<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 June 27, 1997
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 of IRS Employer
incorporation or organization: Identification No.:
DELAWARE 94-2359345
Address of principal executive offices:
3050 Hansen Way, Palo Alto, California 94304-1000
Telephone No., including area code:
(650) 493-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the 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 18.
Number of shares of Common Stock, par value $1 per share, outstanding as
of the close of business on July 25, 1997: 30,235,000 shares.
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS
UNAUDITED
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
- ----------------------------------------------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS JUNE 27, JUNE 28, JUNE 27, JUNE 28,
EXCEPT PER SHARE AMOUNTS) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 359,903 $ 417,098 $ 1,020,049 $ 1,185,948
------------- ----------- ------------ -------------
Operating Costs and Expenses
Cost of sales 227,507 260,035 651,833 741,532
Research and development 29,366 28,052 84,948 79,847
Marketing 51,710 51,053 149,192 148,793
General and administrative 20,301 24,489 54,169 70,969
------------- ----------- ------------ -------------
Total Operating Costs and Expenses 328,884 363,629 940,142 1,041,141
------------- ----------- ------------ -------------
OPERATING EARNINGS 31,019 53,469 79,907 144,807
Interest expense (2,307) (1,602) (6,072) (4,933)
Interest income 921 722 2,208 4,218
Gain on Sale of Thin Film Systems 51,039 - 51,039
------------- ----------- ------------ -------------
EARNINGS BEFORE TAXES 80,672 52,589 127,082 144,092
Taxes on earnings 28,240 18,210 44,480 51,150
============= =========== ============ =============
NET EARNINGS $ 52,432 $ 34,379 $ 82,602 $ 92,942
============= =========== ============ =============
Average Shares Outstanding Including
Common Stock Equivalents 31,321 32,222 31,537 32,233
============= =========== ============ =============
NET EARNINGS PER SHARE $ 1.67 $ 1.07 $ 2.62 $ 2.88
============= =========== ============ =============
Dividends Declared Per Share $ 0.09 $ 0.08 $ 0.26 $ 0.23
Order Backlog $583,200 $645,694
</TABLE>
See accompanying notes to the consolidated financial statements.
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<PAGE> 3
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 27, September 27,
1997 1996
(Dollars in thousands except par values) (Unaudited)
----------- -----------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 174,712 $ 82,675
Accounts receivable 350,429 380,330
Inventories
Raw materials and parts 93,576 112,322
Work in process 44,810 53,682
Finished goods 43,067 23,878
----------- -----------
Total inventories 181,453 189,882
Other current assets 96,531 91,010
----------- -----------
Total Current Assets 803,125 743,897
----------- -----------
Property, Plant, and Equipment 453,709 473,852
Accumulated depreciation and amortization (261,880) (261,766)
----------- -----------
Net Property, Plant, and Equipment 191,829 212,086
----------- -----------
Other Assets 97,576 62,938
----------- -----------
TOTAL ASSETS $ 1,092,530 $ 1,018,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 19,530 $ 4,362
Accounts payable - trade 74,603 75,745
Accrued expenses 288,492 264,565
Product warranty 36,462 49,251
Advance payments from customers 53,319 56,071
----------- -----------
Total Current Liabilities 472,406 449,994
Long-Term Accrued Expenses 35,087 29,007
Long-Term Debt 73,186 60,258
Deferred Taxes 12,127 11,753
----------- -----------
Total Liabilities 592,806 551,012
----------- -----------
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
30,222,000 shares at June 27, 1997 and 30,646,000 shares at
September 27, 1996 30,222 30,646
Retained earnings 469,502 437,263
----------- -----------
Total Stockholders' Equity 499,724 467,909
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,092,530 $ 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>
For the Nine Months Ended
June 27, June 28,
(Dollars in thousands) 1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities $ 47,622 $ 35,692
---------- ----------
INVESTING ACTIVITIES
Proceeds from the sale of Thin Film Systems 145,500 -
Purchase of property, plant, and equipment (39,743) (49,193)
Purchase of businesses, net of cash acquired (36,602) (2,550)
Other, net (6,243) (3,674)
---------- ----------
Net Cash Provided/(Used) by Investing Activities 62,912 (55,417)
---------- ----------
FINANCING ACTIVITIES
Net borrowings on short-term obligations 3,167 47,706
Proceeds from long-term borrowings 25,000 -
