-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ni+uL6a2VxLI9ui1qw9kcBQkBH47/AlrdJ5l0fDZHUEcdaEM+Pdny3E4Yd1dKGXW i4uWiB8GRe8S/bQyoaeYJQ== 0001012870-01-500722.txt : 20010514 0001012870-01-500722.hdr.sgml : 20010514 ACCESSION NUMBER: 0001012870-01-500722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010330 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VARIAN INC CENTRAL INDEX KEY: 0001079028 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY ANALYTICAL INSTRUMENTS [3826] IRS NUMBER: 770501995 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25393 FILM NUMBER: 1629683 BUSINESS ADDRESS: STREET 1: 3050 HANSEN WAY CITY: PALO ALTO STATE: CA ZIP: 94304-1000 BUSINESS PHONE: 6504245352 10-Q 1 d10q.txt MARCH 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------- FORM 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2001 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number 000-25393 ---------------- VARIAN, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 77-0501995 (State or Other Jurisdiction (IRS Employer of Incorporation or Organization) Identification Number)
3120 Hansen Way, Palo Alto, California 94304-1030 (Address of Principal Executive Offices) (Zip Code)
(650) 213-8000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[_] The number of shares of the Registrant's common stock outstanding as of April 27, 2001 was 33,033,306. TABLE OF CONTENTS Part I. Financial Information.......................................... 3 Item 1. Financial Statements........................................... 3 Consolidated Statements of Earnings............................ 3 Consolidated Balance Sheets.................................... 4 Consolidated Statements of Cash Flows.......................... 5 Notes to the Consolidated Financial Statements................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 Item 3. Quantitative and Qualitative Disclosure about Market Risk...... 18 Part II. Other Information.............................................. 20 Item 4. Submission of Matters to a Vote of Security Holders............ 20 Item 6. Exhibits and Reports on Form 8-K............................... 20
RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the "Company") to differ materially from management's current expectations. Those risks and uncertainties include, without limitation: new product development and commercialization; growth in life science, health care and industrial sales continuing to be sufficient to offset the decline in demand from semiconductor and telecommunications customers; demand and acceptance for the Company's products; competitive products and pricing; economic conditions in the Company's product and geographic markets; foreign currency fluctuations if they adversely impact revenue growth and earnings; market investment in capital equipment; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Varian, Inc. and Subsidiary Companies Consolidated Statements of Earnings (In thousands, except per share amounts) (Unaudited)
Quarter Ended Six Months Ended ----------------- ----------------- Mar. 30, Mar. 31, Mar. 30, Mar. 31, 2001 2000 2001 2000 -------- -------- -------- -------- Sales...................................... $194,186 $177,310 $385,444 $337,262 Cost of sales.............................. 119,576 109,676 239,092 207,631 -------- -------- -------- -------- Gross profit............................... 74,610 67,634 146,352 129,631 -------- -------- -------- -------- Operating expenses Sales and marketing...................... 33,453 31,301 64,455 61,106 Research and development................. 9,256 8,549 17,100 15,531 General and administrative............... 10,625 10,679 22,100 21,016 -------- -------- -------- -------- Total operating expenses................. 53,334 50,529 103,655 97,653 -------- -------- -------- -------- Operating earnings......................... 21,276 17,105 42,697 31,978 Interest expense, net...................... 113 553 577 1,244 -------- -------- -------- -------- Earnings before income taxes............... 21,163 16,552 42,120 30,734 Income tax expense......................... 8,254 6,314 16,427 11,987 -------- -------- -------- -------- Net earnings............................... $ 12,909 $ 10,238 $ 25,693 $ 18,747 ======== ======== ======== ======== Net earnings per share: Basic.................................... $ 0.39 $ 0.33 $ 0.78 $ 0.60 ======== ======== ======== ======== Diluted.................................. $ 0.37 $ 0.30 $ 0.75 $ 0.56 ======== ======== ======== ======== Shares used in per share calculations: Basic.................................... 32,946 31,498 32,903 31,154 ======== ======== ======== ======== Diluted.................................. 34,475 33,770 34,468 33,232 ======== ======== ======== ========
See accompanying Notes to the Consolidated Financial Statements. 3 Varian, Inc. and Subsidiary Companies Consolidated Balance Sheets (In thousands, except share and par value amounts)
Mar. 30, Sept. 29, 2001 2000 ----------- --------- (Unaudited) ASSETS Current assets Cash and cash equivalents.............................. $ 55,894 $ 39,708 Accounts receivable, net............................... 161,986 168,513 Inventories............................................ 124,880 105,450 Deferred taxes......................................... 20,845 21,044 Other current assets................................... 11,276 10,734 -------- -------- Total current assets................................... 374,881 345,449 Property, plant, and equipment, net...................... 84,344 80,632 Other assets............................................. 95,374 86,238 -------- -------- Total assets............................................. $554,599 $512,319 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt...................... $ 6,366 $ 6,384 Notes payable.......................................... 9,792 -- Accounts payable....................................... 54,759 52,193 Accrued liabilities.................................... 143,740 133,825 -------- -------- Total current liabilities.............................. 214,657 192,402 Long-term debt........................................... 42,615 45,516 Deferred taxes........................................... 6,669 6,669 Other liabilities........................................ 10,321 11,626 -------- -------- Total liabilities........................................ 274,262 256,213 -------- -------- Contingencies (Note 8) Stockholders' equity Preferred stock--par value $.01, authorized--1,000,000 shares; issued--none.................................. -- -- Common stock--par value $.01, authorized--99,000,000 shares; issued and outstanding--32,989,003 shares at March 30, 2001 and 32,834,000 shares at Sept. 29, 2000.................................................. 225,206 222,838 Retained earnings...................................... 81,637 55,944 Other comprehensive loss............................... (26,506) (22,676) -------- -------- Total stockholders' equity............................. 280,337 256,106 -------- -------- Total liabilities and stockholders' equity............... $554,599 $512,319 ======== ========
