used for the
purchase of property, plant and equipment. Financing activities in the first
quarter of fiscal 1997 provided $23.9 million, which included $25.0 million in
long- term borrowing. Financing activities provided $13.2 million in the first
quarter of fiscal 1996. Total debt as a percentage of total capital increased
to 18.02% at the end of the first quarter of fiscal 1997 as compared with
12.13% at fiscal year end, 1996. The ratio of current assets to current
liabilities increased to 1.69 to 1 at December 27, 1996, from 1.65 to 1 at
fiscal year end, 1996. The Company has available $50 million in unused
committed lines of credit.
10
<PAGE> 11
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
subsidiary companies as of December 27, 1996 and the related consolidated
statements of earnings and the condensed consolidated statements of cash flows
for the quarters ended December 27, 1996 and December 29, 1995. 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
January 15, 1997
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11 Computation of Earnings Per Share.
Exhibit 15 Letter Regarding Unaudited Interim Financial
Information.
Exhibit 27 Financial Data Schedule (EDGAR filing only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the first quarter
ended December 27, 1996.
12
<PAGE> 13
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
February 6, 1997
-----------------------------------
Date
/s/ Wayne P. Somrak
-----------------------------------
Wayne P. Somrak
Vice President and Controller
(Chief Accounting Officer)
13
<PAGE> 14
INDEX OF EXHIBITS
Exhibit
Number
11 Computation of Earnings Per Share
15 Letter Regarding Unaudited Interim Financial Information
27 Financial Data Schedule (EDGAR filing only)
14
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE IN ACCORDANCE
WITH INTERPRETIVE RELEASE NO. 34-9083
UNAUDITED
<TABLE>
<CAPTION>
FIRST QUARTER ENDED
DEC 27, DEC 29,
(SHARES IN THOUSANDS) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actual weighted average shares outstanding for the period 30,702 31,079
Dilutive employee stock options 897 1,187
----------- -----------
Weighted average shares outstanding for the period 31,599 32,266
=========== ===========
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings applicable to fully diluted earnings per share $ 12,821 $ 25,536
=========== ===========
Earnings per share based on SEC interpretive release
No. 34-9083:
Earnings per share - Fully Diluted (1) $ 0.41 $ 0.79
=========== ===========
</TABLE>
(1) There is no significant difference between fully diluted earnings per
share and primary earnings per share.
<PAGE> 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 January 15, 1997 on our reviews of the
interim financial information of Varian Associates, Inc. for the quarter ended
December 27, 1996 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
February 6,1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1997
<PERIOD-START> SEP-28-1996
<PERIOD-END> DEC-27-1996
<CASH> 76,899
<SECURITIES> 0
<RECEIVABLES> 334,471
<ALLOWANCES> 2,190
<INVENTORY> 201,784
<CURRENT-ASSETS> 703,498
<PP&E> 481,006
<DEPRECIATION> 268,757
<TOTAL-ASSETS> 1,001,904
<CURRENT-LIABILITIES> 416,000
<BONDS> 0
0
0
<COMMON> 30,597
<OTHER-SE> 436,076
<TOTAL-LIABILITY-AND-EQUITY> 1,001,904
<SALES> 321,959
<TOTAL-REVENUES> 321,959
<CGS> 210,060
<TOTAL-COSTS> 301,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,093
<INCOME-PRETAX> 19,731
<INCOME-TAX> 6,910
<INCOME-CONTINUING> 12,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,821
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.41
</TABLE>