Proceeds from common stock issued to employees 22,577 26,528
Purchase of common stock (65,430) (54,733)
Other, net (8,005) (7,236)
---------- ----------
Net Cash (Used)/Provided by Financing Activities (22,691) 12,265
---------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 4,194 1,797
---------- ----------
Net Increase/(Decrease) in Cash and Cash Equivalents 92,037 (5,663)
Cash and Cash Equivalents at Beginning of Period 82,675 122,728
---------- ----------
Cash and Cash Equivalents at End of Period $174,712 $117,065
========== ==========
</TABLE>
-4-
<PAGE> 5
Varian Associates, Inc. and Subsidiary Companies
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1: The consolidated financial statements include the accounts of Varian
Associates, Inc. and its subsidiaries and have been prepared by the
Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The year ended
September 27, 1996 balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. It is suggested that these
financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Form
10-K annual report. In the opinion of management, the consolidated
financial statements include all normal recurring adjustments
necessary to present fairly the information required to be set forth
therein. The results of operations for the third quarter and nine
months ended June 27, 1997, 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 $47.8 million at June 27, 1997, and $46.8
million at September 27, 1996.
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. Gains and losses on hedges of existing assets or
liabilities are included in the carrying amounts of those assets or
liabilities and are ultimately recognized in income as part of those
carrying amounts. Gains and losses related to qualifying hedges of
firm commitments also are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs.
Any deferred gains or losses are included in accrued expenses in the
balance sheet. If a hedging instrument is sold or terminated prior to
maturity, gains and losses continue to be deferred until the hedged
item is recognized in income. If a hedging instrument ceases to
qualify as a hedge, any subsequent gains and losses are recognized
currently in income. At June 27, 1997, the Company had forward
exchange contracts with maturities of twelve months or less to sell
foreign currencies totaling $87.1 million ($18.0 million of Japanese
yen, $17.8 million of French francs, $11.5 million of Canadian
dollars, $9.5 million of British pounds, $8.5 million of Italian lira,
$7.3 million of German marks, $3.0 million of Portuguese escudos, $2.3
million of Finnish marks, $2.3 million of Taiwan dollars, $2.0 million
of Norwegian krone, $1.9 million of Dutch gilders, $1.5 million of
Spanish pesetas, $1.0 million of Belgium francs, and $0.5 million of
Swedish krona) and to buy foreign currencies totaling $22.0 million
($9.2 million of German marks, $8.7 million of British pounds, $1.6
million of Australian dollars, $1.3 million of Canadian dollars, $0.9
million of Italian lira, $0.2 million of Swiss francs, and $0.1
million of Japanese yen).
NOTE 4: In February 1990, a purported class action was brought by Panache
Broadcasting of Pennsylvania, Inc. on behalf of all purchasers of
electron tubes in the U.S. against the Company and a joint-venture
partner, alleging that the activities of their joint venture in the
power-grid tube industry violated antitrust laws. The complaint seeks
injunctive relief and unspecified damages, which may be trebled under
the antitrust laws. In February 1993, the U.S. District Court in
Chicago granted in part and denied in part the Company's motion to
dismiss the complaint. Panache Broadcasting filed an amended complaint
in March 1993. In October 1995, the Court affirmed a federal
Magistrate's recommendation to grant in part and deny in part the
Company's motion to dismiss the amended complaint. Also in October
1995, the Magistrate recommended denial of plaintiff's request to
certify the purported class and recommended certification of a
different and narrower class than that defined by plaintiff. The
Company is appealing that proposed class certification to the District
Court, and management believes that the Company has meritorious
defenses to the Panache lawsuit.
6
<PAGE> 7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: (Continued)
In addition to the above-referenced matter, the Company is currently a
defendant in a number of legal actions and could incur an uninsured
liability in one or more of them. In the opinion of management, the
outcome of the above litigation (including the Panache lawsuit) will
not have a material adverse effect on the consolidated financial
statements of the Company.