See accompanying Notes to the Consolidated Financial Statements. 4 Varian, Inc. and Subsidiary Companies Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended ------------------ Mar. 30, Mar. 31, 2001 2000 -------- -------- Cash flows from operating activities Net earnings.............................................. $ 25,693 $ 18,747 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................ 10,153 9,317 (Gain) loss on disposition of property, plant, and equipment............................................... (81) (29) Changes in assets and liabilities: Accounts receivable, net................................ 8,804 (5,392) Inventories............................................. (14,920) (23,009) Other current assets.................................... (1,617) 367 Accounts payable........................................ (3,574) 17,484 Accrued liabilities..................................... 10,937 13,028 Other liabilities....................................... (797) 2,932 Other assets............................................ 839 (932) -------- -------- Net cash provided by operating activities................. 35,437 32,513 -------- -------- Cash flows from investing activities Proceeds from sale of property, plant, and equipment...... 545 286 Purchase of property, plant, and equipment................ (12,107) (10,558) Purchase of businesses, net of cash acquired.............. (16,061) (7,095) -------- -------- Net cash used in investing activities..................... (27,623) (17,367) -------- -------- Cash flows from financing activities Issuance of debt.......................................... 11,438 -- Repayment of debt......................................... (3,343) (3,337) Issuance of common stock.................................. 2,368 21,752 Purchase of common stock.................................. -- (2,548) Transfers (to) from Varian Medical Systems, Inc........... (1,190) 1,095 -------- -------- Net cash provided by financing activities................. 9,273 16,962 -------- -------- Effects of exchange rate changes on cash.................. (901) (928) -------- -------- Net increase in cash and cash equivalents................. 16,186 31,180 Cash and cash equivalents at beginning of period.......... 39,708 23,348 -------- -------- Cash and cash equivalents at end of period................ $ 55,894 $ 54,528 ======== ======== Supplemental cash flow information Income taxes paid......................................... $ 11,510 $ 2,453 Interest paid............................................. $ 1,707 $ 1,928
See accompanying Notes to the Consolidated Financial Statements. 5 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Interim Consolidated Financial Statements These interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The year ended September 29, 2000 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended September 29, 2000 filed with the Securities and Exchange Commission. In the opinion of the Company's management, the interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter and six months ended March 30, 2001 are not necessarily indicative of the results to be expected for a full year or for any other periods. During the fiscal quarter ended December 29, 2000, the Company acquired substantially all of the assets of Imagine Manufacturing Solutions, Inc. and R&S Technology, Inc. During the fiscal quarter ended March 30, 2001, the Company acquired all of the outstanding capital stock of Bear Instruments, Inc. These acquisitions, which did not have a material effect on the Company's operations or financial position, were accounted for using the purchase method of accounting. Note 2. Description of Business and Basis of Presentation The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum technology products and services, and electronics manufacturing services. These businesses primarily serve life science, health care, semiconductor processing, communications, industrial, and academic customers. Until April 2, 1999, the business of the Company was operated as the Instrument Business ("IB") of Varian Associates, Inc. ("VAI"). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company for each share of VAI (the "Distribution"). The Company's fiscal years reported are the 52-week periods ending on the Friday nearest September 30. Fiscal year 2001 will comprise the 52-week period ending September 28, 2001, and fiscal year 2000 was comprised of the 52-week period ended September 29, 2000. The fiscal quarters ended March 30, 2001 and March 31, 2000 each comprise 13 weeks, and the six-month periods ended March 30, 2001 and March 31, 2000 each comprise 26 weeks. Note 3. Balance Sheet Detail
Mar. 30, Sept. 29, 2001 2000 -------- --------- (In thousands) INVENTORIES Raw materials and parts...................................... $ 69,830 $ 55,649 Work in process.............................................. 13,111 10,912 Finished goods............................................... 41,939 38,889 -------- -------- $124,880 $105,450 ======== ========
6 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 4. Forward Exchange Contracts Effective September 30, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS 133 and 138 did not have a material effect on the Company's financial statements for the fiscal quarter and the six months ended March 30, 2001. The Company's forward exchange contracts generally range from one to 12 months in original maturity. Forward exchange contracts outstanding as of March 30, 2001 that hedge the balance sheet and certain purchase commitments were effective March 30, 2001, and accordingly there were no significant unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. Forward exchange contracts that were outstanding as of March 30, 2001 are summarized as follows:
Notional Notional Value Value Sold Purchased -------- --------- (In thousands) Australian Dollar............................................ $ -- $25,966 Euro......................................................... -- 12,864 Canadian Dollar.............................................. 3,966 -- British Pound................................................ 4,769 -- Japanese Yen................................................. 1,553 -- ------- ------- Total...................................................... $10,288 $38,830 ======= =======
7 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5. Net Earnings Per Share Basic earnings per share are calculated based on net earnings and the weighted-average number of shares outstanding during the reported period. Diluted earnings per share include dilution from potential common stock shares issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method. For the fiscal quarter and six months ended March 30, 2001, options to purchase 667,531 and 468,644, respectively, potential common stock shares with exercise prices greater than the weighted-average market value of such common stock were excluded from the calculation of diluted earnings per share. For the fiscal quarter and six months ended March 31, 2000, options to purchase 7,113 and 12,484, respectively, potential common stock shares with exercise prices greater than the weighted-average market value of such common stock were excluded from the calculation of diluted earnings per share. A reconciliation follows: (In thousands except per share amounts)
Six Months Quarter Ended Ended --------------- --------------- Mar. Mar. Mar. Mar. 30, 31, 30, 31, 2001 2000 2001 2000 ------- ------- ------- ------- Basic Net earnings................................... $12,909 $10,238 $25,693 $18,747 Weighted average shares outstanding............ 32,946 31,498 32,903 31,154 Net earnings per share......................... $ 0.39 $ 0.33 $ 0.78 $ 0.60 ======= ======= ======= ======= Diluted Net earnings................................... $12,909 $10,238 $25,693 $18,747 Weighted average shares outstanding 32,946 31,498 32,903 31,154 Net effect of dilutive stock options........... 1,529 2,272 1,565 2,078 ------- ------- ------- ------- Total shares................................... 34,475 33,770 34,468 33,232 Net earnings per share......................... $ 0.37 $ 0.30 $ 0.75 $ 0.56 ======= ======= ======= =======
Note 6. Comprehensive Income Comprehensive income is comprised of net income and the currency translation adjustment. Comprehensive income was $5.4 million and $4.7 million for the fiscal quarters ended March 30, 2001 and March 31, 2000, respectively and $21.9 million and $4.5 million for the six months ended March 30, 2001 and March 31, 2000, respectively. Note 7. Debt and Credit Facilities In December 2000, the Company established a 364-day bank credit facility in Japan in the amount of 1.2 billion yen. The credit facility is for working capital purposes for its wholly-owned Japanese subsidiary. As of March 30, 2001, 1.2 billion yen ($9.8 million) was outstanding under this credit facility with an annual interest rate of 1.8%. This credit facility contains certain covenants that limit future borrowings of the Company and requires the maintenance by the Company of certain levels of working capital and operating results. Note 8. Contingencies Environmental Matters. The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the 8 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the terms of the Distribution, the Company and Varian Semiconductor Equipment Associates, Inc. ("VSEA") each agreed to indemnify Varian Medical Systems, Inc. ("VMS") for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring, and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring, and/or remediation activities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of March 30, 2001, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.6 million to $5.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of March 30, 2001. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.6 million as of March 30, 2001. As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of March 30, 2001, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $8.0 million to $18.3 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of March 30, 2001. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $14.1 million at March 30, 2001. The Company therefore accrued $6.3 million as of March 30, 2001, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.6 million described in the preceding paragraph. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with various insurance companies, VMS is still pursuing lawsuits against an insurance company and certain other third parties for the benefit of itself, VSEA, and the Company. In addition, an insurance company has agreed to pay a portion of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.6 million receivable in Other Assets as of March 30, 2001 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may 9 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental- related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Legal Proceedings. Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings related to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Note 9. Industry Segments The Company's operations are grouped into three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. Scientific Instruments is a supplier of instruments, consumable laboratory supplies, and after sales support used in studying the chemical composition and structure of myriad substances and for imaging. These products are tools for scientists engaged in drug discovery, life sciences, genetic engineering, health care, environmental analysis, quality control, and academic research. Vacuum Technologies provides products and solutions to create, maintain, contain, and measure an ultra-clean or high-vacuum environment for industrial and scientific applications. Vacuum Technologies products are used in semiconductor manufacturing equipment, life science and other analytical instruments, industrial manufacturing, and quality control. Electronics Manufacturing provides contract manufacturing services for technology companies with low-volume and high-mix requirements. Transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company's operations to similar operations of other companies may not be meaningful. 10 VARIAN, INC. AND SUBSIDIARY COMPANIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Industry Segments (In millions)
