<PAGE>
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 JULY 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 July 31, 1998: 29,729,000 shares.
<PAGE>
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 JULY 3, JUNE 27, JULY 3, JUNE 27,
EXCEPT PER SHARE AMOUNTS) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 340,002 $ 359,903 $ 1,057,664 $ 1,020,049
----------- ---------- ----------- ------------
OPERATING COSTS AND EXPENSES
Cost of sales 216,334 227,507 667,545 651,833
Research and development 24,486 29,366 79,992 84,948
Marketing 49,390 51,710 147,270 149,192
General and administrative 20,952 20,301 67,211 54,169
----------- ---------- ----------- ------------
TOTAL OPERATING COSTS AND EXPENSES 311,162 328,884 962,018 940,142
----------- ---------- ----------- ------------
OPERATING EARNINGS 28,840 31,019 95,646 79,907
Interest expense (2,223) (2,307) (5,852) (6,072)
Interest income 1,601 921 3,625 2,208
Gain on Sale of Thin Film Systems - 51,039 - 51,039
----------- ---------- ----------- ------------
EARNINGS BEFORE TAXES 28,218 80,672 93,419 127,082
Taxes on earnings 9,740 28,240 32,230 44,480
----------- ---------- ----------- ------------
NET EARNINGS $ 18,478 $ 52,432 $ 61,189 $ 82,602
=========== ========== =========== ============
AVERAGE SHARES OUTSTANDING - BASIC 29,825 30,383 29,965 30,537
=========== ========== =========== ============
AVERAGE SHARES OUTSTANDING - DILUTED 30,294 31,229 30,610 31,474
=========== ========== =========== ============
NET EARNINGS PER SHARE - BASIC $ 0.62 $ 1.73 $ 2.04 $ 2.70
=========== ========== =========== ============
NET EARNINGS PER SHARE - DILUTED $ 0.61 $ 1.68 $ 2.00 $ 2.62
=========== ========== =========== ============
- ----------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Share $ 0.10 $ 0.09 $ 0.29 $ 0.26
Order Backlog $ 529,621 $ 583,200
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
-2-
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
JULY 3, SEPTEMBER 26,
1998 1997
(DOLLARS IN THOUSANDS EXCEPT PAR VALUES) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 151,147 $ 142,298
Accounts receivable 365,873 418,978
Inventories
Raw materials and parts 127,199 97,220
Work in process 47,740 37,431
Finished goods 33,957 24,947
-------------- ---------------
Total inventories 208,896 159,598
Other current assets 106,220 92,596
-------------- ---------------
TOTAL CURRENT ASSETS 832,136 813,470
-------------- ---------------
Property, Plant, and Equipment 486,494 460,251
Accumulated depreciation and amortization (287,508) (264,612)
-------------- ---------------
NET PROPERTY, PLANT, AND EQUIPMENT 198,986 195,639
-------------- ---------------
Other Assets 131,105 95,224
============== ===============
TOTAL ASSETS $ 1,162,227 $ 1,104,333
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 36,566 $ 18,668
Accounts payable - trade 67,901 83,771
Accrued expenses 255,078 269,067
Product warranty 43,410 37,620
Advance payments from customers 58,346 55,184
-------------- ---------------
TOTAL CURRENT LIABILITIES 461,301 464,310
Long-Term Accrued Expenses 37,952 35,752
Long-Term Debt 111,090 73,186
Deferred Taxes 7,068 6,508
-------------- ---------------
TOTAL LIABILITIES 617,411 579,756
-------------- ---------------
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
29,793,000 shares at July 3, 1998 and 30,108,000 shares at
September 26, 1997 29,793 30,108
Retained earnings 515,023 494,469
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 544,816 524,577
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,162,227 $ 1,104,333
============== ===============
</TABLE>
See accompanying notes to the consolidated financial statements.