The Company has been named by the U.S. Environmental Protection Agency
or third parties as a potentially responsible party under the
Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended, at eight sites where the Company is alleged to have
shipped manufacturing waste for recycling or disposal. The Company is
also involved in various stages of environmental investigation and/or
remediation under the direction of, or in consultation with, federal,
state and/or local agencies at certain current or former Company
facilities (including facilities disposed of in connection with the
Company's sale of its Electron Devices business during 1995, and the
sale of the Company's Thin Film Systems operations during 1997).
For certain of these facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation
or remediation activities or to estimate the future costs of such
activities if undertaken. As of June 27, 1997, the Company nonetheless
estimated that the Company's future exposure for environmental related
investigation and remediation costs for these sites ranged in the
aggregate from $7.9 million to $29.5 million. The time frame over
which the Company expects to incur such costs varies with each site,
ranging up to 29 years as of June 27, 1997. Management believes that
no amount in the foregoing range of estimated future costs is more
probable of being incurred than any other amount in such range and
therefore accrued $7.9 million in estimated environmental costs as of
June 27, 1997. The amount accrued has not been discounted to present
value.
As to other facilities, the Company has gained sufficient knowledge to
be able to better estimate the scope and costs of future environmental
activities. As of June 27, 1997, the Company estimated that the
Company's future exposure for environmental related investigation and
remediation costs for these sites ranged in the aggregate from $62.6
million to $95.6 million. The time frame over which the Company
expects to incur such costs varies with each site, ranging up to 29
years as of June 27, 1997. As to each of these sites, management
determined that a particular amount within the range of estimated
costs was a better estimate of the future environmental liability than
any other amount within the range, and that the amount and timing of
these future costs were reliably determinable. Together, these amounts
totaled $67.0 million at June 27, 1997. The Company accordingly
accrued $30.3 million, which represents this best estimate of the
future costs discounted at 4%, net of inflation. This reserve is in
addition to the $7.9 million described above.
7
<PAGE> 8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4: (Continued)
The foregoing amounts are only estimates of anticipated future
environmental related costs, and the amounts actually spent in the
years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties
inherent in many environmental investigation and remediation
activities and the large number of sites where the Company is
undertaking such investigation and remediation activities. The Company
believes that most of these cost ranges will narrow as investigation
and remediation activities progress.
The Company believes that its reserves are adequate, but as the scope
of its obligations becomes more clearly defined, these reserves may be
modified and related charges against earnings may be made. Although
any ultimate liability arising from environmental related matters
described herein could result in significant expenditures that, if
aggregated and assumed to occur within a single fiscal year, would be
material to the Company's financial statements, the likelihood of such
occurrence is considered remote. Based on information currently
available to management and its best assessment of the ultimate amount
and timing of environmental related events, the Company's management
believes that the costs of these environmental related matters are not
reasonably likely to have a material adverse effect on the
consolidated financial statements of the Company.
The Company evaluates its liability for environmental related
investigation and remediation in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies
with respect to which the Company believes that it has rights to
contribution, indemnity and/or reimbursement. Claims for recovery of
environmental investigation and remediation costs already incurred,
and to be incurred in the future, have been asserted against various
insurance companies and other third parties. In 1992, the Company
filed a lawsuit against 36 insurance companies with respect to most of
the above-referenced sites. The Company received certain cash
settlements during 1995 and 1996 from defendants in that lawsuit, and
has a $0.5 million receivable in Other Current Assets at June 27,
1997. The Company has also reached an agreement with another insurance
company under which the insurance company has agreed to pay a portion
of the Company's past and future environmental related expenditures,
and the Company therefore has a $6.2 million receivable in Other
Assets at June 27, 1997. Although the Company intends to aggressively
pursue additional insurance recoveries, the Company has not reduced
any liability in anticipation of recovery with respect to claims made
against third parties.
