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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 27, 2002
OR
¨ |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ____________ to ____________
000-25393
(Commission File Number)
VARIAN, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware |
|
77-0501995 |
| (State or Other Jurisdiction of |
|
(IRS Employer |
| Incorporation or Organization) |
|
Identification No.) |
| |
| 3120 Hansen Way, Palo Alto, California |
|
94304-1030 |
| (Address of principal executive offices) |
|
(Zip Code) |
(650) 213-8000
(Telephone number)
Securities registered pursuant to Section
12(b) of the Act:
| (Title of each class) |
|
(Name of each exchange on which registered) |
| None |
|
None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Stock Purchase
Rights
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 ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. ¨
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of November 15, 2002 was $1,070,499,395.
The number of shares of the registrant’s common stock outstanding as of November 15, 2002 was 33,890,931.
| Documents Incorporated by Reference:
|
| Document Description
|
|
10-K Part
|
| Certain sections, identified by caption, of the definitive Proxy Statement for the registrant’s 2003 Annual Meeting
of Stockholders (the “Proxy Statement”) |
|
III |
An index of exhibits filed with this Form 10-K is located on page 28.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 2002
TABLE OF CONTENTS
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Page
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| PART I |
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| Item 1. |
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3 |
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| Item 2. |
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| Item 3. |
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| Item 4. |
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10 |
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| PART II |
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| Item 5. |
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| Item 6. |
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| Item 7. |
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| Item 7A. |
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25 |
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| Item 8. |
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| Item 9. |
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26 |
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| PART III |
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| Item 10. |
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27 |
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| Item 11. |
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27 |
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| Item 12. |
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27 |
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| Item 13. |
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27 |
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| Item 14. |
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27 |
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| PART IV |
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| Item 15. |
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28 |
2
PART I
GENERAL
Overview and History
Varian, Inc., together with its subsidiaries (collectively, the “Company” or the “Registrant”), is a technology company engaged in the design, development, manufacture, sale, and service of scientific instruments
and vacuum technologies, and in contract electronics manufacturing. The Company’s operations are grouped into three corresponding segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. These segments, their
products, and the markets they serve are described below.
Varian, Inc. became a separate, public company on
April 2, 1999. Until that date, the business of the Company was operated as the Instruments business (“IB”) of Varian Associates, Inc. (“VAI”). VAI contributed its Instruments business 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. 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. These transactions (collectively referred to as the “Distribution”) 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”). References in this section to the Company’s business for periods prior to April 2, 1999 refer to the historical business and operations of IB conducted by VAI prior to the Distribution.
Business Segments and Products
The Company’s products and services can be classified into the following three categories, which correspond to the Company’s three business segments: Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing.
Scientific Instruments
The Company’s Scientific Instruments business designs, develops, manufactures, sells, and services chromatography, optical spectroscopy, mass spectroscopy, dissolution
testing, and nuclear magnetic resonance equipment and consumable laboratory supplies for a broad range of life science and chemical analysis applications requiring identification, quantification, and analysis of the elemental, molecular, physical,
or biological composition or structure of liquids, solids, or gases.
Chromatography is a technique for
separating, identifying, and quantifying the individual chemical components of substances based on the physical and chemical characteristics specific to each component. The Company’s chromatography instruments include gas chromatographs
(“GCs”), high-performance liquid chromatographs (“HPLCs”), sample automation products, and data analysis systems. Consumable laboratory supplies include sample preparation products, GC and HPLC columns, GC filters, and testing
devices for drugs of abuse. For certain applications, mass spectrometers are sold as a detector for GC or HPLC systems.
Optical spectroscopy is a technique for analyzing the individual chemical components of substances based on the absorption or emission of electromagnetic radiation of a specific wavelength of light. The Company’s optical
spectroscopy instruments include atomic absorption spectrometers, inductively coupled plasma-optical emissions spectrometers, inductively coupled plasma-mass spectrometers, fluorescence spectrometers, ultraviolet-visible (“UV-Vis”) and
near-infrared spectrophotometers, sample automation products, and data analysis systems. Accessories and consumable laboratory supplies include sample preparation products, xenon lamps, cuvettes, and graphite furnace replacement parts.