-3-
<PAGE>
VARIAN ASSOCIATES, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------
JULY 3, JUNE 27,
(DOLLARS IN THOUSANDS) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Cash Provided by Operating Activities $ 65,525 $ 47,622
---------- ----------
INVESTING ACTIVITIES
Proceeds from the sale of Thin Film Systems - 145,500
Purchase of property, plant, and equipment (31,821) (39,743)
Purchase of businesses, net of cash acquired (50,548) (36,602)
Other, net 8,706 (6,243)
---------- ----------
Net Cash (Used)/Provided by Investing Activities (73,663) 62,912
---------- ----------
FINANCING ACTIVITIES
Net borrowings on short-term obligations 17,379 3,167
Proceeds from long-term borrowings 38,000 25,000
Proceeds from common stock issued to employees 16,516 22,577
Purchase of common stock (48,789) (65,430)
Other, net (8,780) (8,005)
---------- ----------
Net Cash Provided/(Used) by Financing Activities 14,326 (22,691)
---------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH 2,661 4,194
---------- ----------
Net Increase in Cash and Cash Equivalents 8,849 92,037
Cash and Cash Equivalents at Beginning of Period 142,298 82,675
---------- ----------
Cash and Cash Equivalents at End of Period $ 151,147 $ 174,712
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
-4-
<PAGE>
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 third quarter and nine months
ended July 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 $49.9 million at July 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 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
5
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ----------------------------------------------------------
NOTE 3: (Continued)
-----------
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 July 3, 1998, the Company had
forward exchange contracts with maturities of twelve months or
less to sell foreign currencies totaling $144.9 million ($29.7
million of Japanese yen, $25.2 million of French francs, $15.1
million of German marks, $14.0 million of Canadian dollars, $11.2
million of Spanish pesetas, $11.1 million of Italian lira, $8.7
million of Korean won, $7.8 million of British pounds, $5.3
million of Australian dollars, $4.8 million of Portuguese escudos,
$4.5 million of Belgium francs, $2.3 million of Irish punt, $1.2
million of Dutch guilders, $1.0 million of Swedish krona, $0.9
million of Finnish marks, $0.8 million of Singapore dollars, $0.5
million of Argentine pesos, $0.4 million of Mexican pesos, $0.3
million of Austrian schillings, and $0.1 million of Danish krone)
and to buy foreign currencies totaling $64.1 million ($30.4
million of Dutch gilders, $6.2 million of Australian dollars, $5.9
million of British pounds, $5.5 million of French francs, $4.0
million of Swiss francs, $2.2 million of Belgium francs, $2.1
million of Swedish krona, $2.0 million of Spanish pesetas, $1.9
million of German marks, $1.3 million of Canadian dollars, $1.1
million of Portuguese escudos, $1.0 million of Brazilian real,
$0.4 million of Finnish marks, and $0.1 million of Italian lira).
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>
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 July 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 $16.2 million to $43.4
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 July 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 $16.2 million in estimated environmental costs as of July
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 July 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 $44.5 million to $70.0 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 July 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 $52.2 million at July 3, 1998. The Company accordingly
accrued $20.8 million, which represents this best estimate of the
future costs discounted at 4%, net of inflation. This reserve is
in addition to the $16.2 million described above.
7
<PAGE>
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 July 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 July 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>
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 used in the
earnings per share calculations are presented as follows:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED JULY 3, 1998 THIRD QUARTER ENDED JUNE 27, 1997
---------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS $18,478 29,825 $0.62 $52,432 30,383 $1.73
EFFECT OF DILUTIVE SECURITIES
Employee Stock Options 469 (0.01) 846 (0.05)
---------------------------------------- -----------------------------------------
DILUTED EPS $18,478 30,294 $0.61 $52,432 31,229 $1.68
======================================== =========================================
</TABLE>
Options to purchase 2,713,367 shares and 85,850 shares at average
exercise prices of $52.02 and $56.16, respectively, were
outstanding during the quarters ended July 3, 1998 and June 27,
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>
NINE MONTHS ENDED JULY 3, 1998 NINE MONTHS ENDED JUNE 27, 1997
---------------------------------------- -----------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS $61,189 29,965 $2.04 $82,602 30,537 $2.70
EFFECT OF DILUTIVE SECURITIES
Employee Stock Options 645 (0.04) 937 (0.08)
---------------------------------------- -----------------------------------------
DILUTED EPS $61,189 30,610 $2.00 $82,602 31,474 $2.62
======================================== =========================================
</TABLE>
Options to purchase 803,138 shares and 58,546 shares at average
exercise prices of $58.13 and $58.01, respectively, were
outstanding during the quarters ended July 3, 1998 and June 27,
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>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ----------------------------------------------------------
NOTE 6: Non-cash investing activities for the nine months ended July 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 nine months ended
July 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 July 3, 1998 and September 26, 1997 is
goodwill of $90.1 million and $45.9 million, respectively (net of
accumulated amortization of $8.5 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.