8
<PAGE> 9
NOTE 5: In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings per Share". SFAS 128 is effective for the Company's
fiscal year 1998. SFAS 128 requires a revised presentation and
calculation of Earnings per Share and that prior periods be restated
to conform to that revised presentation and calculation. Early
adoption of SFAS 128 is not permitted. The impact of its
implementation on the consolidated financial statements of the Company
has not yet been determined.
In February 1997, the Financial Accounting Standards Board issued SFAS
129, "Disclosure of Information about Capital Structure". SFAS 129
requires disclosure about an entity's capital structure and contains
no change in disclosure requirements for entities that were subject to
the previously existing requirements. SFAS 129 is effective for the
Company's fiscal year 1998. Its adoption will not have a material
effect on the financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income". SFAS 130 establishes standards
for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. It is effective
for the Company's fiscal year 1999. The impact of its implementation
on the consolidated financial statements of the Company has not yet
been determined
In June 1997, the Financial Accounting Standards Board issued SFAS
131, "Disclosures About Segments of an Enterprise and Related
Information". SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting
(referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for the Company's
fiscal year 1999. The Company will be studying the implications of the
Statement, but the impact of its implementation on the financial
statements of the Company has not yet been determined.
NOTE 6: Certain prior year balances have been reclassified to conform with the
current year financial statement presentation. This reclassification
has no effect on net income.
NOTE 7: On June 20, 1997, the Company completed the sale of its Thin Film
Systems operations (a product line of the Semiconductor Equipment
segment). Total proceeds received from the sale were $145.5 million in
cash. A $51.5 million reserve was recorded to cover, among other
items, retained liabilities, transaction costs, employee terminations,
facilities separation costs, indemnification obligations, litigation
expenses, and other contingencies. The gain on the sale was $33.2
million (net of income taxes of $17.8 million).
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On July 17, 1997, the Company reported higher third-quarter orders and
earnings on lower sales compared to the third quarter last year. The Company's
orders of $354 million rose 1% over the prior year. However, orders were up 7%
after adjusting for the June sale of its Thin Film Systems (TFS) semiconductor
equipment business unit. Third-quarter sales of $360 million declined 14% from
the year-ago period, and were down 7% after adjusting for the TFS divestiture.
Sales rose 11% from the previous three months on a TFS-adjusted basis. Backlog
of $583 million was below the previous year's $646 million, but increased $17
million on a TFS-adjusted basis.
Net earnings totaled $52.4 million for the third quarter, up 52% from
$34.4 million in the third quarter of fiscal 1996. Earnings per share for the
third quarter rose 56% to $1.67 from the prior year's $1.07. Net earnings for
the first nine months of fiscal 1997 were $82.6 million compared to the
year-ago's $92.9 million. Earnings per share of $2.62 for the first nine months
of fiscal 1997 fell below the $2.88 per share earned in the same period last
year. Third quarter and year-to-date earnings include a $33.2 million gain on
the TFS sale, an earnings per share of $1.06 for the quarter and $1.05 for the
nine months. The earnings figures also include a $3.0 million ($.10/share) loss
in the third quarter and a $4.0 million ($.14/share) loss for the nine months
from the TFS business.
Year to date orders of $1.077 billion declined 11% from the prior year,
and 6% after adjusting for the TFS divestiture. Sales of $1.020 billion were 14%
below the year-ago's first nine months, and declined 11% on a TFS-adjusted
basis.
The third quarter's results clearly reflect the mixed conditions in the
Company's diverse portfolio of businesses. The Instruments business operations
turned in record orders and sales. However, the Health Care Systems business
continued to contend with difficult market conditions, leading to flat orders
and lower sales and profits for that segment in the quarter. All three of the
Company's core businesses posted sequential sales gains over the second quarter.
The improvement was substantial for the Ion Implant Systems unit of Varian's
Semiconductor Equipment business which has been battling a year-long industry
down cycle.
Health Care Systems orders for the first nine months totaled $339
million, up 2% from the 1996 period, with higher bookings in the Oncology
Systems unit offsetting lower orders in the X-ray Tube Products unit.