3
Mass spectroscopy is a technique for analyzing the individual chemical components
of substances by breaking molecules into multiple electrically charged ions which are then sorted for analysis according to their mass-to-charge ratios. The Company combines mass spectrometers with other instruments, such as liquid
chromatograph/mass spectrometers, liquid chromatograph/nuclear magnetic resonance/mass spectrometers, gas chromatograph/mass spectrometers, and inductively coupled plasma-mass spectrometers, and offers related consumable laboratory supplies.
Dissolution testing is a technique for in-vitro analysis of the rate of release of a drug under controlled
conditions. The Company’s dissolution testing products include systems for analyzing the rate of release and equipment for testing the physical characteristics of different dosage forms.
Nuclear magnetic resonance (“NMR”) is a non-destructive instrumental technique that uses electromagnetic fields to interact with the magnetic property of
atomic nuclei in order to determine and analyze the molecular content and structure of liquids and solids. NMR spectroscopy is used in the study of liquids containing chemical substances including proteins, nucleic acids (DNA and RNA),
carbohydrates, membranes, and solid materials such as crystals, plastics, rubbers, ceramics, and polymers. NMR imaging systems are used to obtain non-invasive images of, primarily, biological materials and to probe the chemical processes within
these materials. The Company’s NMR systems include NMR spectrometers, NMR imaging spectrometers, and liquid chromatograph/NMR/mass spectrometers. The Company also offers probes and console upgrades to customers seeking to enhance NMR
performance.
Scientific Instruments’ chromatography, optical spectroscopy, mass spectroscopy, dissolution
testing, NMR, and consumable products can be generally categorized as either those used principally in life science applications or those used principally in chemical analysis applications (although many products are used in both applications). Life
science applications include the study of biological processes, the testing of biological materials, and the diagnosis, treatment, or development of treatments of diseases. In fiscal year 2002, Scientific Instruments sales into life science
applications accounted for approximately 46% of the segment’s total sales, compared to approximately 36% in the prior year (these are estimates based on assumptions of how the Company’s products are likely to be used by customers, and is
provided only as an indication of a historical trend).
Life science products include HPLCs, liquid
chromatograph/mass spectrometers, HPLC columns, fluorescence and UV-Vis spectrophotometers, NMR spectrometers, NMR imaging spectrometers, liquid chromatograph/NMR/mass spectrometers, sample automation products, data analysis systems, dissolution
systems, and sample preparation products. These products are primarily used by pharmaceutical companies in drug development, manufacturing, and quality control; by biotechnology and biopharmaceutical companies in studying biomolecules and the
prevention, diagnosis, and treatment of diseases; by government and private laboratories and employers in drug testing; and by research hospitals and universities in basic chemistry, biological, biochemistry, and health care research. Life science
customers include AstraZeneca, Aventis, Bayer, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Merck, Novartis, Pfizer, Wyeth, governmental agencies, and numerous academic institutions and research hospitals.
Chemical analysis products include GCs, gas chromatograph/mass spectrometers, atomic absorption spectrometers, near-infrared
spectrophotometers, inductively coupled plasma-optical emissions spectrometers, inductively coupled plasma-mass spectrometers, NMR spectrometers, sample automation products, data analysis systems, and sample preparation products. These products are
primarily used by environmental laboratories in testing water, soil, air, solids, and food products; by petroleum and natural gas companies in refining and quality control; by petroleum, agriculture, and chemical companies in research and quality
control; by mining and metallurgy companies in research and quality control; by food and beverage processing companies in research and quality control; by semiconductor companies in manufacturing and quality control; and by other industrial,
governmental, and academic research laboratories in forensic analysis, materials science, and general research. Chemical analysis customers include BASF, British Petroleum, DuPont, Formosa Plastics, Huntsman Polymers, Laboratory Corporation of
America, Monsanto, Procter & Gamble, governmental agencies, and numerous academic and research institutions.
4
Vacuum Technologies
The Company’s Vacuum Technologies business designs, develops, manufactures, sells, and services a broad range of products and services used to create, control,
measure, and test vacuum environments in life science, industrial, research, semiconductor, and scientific applications where ultra-clean, high-vacuum environments are needed. Products include a wide range of high and ultra-high vacuum pumps
(diffusion, turbo-molecular, and ion getter), intermediate vacuum pumps (rotary vane, mechanical, sorption, and dry scroll), vacuum instrumentation (vacuum control instruments, sensor gauges, and meters), and vacuum components (valves, flanges, and
other mechanical hardware). Its products also include helium mass spectrometry and helium sensing leak detection equipment for use in identifying and measuring leaks in hermetic or vacuum environments. In addition to product sales, the Company also
offers a wide range of services including assistance with the design and integration of vacuum systems, a pump exchange and repair program, applications support, and training in basic and advanced vacuum technology.