NOTE 8: In June 1998, the Financial Accounting and Standards Board issued
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes a new model for accounting for
derivatives and heding activities and supersedes and amends a
number of existing standards. SFAS 133 is effective for the
Company's fiscal year 2000. 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.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
On July 23, 1998 the Company reported lower orders, sales, and earnings for
the third quarter of fiscal 1998 compared to the third quarter last year. The
declines were due largely to the continued lower results in the Company's
semiconductor equipment business, which is in the midst of an industry-wide
downturn. Total orders for the third quarter were $315 million, down 11% from
$354 million in the 1997 quarter. Third-quarter sales of $340 million dropped
6% below the prior year's $360 million, and were off 1% after adjustments for
the 1997 sale of the Company's Thin Film Systems (TFS) semiconductor equipment
business. Third-quarter net earnings were $18.5 million compared to $52.4
million in 1997's third quarter. Through the first nine months of fiscal 1998
net earnings declined to $61.2 million compared to the year-ago's $82.6 million.
Fiscal 1997 earnings for both the third quarter and year-to-date periods include
a $33.2 million after-tax gain on the TFS sale, representing earnings per share
of $1.06 for the quarter and $1.05 for the nine months. Diluted earnings per
share for the third quarter totaled $0.61 compared to $1.68 in 1997's third
quarter. For the year-to-date period, diluted earnings per share were $2.00
compared to the previous year's $2.62. (All earnings per share amounts
represent diluted earnings per share as defined within Statement of Financial
Accounting Standards No. 128.) The 1997 earnings amounts also include a $3
million ($.10/share) third-quarter loss and a $4 million ($.14/share) loss for
the nine months from the Thin Film unit's operations in those periods. Orders
for the first nine months of $1.033 billion were 4% below the year-ago's $1.077
billion; year to date orders rose 1% after adjusting for the TFS sale. Year-to-
date sales of $1.058 billion were up 4% from the $1.020 billion posted in the
first nine months of 1997, and rose 12% on a Thin Film-adjusted basis. Backlog
declined to $530 million at the end of the third quarter, down 9% from the same
period in 1997. The current quarter's results reflect the mixed conditions in
the Company's three diverse business segments, where a strong performance in
Health Care Systems' cancer therapy business was more than offset by slower
orders and sales in the Semiconductor Equipment and Instruments segments. Gross
margin gains in the Health Care and Instruments areas were overcome by lower
returns from Semiconductor Equipment activities.
Nine-month orders for the Company's Health Care Systems segment were $408
million, up 20% from the prior year period as an increased demand for oncology
products more than offset a decline in x-ray product orders. Third-quarter
orders were up 42% from the previous year and rose 18% over the second quarter.
Sales followed a similar pattern, growing 15%, to $361 million, for the year-to-
date and 19%, to $131 million, for the third quarter from the comparable 1997
periods. The sales and orders growth was due to continuing strong demand for the
Company's cancer therapy systems. Health Care Systems backlog of $357 million
rose 8% from the prior year, while margins grew from last year on both a
quarterly and sequential basis.
The Company's Instruments business orders for the nine months totaled $393
million, down 3% from the previous year, with the NMR instruments and the
printed circuit board manufacturing businesses accounting for most of the
decline. Third-quarter orders were off 8% from the prior year at $131 million.
Sales for the year-to-date period
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------
rose 3% to $399 million, and were down 5% from 1997 on a quarterly basis at $127
million. Instruments business margins and profits improved for both the quarter
and the year to date. Backlog declined 10% to $115 million from the year-ago
level, and grew 1% sequentially. Although the Asian financial turmoil has had
some impact on these operations, most of the Company's traditional instrument
lines have fared reasonably well given the circumstances.