Year-to-date sales of $315 million were down 4% from the prior year, largely
reflecting the combined effects of soft X-ray tube demand and customer-extended
capital equipment deliveries. Sequentially, sales for the third quarter were up
2% over the second quarter. Third quarter backlog rose over the prior year by
$44 million to $330 million. Operating margins were below the prior year's level
for both the third quarter and nine-month periods due primarily to the decline
in revenue. However, margins improved sequentially and remained in the
double-digit range
Orders for the Company's Instruments business reached a record $143
million in the third quarter and climbed to $406 million for the first nine
months. Sales also set a third-quarter record at $133 million, with year-to-date
revenues up 10% to $386 million.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Backlog also reached a new high at $128 million. Nearly all product lines in
this segment contributed to the higher orders and sales, as well as to improved
operating margins.
Orders for the Company's Semiconductor Equipment business totaled $109
million in the third quarter, down 16% from the year-ago period and 4% below the
prior quarter. Orders were essentially flat with the year-ago quarter and
increased 3% over the second quarter of 1997 after adjusting for the sale of the
Company's TFS unit. Nine-month orders of $327 million were off 40% from 1996
reflecting the effects of the equipment industry downturn. After the TFS sale
adjustment, year-to-date bookings for the segment were off 35% from the 1996
period. Sales were $117 million for the third quarter, down 34% from 1996 and
down 24% after the TFS adjustment. Third-quarter sales for this business grew
18% over the second quarter and rose 39% on a TFS-adjusted basis. Sales for the
year to date of $317 million fell below the year-ago's $503 million. On a
TFS-adjusted basis, year to date sales of $237 million fell below the year ago's
$378 million. Operating margins were down from 1996 levels for both the quarter
and the nine month periods and were down on a TFS-adjusted basis for the same
periods. However, operating margins for this business remained in the
double-digit range despite the industry downturn, both before and after
adjusting for the TFS sale.
In February 1997, the Financial Accounting Standards Board issued SFAS
128, "Earnings per Share". SFAS 128 is effective for the Company's fiscal year
1998. SFAS 128 requires a revised presentation and calculation of Earnings per
Share and that prior periods be restated to conform to that revised presentation
and calculation. Early adoption of SFAS 128 is not permitted. The impact of its
implementation on the consolidated financial statements of the Company has not
yet been determined.
In February 1997, the Financial Accounting Standards Board issued SFAS
129, "Disclosure of Information about Capital Structure". SFAS 129 requires
disclosure about an entity's capital structure and contains no change in
disclosure requirements for entities that were subject to the previously
existing requirements. SFAS 129 is effective for the Company's fiscal year 1998.
Its adoption will not have a material effect on the financial statements of the
Company.
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income". SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. It is effective for the Company's fiscal
year 1999. The impact of its implementation on the consolidated financial
statements of the Company has not yet been determined.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information". SFAS 131
changes current practice under SFAS 14 by establishing a new framework on which
to base segment reporting (referred to as the "management" approach) and also
requires interim reporting of segment information. It is effective for the
Company's fiscal year 1999. The Company will be studying the implications of the
Statement, but the impact of its implementation on the financial statements of
the Company has not yet been determined.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
FINANCIAL CONDITION
The Company's financial condition remained strong during the first nine
months of fiscal 1997. Operating activities provided cash of $47.6 million in
the first nine months of fiscal 1997 and provided $35.7 million in the same
period last year. Investing activities during the nine months of fiscal 1997
provided $62.9 million inclusive of $145.5 million in proceeds from the sale of
the Thin Film Systems operations, offset by the purchase of businesses of $36.6
million and the purchase of property, plant and equipment of $39.7 million.
Investing activities in the same period last year used $55.4 million, of which
$49.2 million was used for the purchase of property, plant and equipment.
Financing activities used $22.7 million during the nine months of fiscal 1997,
which included $65.4 million to purchase the Company's common stock and proceeds
of $25.0 million from long-term borrowing. Financing activities provided $12.3
million in the first nine months of fiscal 1996. Total debt as a percentage of
total capital increased to 15.65% at the end of the third quarter of fiscal 1997
as compared with 12.13% at fiscal year end, 1996. The ratio of current assets to
current liabilities was 1.70 to 1 at June 27, 1997, compared to 1.65 to 1 at
fiscal year end, 1996. The Company has available $50 million in unused committed
lines of credit.