Vacuum Technologies products are used in a broad range of applications including in life sciences (such as mass spectrometers for mass
analysis and linear accelerators for cancer therapy); in the manufacture of flat-panel displays, television tubes, decorative coating, architectural glass, optical lenses, light bulbs, and automobile components; in food packaging; in the testing of
aircraft components, automobile airbags, refrigeration components, medical devices, and industrial processing equipment; in high-energy physics research; and in the manufacture of semiconductors. Customers include Applied Biosystems, KLA-Tencor, MDS
SCIEX, Varian Medical Systems, and Varian Semiconductor Equipment Associates.
Electronics Manufacturing
The Company’s Electronics Manufacturing business is a contract manufacturer of electronic assemblies and
subsystems such as printed circuit boards for original equipment manufacturers (“OEMs”). For some customers, the business provides total manufacturing services including design support, customized manufacturing (such as just-in-time and
inventory management) and post-manufacturing services (such as direct end-user shipping and repair depots).
The
Electronics Manufacturing business serves customers in a wide range of industries, including life science products (which includes medical equipment) and communications equipment (e.g., satellite, networking, telephony, and voice and data transfer).
The business focuses on customers with low- to medium-volume, high-mix manufacturing needs. Customers include Alaris Medical, GE OEC Medical Systems, Honeywell Aerospace Electronic Systems, Inter-Tel, Medtronic, Radyne/Comstream, Thomson Multimedia,
Varian Medical Systems, and Varian Semiconductor Equipment Associates. The business also supplies products to the Company’s Scientific Instruments and Vacuum Technologies businesses.
For financial information about industry segments including foreign and domestic operations and export sales, see Note 16 of the Notes to the Consolidated Financial
Statements.
Marketing and Sales
In the United States, the Company markets the largest portion of its products directly through its own sales and distribution organizations, although a few products and services are marketed through
independent distributors and sales representatives. Sales to major markets outside the United States are generally made by the Company’s foreign-based sales and service staff, although some export sales are made directly from the United States
to foreign customers. In addition, in certain foreign countries, sales are made through various representative and distributorship arrangements. The Company maintains sales and service offices in strategic regional locations in the United States
and, through its sales subsidiaries, in foreign locations.
The markets in which the Company competes are, for the
most part, global. Sales outside of North America accounted for 39%, 39%, and 40% of sales for fiscal years 2002, 2001, and 2000, respectively. As a result, the Company’s customers increasingly require service and support on a worldwide basis.
In addition to the United States, the Company has sales and service offices located throughout Europe, Asia, and Latin America. The Company has invested substantial financial and management resources to develop an international infrastructure to
meet the needs of its customers worldwide.
5
Demand for the Company’s products depends on many factors, including the
level of capital expenditures of the Company’s customers, the rate of economic growth in the Company’s major markets, and competitive considerations. No single customer accounted for 10% or more of the Company’s sales in fiscal year
2002, 2001, or 2000.
The Company experiences some cyclical patterns in sales of its products. Generally, sales
and earnings in the first quarter of the Company’s fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in the first fiscal quarter (October to December) and many customers
defer December deliveries until the next calendar year, the Company’s second fiscal quarter. The Company’s fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the other three quarters, primarily
because many customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced by other factors, including general economic conditions, acquisitions, and new product introductions.
The Company believes that it differentiates its products from those of its competitors by its responsiveness to customer requirements, as
determined through market research. Although specific customer requirements can vary depending on applications, customers generally demand superior performance, high quality, productivity, and low cost of ownership. The Company has responded to
these customer demands by introducing new products focused on these emerging requirements in the markets it serves. For example, customers of Scientific Instruments products have demanded higher levels of analytical throughput to support their
research programs aimed at drug discovery and advanced life sciences. The Company has responded to these needs by introducing products with higher levels of automation and computerized data analysis routines.