Orders for the Company's Semiconductor Equipment business for the year-to-
date period were down 28% to $236 million from the 1997 period and off 11% after
the TFS adjustment. Third-quarter orders fell 58% from the year-ago period and
52% after the TFS adjustment. Sales for the nine months were $296 million, down
7% from the year-ago period, and rose 25% on a TFS-adjusted basis. Third-
quarter sales of $81 million declined 30% from 1997's third quarter and were
down 19% on a TFS-adjusted basis. Backlog of $79 million declined substantially
from both the year-ago and the previous quarter. Operating margins were positive
but off significantly from both 1997's third quarter and the previous quarter.
The Company's Semiconductor Equipment segment will likely continue to struggle
against the effects of industry overcapacity and the turmoil in Asia for several
more quarters. As a result, this business is expected to experience lower order
rates for the remainder of the year.
With the continuing downturn in the semiconductor capital equipment market
along with the continued erosion of the financial situation in Asia, the Company
has further scaled back its expectations for near-term sales and earnings
growth.
FINANCIAL CONDITION
The Company's financial condition remained strong during the first nine
months of fiscal 1998. Operating activities provided cash of $65.5 million in
the first nine months of fiscal 1998 and provided $47.6 million in the same
period last year. Investing activities used $73.7 million in the first nine
months of fiscal 1998, $50.5 million for the purchase of businesses and $31.8
million for the purchase of property, plant and equipment. The purchase of
businesses caused Other Assets to increase $35.9 million to $131.1 million, due
to the recording of goodwill. Investing activities in the same period last year
provided $62.9 million inclusive of $145.5 million in proceeds from the sale of
the Thin Film Systems operations, partially offset by the purchase of businesses
of $36.6 million and the purchase of property, plant and equipment of $39.7
million. Financing activities provided $14.3 million in the first nine months of
fiscal 1998 which included $32.3 million used to buy back shares of the
Company's stock, including shares purchased to offset the issuance of stock to
employees and proceeds of $38.0 million from long-term borrowing. Financing
activities used $22.7 million during the first nine months of fiscal 1997, which
included $42.9 million used to buy back shares of the Company's stock, including
shares purchased to offset the issuance of stock to employees and proceeds of
$25.0 million from long-term borrowing. Total debt as a percentage of total
capital increased to 21.32% at the end of the third quarter of fiscal 1998 as
compared with 14.90% at fiscal year end, 1997. The ratio of current assets to
current liabilities was 1.80 to 1 at July 3, 1998, compared to 1.75 to 1 at
fiscal year end, 1997. As of July 3, 1998, the Company has available $50
million in unused committed lines of credit.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------
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 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 July 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 $16.2 million to $43.4 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 July 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
$16.2 million in estimated environmental costs as of July 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 July 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 $44.5 million to $70.0 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 July 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 $52.2 million at
July 3, 1998. The Company accordingly accrued $20.8 million, which represents
this best estimate of the future costs discounted at 4%, net of inflation. This
reserve is in addition to the $16.2 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
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------
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 July 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 July 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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- ------------------------------------------------
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 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 by the Company and
certain third parties 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 Exchange Commission.
15
<PAGE>
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 July 3, 1998, and the related consolidated statements of
earnings for the quarters and nine-month periods ended July 3, 1998 and June 27,
1997, and the condensed consolidated statements of cash flows for the nine-month
periods ended July 3, 1998 and June 27, 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/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
July 22, 1998
16
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
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 nine months ended
July 3, 1998 (EDGAR filing only).
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the third quarter ended
July 3, 1998.
17
<PAGE>
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 13, 1998
-------------------------------------
Date
/s/ Wayne P. Somrak
-------------------------------------
Wayne P. Somrak
Vice President and Controller
(Chief Accounting Officer)
18
<PAGE>
INDEX OF EXHIBITS
Exhibit
Number
- ------
15 Letter Regarding Unaudited Interim Financial Information.
27 Financial Data Schedule for the nine months ended July 3, 1998
(EDGAR filing only).
19
<PAGE>
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 22, 1998 on our reviews of the interim
financial information of Varian Associates, Inc. for the quarters and nine-month
periods ended July 3, 1998 and 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/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
August 13, 1998
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