On June 20, 1997, the Company completed the sale of its Thin Film
Systems operations (a product line of the Semiconductor Equipment segment).
Total proceeds received from the sale were $145.5 million in cash. A $51.5
million reserve was recorded to cover, among other items, retained liabilities,
transaction costs, employee terminations, facilities separation costs,
indemnification obligations, litigation expenses, and other contingencies. The
gain on the sale was $33.2 million (net of income taxes of $17.8 million).
The Company has been named by the U.S. Environmental Protection Agency
or third parties as a potentially responsible party under the Comprehensive
Environmental Response Compensation and Liability Act of 1980, as amended, at
eight sites where the Company is alleged to have shipped manufacturing waste for
recycling or disposal. The Company is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, federal, state and/or local agencies at certain current or
former Company facilities (including facilities disposed of in connection with
the Company's sale of its Electron Devices business during 1995, and the sale of
the Company's Thin film Systems operations during 1997).
For certain of these facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of June 27, 1997, the Company nonetheless estimated that the
Company's future exposure for environmental related investigation and
remediation costs for these sites ranged in the aggregate from $7.9 million to
$29.5 million. The time frame over which the Company expects to incur such costs
varies with each site, ranging up to 29 years as of June 27, 1997. Management
believes that no amount in the foregoing range of estimated future costs is more
probable of being incurred than any other amount in such range and therefore
accrued $7.9 million in estimated environmental costs as of June 27, 1997. The
amount accrued has not been discounted to present value.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
As to other facilities, the Company has gained sufficient knowledge to
be able to better estimate the scope and costs of future environmental
activities. As of June 27, 1997, the Company estimated that the Company's future
exposure for environmental related investigation and remediation costs for these
sites ranged in the aggregate from $62.6 million to $95.6 million. The time
frame over which the Company expects to incur such costs varies with each site,
ranging up to 29 years as of June 27, 1997. As to each of these sites,
management determined that a particular amount within the range of estimated
costs was a better estimate of the future environmental liability than any other
amount within the range, and that the amount and timing of these future costs
were reliably determinable. Together, these amounts totalled $67.0 million at
June 27, 1997. The Company accordingly accrued $30.3 million, which represents
this best estimate of the future costs discounted at 4%, net of inflation. This
reserve is in addition to the $7.9 million described above.
The foregoing amounts are only estimates of anticipated future
environmental related costs, and the amounts actually spent in the years
indicated may be greater or less than such estimates. The aggregate range of
cost estimates reflects various uncertainties inherent in many environmental
investigation and remediation activities and the large number of sites where the
Company is undertaking such investigation and remediation activities. The
Company believes that most of these cost ranges will narrow as investigation and
remediation activities progress.
The Company believes that its reserves are adequate, but as the scope
of its obligations becomes more clearly defined, these reserves may be modified
and related charges against earnings may be made. Although any ultimate
liability arising from environmental related matters described herein could
result in significant expenditures that, if aggregated and assumed to occur
within a single fiscal year, would be material to the Company's financial
condition, the likelihood of such occurrence is considered remote. Based on
information currently available to management and its best assessment of the
ultimate amount and timing of environmental related events, the Company's
management believes that the costs of these environmental related matters are
not reasonably likely to have a material adverse effect on the consolidated
financial statements of the Company.
The Company evaluates its liability for environmental related
investigation and remediation in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies with
respect to which the Company believes that it has rights to contribution,
indemnity and/or reimbursement. Claims for recovery of environmental
investigation and remediation costs already incurred, and to be incurred in the
future, have been asserted against various insurance companies and other third
parties. In 1992, the Company filed a lawsuit against 36 insurance companies
with respect to most of the above-referenced sites. The Company received certain
cash settlements during 1995 and 1996 from defendants in that lawsuit, and has a
$0.5 million receivable in Other Current Assets at June 27, 1997. The Company
has also reached an agreement with another insurance company under which the
insurance company has agreed to pay a portion of the Company's past and future
environmental related expenditures, and the Company therefore has a $6.2 million
receivable in Other Assets at June 27, 1997.