Quarter Ended Quarter Ended ----------------- ----------------- Mar. 30, Mar. 31, Mar. 30, Mar. 31, 2001 2000 2001 2000 -------- -------- -------- -------- Pretax Pretax Sales Sales Earnings Earnings Scientific Instruments...................... $110.0 $102.0 $13.0 $11.3 Vacuum Technologies ........................ 40.9 34.8 8.6 5.8 Electronics Manufacturing................... 43.2 40.5 2.1 3.0 ------ ------ ----- ----- Total industry segments..................... 194.1 177.3 23.7 20.1 General corporate........................... -- -- (2.5) (3.1) Interest expense, net....................... -- -- (0.1) (0.5) ------ ------ ----- ----- Total....................................... $194.1 $177.3 $21.1 $16.5 ====== ====== ===== ===== Industry Segments (In millions) Six Months Ended Six Months Ended ----------------- ----------------- Mar. 30, Mar. 31, Mar. 30, Mar. 31, 2001 2000 2001 2000 -------- -------- -------- -------- Pretax Pretax Sales Sales Earnings Earnings Scientific Instruments...................... $216.7 $196.3 $24.9 $22.6 Vacuum Technologies ........................ 82.5 66.7 17.7 10.3 Electronics Manufacturing................... 86.2 74.3 4.9 5.7 ------ ------ ----- ----- Total industry segments..................... 385.4 337.3 47.5 38.6 General corporate........................... -- -- (4.8) (6.7) Interest expense, net....................... -- -- (0.6) (1.2) ------ ------ ----- ----- Total....................................... $385.4 $337.3 $42.1 $30.7 ====== ====== ===== =====
Note 10. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. SAB 101 is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes." In October 2000, the Securities and Exchange Commission issued SAB 101 Frequently Asked Questions and Answers, which the Company is utilizing to determine the impact that adoption will have on its consolidated financial statements. Because the Company has complied with generally accepted accounting principles for historical revenue recognition, any change in revenue recognition resulting from SAB 101 will be reported as a change in accounting principle in the fourth quarter of fiscal year 2001 with restatements, if material, of the first, second, and third quarters of fiscal year 2001. While SAB 101 would not affect the fundamental aspects of the Company's operations as measured by shipments and cash flows, the implementation of SAB 101 could result in some changes to the timing of the Company's revenue recognition practices in certain situations, and therefore could have an effect on the Company's reported results of operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Until April 2, 1999, the business of Varian, Inc. (the "Company") was operated as the Instruments Business ("IB") of Varian Associates, Inc. ("VAI"). IB included the business units that designed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the "Distribution"). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. ("VSEA") and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc., ("VMS") effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the "Distribution Agreement"). The Company's fiscal years reported are the 52-week periods ending on the Friday nearest September 30. Fiscal year 2001 will comprise the 52-week period ending September 28, 2001, and fiscal year 2000 was comprised of the 52-week period ended September 29, 2000. The fiscal quarters ended March 30, 2001 and March 31, 2000 each comprise 13 weeks, and the six-month periods ended March 30, 2001 and March 31, 2000 each comprise 26 weeks. Results of Operations Second Quarter of Fiscal Year 2001 Compared to Second Quarter of Fiscal Year 2000 Sales. Sales were $194.1 million in the second quarter of fiscal year 2001, an increase of 9.5% from sales of $177.3 million in the second quarter of fiscal year 2000. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 7.9%, 17.6% and 6.7%, respectively. Geographically, sales in North America of $114.8 million, Europe of $45.7 million and the rest of the world of $33.6 million in the second quarter of fiscal year 2001 represented increases (decreases) of 11.5%, (6.3%), and 31.9%, respectively, as compared to the second quarter of fiscal year 2000. The increase in North America was due to the sales growth in all three segments. Scientific Instruments grew 12.8%, Vacuum Technologies grew 17.7% and Electronics Manufacturing grew 6.7%. The decrease in Europe was primarily due to the sharp decline in the European currencies compared to the second quarter of fiscal year 2000. The increase in the rest of the world was primarily due to strong sales growth in Scientific Instruments. Gross Profit. Gross profit was $74.7 million (representing 38.4% of sales) in the second quarter of fiscal year 2001, compared to $67.6 million (representing 38.1% of sales) in the second quarter of fiscal year 2000. The $7.0 million increase in gross profit resulted primarily from the increase in sales in the second quarter of fiscal year 2001 compared to the second quarter of fiscal year 2000. The increase in gross profit as a percent of sales primarily reflects the revenue shift to Scientific Instruments and Vacuum Technologies which have higher gross profit percentages than Electronics Manufacturing, which has lower gross profit percentages (but also lower operating expenses). Sales and Marketing. Sales and marketing expenses were $33.5 million (representing 17.2% of sales) in the second quarter of fiscal year 2001, compared to $31.3 million (representing 17.7% of sales) in the second quarter of fiscal year 2000. The $2.2 million increase was primarily to support the sales growth. The decrease in the sales and marketing expenses as a percent of sales resulted primarily from the Company's ability to leverage these expenses as sales increased and the favorable effect on these expenses of the weaker euro and Australian dollar. 