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