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Although the Company intends to aggressively pursue additional insurance
recoveries, the Company has not reduced any liability in anticipation of
recovery with respect to claims made against third parties.
14
<PAGE> 15
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 June 27, 1997, and the related consolidated
statements of earnings for the quarters and nine-month periods ended June 27,
1997 and June 28, 1996, and the condensed consolidated statements of cash flows
for the nine-month periods ended June 27, 1997 and June 28, 1996. 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
July 16, 1997
15
<PAGE> 16
PART II. OTHER INFORMATION
<TABLE>
<CAPTION>
Item 6 Exhibits and Reports on Form 8-K
------ --------------------------------
<S> <C>
(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).
</TABLE>
(b) Reports on Form 8-K:
A report on Form 8-K was filed on July 7, 1997, regarding the
Company's June 20, 1997 sale of its Thin Film Systems operations
to Novellus Systems, Inc.
16
<PAGE> 17
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
August 8, 1997
-----------------------------
Date
/s/ Wayne P. Somrak
-----------------------------
Wayne P. Somrak
Vice President and Controller
(Chief Accounting Officer)
17
<PAGE> 18
INDEX OF EXHIBITS
Exhibit
Number Page
- ------ ----
11 Computation of Earnings Per Share 19
15 Letter Regarding Unaudited Interim Financial Information 20
27 Financial Data Schedule (EDGAR filing only) -
18
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE IN ACCORDANCE
WITH INTERPRETIVE RELEASE NO. 34-9083
UNAUDITED
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
(SHARES IN THOUSANDS) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actual weighted average common shares outstanding for the period 30,383 31,083 30,537 31,083
Common equivalent shares from dilutive employee stock options 938 1,139 1,000 1,150
-------- -------- -------- --------
Weighted average shares used in per share calculations 31,321 32,222 31,537 32,233
======== ======== ======== ========
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net earnings applicable to fully diluted earnings per share $ 52,432 $ 34,379 $ 82,602 $ 92,942
======== ======== ======== ========
Net earnings per share based on SEC interpretive release
No. 34-9083:
Earnings per share - Fully Diluted (1) $ 1.67 $ 1.07 $ 2.62 $ 2.88
======== ======== ======== ========
</TABLE>
(1) There is no significant difference between fully diluted earnings per share
and primary earnings per share.
-19-
<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 July 16, 1997 on our reviews of the interim
financial information of Varian Associates, Inc. for the quarters and nine-month
periods ended June 27, 1997 included in this Form 10-Q is incorporated by
reference in the Company's registration statements on Forms S-8, Registration
Statement Numbers 33-46000, 33-33661, 33-33660, and 2-95139 and Forms S-8 and
S-3, Registration Statement Number 33-40460. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of that Act.
/s/ Coopers & Lybrand L.L.P.
-----------------------------
COOPERS & LYBRAND L.L.P.
San Jose, California
August 8,1997
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1997
<PERIOD-START> SEP-28-1996
<PERIOD-END> JUN-27-1997
<CASH> 174,712
<SECURITIES> 0
<RECEIVABLES> 352,311
<ALLOWANCES> 1,882
<INVENTORY> 181,453
<CURRENT-ASSETS> 803,125
<PP&E> 453,709
<DEPRECIATION> 261,880
<TOTAL-ASSETS> 1,092,530
<CURRENT-LIABILITIES> 472,406
<BONDS> 0
0
0
<COMMON> 30,222
<OTHER-SE> 469,502
<TOTAL-LIABILITY-AND-EQUITY> 1,092,530
<SALES> 1,020,049
<TOTAL-REVENUES> 1,020,049
<CGS> 651,833
<TOTAL-COSTS> 940,142
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,072
<INCOME-PRETAX> 127,082
<INCOME-TAX> 44,480
<INCOME-CONTINUING> 82,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,602
<EPS-PRIMARY> 0
<EPS-DILUTED> 2.62
</TABLE>