12 Research and Development. Research and development expenses were $9.3 million (representing 4.8% of sales) in the second quarter of fiscal year 2001, compared to research and development expenses of $8.5 million (representing 4.8% of sales) in the second quarter of fiscal year 2000. Research and development expenditures remained consistent with the growth in sales. General and Administrative. General and administrative expenses were $10.6 million (representing 5.5% of sales) in the second quarter of fiscal year 2001, compared to $10.7 million (representing 6.0% of sales) in the second quarter of fiscal year 2000. The decrease as a percent of sales resulted primarily from growth in the revenues while controlling the growth in these costs. Net Interest Expense. Net interest expense was $0.1 million (representing 0.1% of sales) for the second quarter of fiscal year 2001, compared to $0.5 million (representing 0.3% of sales) for the second quarter of fiscal year 2000. The reduction in net interest expense resulted mainly from income on invested cash. Taxes on Earnings. The effective income tax rate was 39.0% for the second quarter of fiscal year 2001, compared to 38.1% for the second quarter of fiscal year 2000. The 38.1% rate for the second quarter of fiscal year 2000 reflected the adjustment needed to bring the first half of fiscal year 2000 effective income tax rate to the expected rate of 39.0% for fiscal year 2000. Net Earnings. Net earnings were $12.9 million ($0.37 diluted net earnings per share) in the second quarter of fiscal year 2001, compared to net earnings of $10.2 million ($0.30 diluted net earnings per share) in the second quarter of fiscal year 2000. The net earnings improvement resulted primarily from higher sales and from operating expenses growing at a lower rate than sales. Segments. Scientific Instruments sales of $110.0 million in the second quarter of fiscal year 2001 increased 7.9% over the second quarter of fiscal year 2000 sales of $102.0 million. The revenue growth was primarily driven by demand for life science products in NMR, liquid chromatography, molecular spectroscopy and tablet dissolution, as well as gas chromatography products used for natural gas analysis, but was negatively impacted by the strong U.S. dollar. Earnings from operations in the second quarter of fiscal year 2001 of $13.0 million (11.8% of sales) increased from $11.3 million (11.1% of sales) in the second quarter of fiscal year 2000. The increase in earnings and the percent of sales primarily reflects the product mix shift to higher margin products for life science applications in addition to controlling expenses as revenues increased. Vacuum Technologies sales of $40.9 million in the second quarter of fiscal year 2001 increased 17.6% above the second quarter of fiscal year 2000 sales of $34.8 million. The revenue growth was primarily driven by broad demand for industrial, research, and life science applications. The slowing in demand for semiconductor applications, which began in the first quarter of fiscal 2001, continued in the second quarter. This slowing in demand was offset by strong demand for the Company's vacuum products for other applications. The Company expects revenues for semiconductor applications to decrease further in the third quarter of fiscal year 2001, but expects continued growth for other applications. Earnings from operations in the second quarter of fiscal year 2001 of $8.6 million (21.0% of sales) were up from the $5.8 million (16.5% of sales) in the second quarter of fiscal year 2000. The improved earnings resulted from the increased sales, improved product mix, and favorable impact of the stronger U.S. dollar on the segment's Torino, Italy factory, which sold approximately 50% of its output into the U.S. Electronics Manufacturing sales in the second quarter of fiscal year 2001 of $43.2 million increased 6.7% from the second quarter of fiscal year 2000 sales of $40.5 million. Electronics Manufacturing continued to experience a slowing of demand, which began in the first quarter of fiscal 2001, from some of its communications customers. This slowing in demand was offset by strong demand from new customers and customers brought to the business by the acquisition in October 2000 of the operations of Imagine Manufacturing Solutions, Inc. Earnings from operations in the second quarter of fiscal year 2001 of $2.1 million (4.9% of sales) decreased from $3.0 million (7.6% of sales) in the second quarter of fiscal year 2000. The decrease in earnings from operations is primarily the result of the costs of integrating an acquisition and the start-up costs of new customers. 13 First Half of Fiscal Year 2001 Compared to First Half of Fiscal Year 2000 Sales. Sales were $385.4 million in the first half of fiscal year 2001, an increase of 14.3% from sales of $337.3 million in the first half of fiscal year 2000. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 10.4%, 23.8%, and 16.0%, respectively. Geographically, sales in North America of $233.2 million, Europe of $91.9 million and the rest of the world of $60.3 million in the first half of fiscal year 2001 represented increases (decreases) of 20.2%, (1.2%), and 20.2% respectively, as compared to the first half of fiscal year 2000. The significant increase in North America was due to the sales growth in all three segments. Scientific Instruments grew 18.8%, Vacuum Technologies grew 30.5%, and Electronics Manufacturing grew 16.0%. The decline in sales in Europe resulted mainly from the sharp decline in the European currencies compared to the first half of fiscal 2000. The increase in the rest of the world was primarily due to strong sales growth in Scientific Instruments. Gross Profit. Gross profit was $146.4 million (representing 38.0% of sales) in the first half of fiscal year 2001, compared to $129.6 million (representing 38.4% of sales) in the first half of fiscal year 2000. The $16.7 million increase in gross profit resulted primarily from the higher sales compared to the same period last year. Currency fluctuations contributed to lower gross margins for Scientific Instruments but contributed to higher gross margins for Vacuum Technologies compared to the same period last year. Electronics Manufacturing had lower gross margins primarily as a result of the costs of integrating an acquisition and the start-up costs of new customers. Sales and Marketing. Sales and marketing expenses were $64.5 million (representing 16.7% of sales) in the first half of fiscal year 2001, compared to $61.1 million (representing 18.1% of sales) in the first half of fiscal year 2000. The $3.3 million increase was primarily to support the higher sales volume. The decrease in sales and marketing expenses as a percent of sales resulted primarily from the Company's ability to leverage these expenses as sales increased and the favorable effect on these expenses of the weaker euro and Australian dollar. Research and Development. Research and development expenses were $17.1 million (representing 4.4% of sales) in the first half of fiscal year 2001, compared to research and development expenses of $15.5 million (representing 4.6% of sales) in the first half of fiscal year 2000. The reduction in research and development expense as a percent of sales resulted primarily from a revenue shift among segments with different research and development structures and from favorable currency effects in certain countries where the Company conducts research and development. General and Administrative. General and administrative expenses were $22.1 million (representing 5.7% of sales) in the first half of fiscal year 2001, compared to $21.0 million (representing 6.2% of sales) in the first half of fiscal year 2000. The decrease as a percent of sales resulted primarily from growth in the revenues while controlling the growth in these costs. Net Interest Expense. Net interest expense was $0.6 million (representing 0.1% of sales) for the first half of fiscal year 2001 compared to $1.2 million (representing 0.4% of sales) for the first half of fiscal year 2000. The reduction in net interest expense resulted mainly from income on invested cash. Taxes on Earnings. The effective income tax rate was 39.0% for the first half of fiscal year 2001 and for the first half of fiscal year 2000. Net Earnings. Net earnings were $25.7 million ($0.75 diluted net earnings per share) in the first half of fiscal year 2001, compared to net earnings of $18.7 million ($0.56 diluted net earnings per share) in the first half of fiscal year 2000. The net earnings improvement resulted primarily from higher sales and from operating expenses growing at a lower rate than sales. Segments. Scientific Instruments sales of $216.7 million in the first half of fiscal year 2001 increased 10.4% over the first half of fiscal year 2000 sales of $196.3 million. The revenue growth was primarily driven 14 by demand for life science products in NMR, liquid chromatography, molecular spectroscopy and tablet dissolution, as well as gas chromatography products used for natural gas analysis, but was negatively impacted by the strong U.S. dollar. Earnings from operations in the first half of fiscal year 2001 of $24.9 million (11.5% of sales) increased from $22.6 million (11.5% of sales) in the first half of fiscal year 2000. The increase in earnings resulted primarily from higher sales, with the leverage of operating expenses offsetting the negative impact of the strong dollar on this segment's profitability. Vacuum Technologies sales of $82.5 million in the first half of fiscal year 2001 increased 23.8% above the first half of fiscal year 2000 sales of $66.7 million. The revenue growth was primarily driven by broad demand for industrial, research, and life science applications. During the first half of fiscal year 2001, this segment experienced a slowing in demand for semiconductor applications. This slowing in demand was offset by strong demand for the Company's vacuum products for other applications. The Company expects revenues for semiconductor applications to decrease further in the third quarter of fiscal year 2001, but expects continued growth for other vacuum product applications. Earnings from operations in the first half of fiscal year 2001 of $17.7 million (21.5% of sales) were up from the $10.3 million (15.4% of sales) in the first half of fiscal year 2000. The improved earnings resulted from the increased sales, improved product mix, and favorable impact of the stronger U.S. dollar on the segment's Torino, Italy factory, which sold approximately 55% of its output into the U.S. Electronics Manufacturing sales in the first half of fiscal year 2001 of $86.2 million increased 16.0% from the first half of fiscal year 2000 sales of $74.3 million. Electronics Manufacturing experienced a slowing of demand from some of its communications customers, which was offset by strong demand from new customers and customers brought to the business by the acquisition in October 2000 of the operations of Imagine Manufacturing Solutions, Inc. Earnings from operations in the first half of fiscal year 2001 of $4.9 million (5.6% of sales) decreased from $5.7 million (7.7% of sales) in the first half of fiscal year 2000. The decrease in earnings from operations is primarily the result of the cost of integrating an acquisition and the start-up costs of new customers. Liquidity and Capital Resources The Company generated $35.4 million of cash from operating activities in the first half of fiscal year 2001, which compares to $32.5 million in the first half of fiscal year 2000. The increase in cash from operating activities resulted from improved net earnings partially offset by higher working capital requirements. The Company used $27.6 million of cash for investing activities in the first half of fiscal year 2001, which compares to $17.4 million in the first half of fiscal year 2000. This increase in cash used for investing activities in the first half of fiscal year 2001 was primarily due to a higher level of business acquisition activity. The Company generated $9.3 million of cash from financing activities in the first half of fiscal year 2001, which compares to $17.0 million in the first half of fiscal year 2000. This decrease resulted primarily from a $19.4 million decline in proceeds from issuance of common stock under stock option plans offset by the issuance of $11.4 million in debt. In December 2000, the Company established a 364-day bank credit facility in Japan in the amount of 1.2 billion yen. The credit facility is for working capital purposes for its wholly-owned Japanese subsidiary. As of March 30, 2001, 1.2 billion yen ($9.8 million) was outstanding under this credit facility with an annual interest rate of 1.8%. This credit facility contains certain covenants that limit future borrowings of the Company and requires the maintenance by the Company of certain levels of working capital and operating results. The Distribution Agreement provides that the Company is responsible for certain litigation to which VAI was a party, and further provides that the Company will indemnify VMS and VSEA for one-third of the costs, expenses, and other liabilities relating to certain discontinued, former, and corporate operations of VAI, including certain environmental liabilities (see "Environmental Matters" below). The Distribution Agreement also 15 provided for the division among the Company, VSEA, and VMS of VAI's cash and debt as of April 2, 1999. Under the Distribution Agreement, the Company was to assume 50% of VAI's term loans and receive an amount of cash from VAI such that it would have net debt (defined in the Distribution Agreement as the amount outstanding under the term loans and notes payable, less cash and cash equivalents) equal to approximately 50% of the net debt of the Company and VMS, subject to such adjustment as was necessary to provide VMS with a net worth (as defined in the Distribution Agreement) of between 40% and 50% of the aggregate net worth of the Company and VMS, and subject to further adjustment to reflect the Company's approximately 50% share of the estimated proceeds, if any, to be received by VMS after the Distribution from the sale of VAI's long- term leasehold interest at certain of its Palo Alto facilities, together with certain related buildings and other corporate assets, and the Company's obligation for approximately 50% of any estimated transaction expenses to be paid by VMS after the Distribution (in each case reduced for estimated taxes payable or tax benefits received from all sales and transaction expenses). Since the amounts transferred immediately prior to the Distribution were based on estimates, these and other adjustments were required following the Distribution. As a result of these final adjustments, the Company recorded an increase in stockholders' equity of $1.1 million in the second quarter of fiscal year 2000. Management believes that no further adjustments are necessary, and that if any are required, they will not have a material effect on the Company's financial condition. The Company's liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. The Company's current business strategy contemplates possible acquisitions, further stock repurchases, and/or facility expansions. Any of these activities could utilize cash currently being generated by the Company. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors and activities, management believes that cash generated from operations, together with the Company's borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next 12 months. Environmental Matters The Company's operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company's operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect upon the Company's capital expenditures, earnings, or competitive position. Under the terms of the Distribution, the Company and VSEA each agreed to indemnify VMS for one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below. VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. VMS is also involved in various stages of environmental investigation, monitoring, and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring, and/or remediation activities. For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of March 30, 2001, it was nonetheless estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.6 million to $5.1 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of March 30, 2001. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore accrued $1.6 million as of March 30, 2001. 16 As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of March 30, 2001, it was estimated that the Company's share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $8.0 million to $18.3 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of March 30, 2001. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $14.1 million at March 30, 2001. The Company therefore accrued $6.3 million as of March 30, 2001, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.6 million described in the preceding paragraph. Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future, were filed by VAI against various insurance companies and other third parties. Following settlements with various insurance companies, VMS is still pursuing lawsuits against an insurance company and certain other third parties for the benefit of itself, VSEA, and the Company. In addition, an insurance company has agreed to pay a portion of VAI's (now VMS') future environmental-related expenditures for which the Company has an indemnity obligation, and the Company therefore has a $1.6 million receivable in Other Assets as of March 30, 2001 for the Company's share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on claims made against third parties. The Company's management believes that its reserves for the foregoing and certain other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges or credits against earnings may be made. Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company's financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company's management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Legal proceedings Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings related to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in a number of its own legal actions and could incur an uninsured liability in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Company's financial position or results of operations. Euro Conversion On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies (legal currencies) and one new common currency--the euro. The euro then began trading on currency exchanges and began to be used in certain business transactions. The transition period for the introduction of the euro occurs through June 2002. Beginning January 1, 2002, new euro-denominated bills and coins will be issued. Simultaneously, legacy currencies will begin to be withdrawn from circulation with the completion of the withdrawal scheduled for no later than July 1, 2002. Because of the Company's significant sales and operating profits generated in the European Union, the Company has initiated a 17 program to identify and address risks arising from the conversion to the euro currency. These risks include, but are not limited to, converting information technology systems to handle the new currency, evaluating the competitive impact of one common currency due to, among other things, increased cross- border price transparency, evaluating the Company's exposure to currency exchange risks during and following the transition period to the euro, and determining the impact on the Company's processes for preparing and maintaining accounting and taxation records. The Company believes that it is taking appropriate steps to prepare for the euro conversion and to mitigate its effects on the Company's business, and that the euro conversion is not likely to have a material adverse effect on the Company's business or financial condition. However, the Company is still assessing the risks that might arise from the euro conversion and the costs to address those risks, and therefore cannot assure that the euro conversion will not have a material adverse effect on the Company's business or financial condition. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. SAB 101 is effective no later than the fourth quarter of fiscal years beginning after December 15, 1999, and requires companies to report any changes in revenue recognition as a cumulative change in accounting principle at the time of implementation in accordance with Accounting Principles Board Opinion 20, "Accounting Changes." In October 2000, the Securities and Exchange Commission issued SAB 101 Frequently Asked Questions and Answers, which the Company is utilizing to determine the impact that adoption will have on its consolidated financial statements. Because the Company has complied with generally accepted accounting principles for historical revenue recognition, any change in revenue recognition resulting from SAB 101 will be reported as a change in accounting principle in the fourth quarter of fiscal year 2001 with restatements, if material, of the first, second, and third quarters of fiscal year 2001. While SAB 101 would not affect the fundamental aspects of the Company's operations as measured by shipments and cash flows, the implementation of SAB 101 could result in some changes to the timing of the Company's revenue recognition practices in certain situations, and therefore could have an effect on the Company's reported results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Effective September 30, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities," which was amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS 133 and 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of those derivatives would be dependent upon the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS 133 and SFAS 138 did not have a material effect on the Company's financial statements for the fiscal quarter and the six months ended March 30, 2001. Foreign Currency Exchange Risk. The Company typically hedges its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with anticipated foreign currency cash flows. As a result, the effect of an immediate 10% change in exchange rates would not be material to the Company's financial condition or results of operations. The Company's forward exchange contracts have generally ranged from one to 12 months in original maturity, and no forward exchange contract has had an original maturity greater than one year. Forward exchange contracts outstanding as of March 30, 2001 that hedge the balance sheet and certain purchase commitments were effective on March 30, 2001, and accordingly there were no significant unrealized gains or losses associated with such contracts and the fair value of these contracts approximates their notional values. 18 Forward Exchange Contracts Outstanding as of March 30, 2001
Notional Notional Value Value Sold Purchased -------- --------- (In thousands) Australian Dollar............................................ $ -- $25,966 Euro......................................................... -- 12,864 Canadian Dollar.............................................. 3,966 -- British Pound................................................ 4,769 -- Japanese Yen................................................. 1,553 -- ------- ------- Total...................................................... $10,288 $38,830 ======= =======
Interest Rate Risk The Company has no material exposure to market risk for changes in interest rates. The Company invests primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to the Company's financial condition or results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At March 30, 2001, most of the Company's debt obligations had fixed interest rates. The estimated fair value of the Company's debt obligations approximates the principal amounts reflected below on rates currently available to the Company for debt with similar terms and remaining maturities. Although payments under certain of the Company's operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases. Debt Obligations Principal Amounts and Related Weighted Average Interest Rates By Year of Maturity
Six Months Ending Fiscal Years -------------- ---------------------------------------------------------- Sept. 28, 2001 2002 2003 2004 2005 2006 Thereafter Total -------------- ------ ------ ------ ------ ------ ---------- ------- (dollars in thousands) Notes payable........... $9,792 $ 9,792 Average interest rate... 1.8% 1.8% Long-term debt (including current portion)............... $3,186 $6,406 $3,546 $3,343 $2,500 $2,500 $27,500 $48,981 Average interest rate... 7.0% 6.9% 5.3% 5.5% 7.2% 7.2% 6.7% 6.6%
19 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 8, 2001, the Company's stockholders considered and voted on the election of two Class II directors to the Board of Directors for three-year terms. The voting on each nominee for director was as follows: John G. McDonald: 29,797,410 votes for, 158,285 votes withheld, and 0 broker non-votes/1/ Wayne R. Moon: 29,792,658 votes for, 158,037 votes withheld, and 0 broker non-votes/1/ /1/ Pursuant to the rules of The Nasdaq Market, Inc., this election of directors constituted a routine matter allowing brokers to vote without receipt of instructions from clients. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required to be filed by Item 601 of Regulation S-K: None. (b) Reports on Form 8-K filed during the fiscal quarter ended March 30, 2001: None. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VARIAN, INC. (Registrant) /s/ G. Edward McClammy By __________________________________ G. Edward McClammy Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) Dated: May 11, 2001 21 -----END PRIVACY-ENHANCED MESSAGE-----