Backlog
The
Company’s recorded backlog was $234 million at September 27, 2002, $265 million at September 28, 2001, and $201 million at September 29, 2000. Backlog decreased from September 28, 2001 to September 27, 2002 primarily due to a trend toward
shorter customer lead times in Electronics Manufacturing. This trend was a result of customers adopting more efficient ordering and production processes as well as their order visibility due to the difficult economic conditions during the fiscal
year. To a lesser degree, the decrease in backlog was also due to the fact that the Company began recognizing revenue on certain leading-edge NMR systems during fiscal year 2002. Of the increase in backlog from September 29, 2000 to September 28,
2001, a total of $47 million was due to the Company’s adoption of Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (“SAB 101”). The Company
includes in backlog purchase orders or production releases under blanket purchase orders that have firm delivery dates. Recorded backlog in U.S. dollars is impacted by foreign currency fluctuations. In addition, recorded backlog might not result in
sales because of cancellations or other factors. Most of the Company’s products are purchased on a short backlog, as short as a few days for some products and less than a fiscal quarter for most others. Significant shipments often occur in the
last month of each quarter, in part because of how customers place orders and schedule shipments. The Company believes that over 90% of orders included in the backlog at September 27, 2002 will result in sales before the end of fiscal year 2003.
Competition
Competition in markets served by the Scientific Instruments and Vacuum Technologies segments is based upon the performance capabilities of products, technical support and after-market service, the manufacturer’s
reputation as a technological leader, and product pricing. The Company believes that performance capabilities are the most important of these criteria. With respect to markets served by the Electronics Manufacturing segment, competition is based
upon assembly and test capabilities, technical expertise and support, flexibility and responsiveness of logistics management capabilities, the manufacturer’s financial stability, and product pricing. The Company believes that technical
expertise and support are the most important of these criteria. The markets in which the Company competes are highly competitive and are characterized by the application of advanced technology. There are numerous companies that specialize in, and a
number of larger companies that devote a significant portion of their resources to, the development, manufacture, sale, and service of products that compete with those
6
manufactured, sold, or serviced by the Company. Many of the Company’s competitors are well-known manufacturers with a high degree of technical proficiency. In addition, competition is
intensified by the ever-changing nature of the technologies in the industries in which the Company is engaged. The markets for the Company’s products are characterized by specialized manufacturers that often have strength in narrow segments of
these markets. While the absence of reliable statistics makes it difficult to determine the Company’s relative market position in its industry segments, the Company is one of the principal manufacturers in its primary fields.
Each of the Company’s major business segments competes with many companies that address the same markets. The
Company’s Scientific Instruments business competes with Agilent Technologies; PerkinElmer; Shimadzu; Thermo Electron; Waters; Bruker; JEOL; and other smaller suppliers. The Company’s Vacuum Technologies business competes with BOC Edwards
High Vacuum; Leybold-Balzers; Pfeiffer Vacuum Technology; Alcatel; and other smaller suppliers. The Company’s Electronics Manufacturing business competes with numerous other high-mix, low-volume contract manufacturers, including Suntron;
Manufacturers’ Services Ltd.; Pemstar; PLEXUS; Sigmatron International; and privately-owned regional and off-shore manufacturers.
Manufacturing
The Company’s principal manufacturing activities consist of precision
assembly, test, calibration, and certain specialized machining activities. The Company subcontracts a portion of its assembly and machining. All other assembly, test, and calibration functions are performed by the Company.
The Company believes that the ability to manufacture reliable products in a cost-effective manner is critical to meeting the
“just-in-time” delivery and other demanding requirements of its OEM and end-user customers. The Company monitors and analyzes product lead times, warranty data, process yields, supplier performance, field data on mean time between
failures, inventory turns, repair response time, and other indicators so that it can continuously improve its manufacturing processes.
The Company operates 15 manufacturing facilities located throughout the world. Scientific Instruments has manufacturing facilities in Palo Alto, California; Walnut Creek, California; Lake Forest, California; Harbor City,
California; Ft. Collins, Colorado; Cary, North Carolina; Wakefield, Rhode Island; Melbourne, Australia; Middelburg, Netherlands; and Grenoble, France. Vacuum Technologies has manufacturing facilities in Lexington, Massachusetts; and Turin, Italy.
Electronics Manufacturing has manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin, California.
All of the Company’s manufacturing facilities, other than Lake Forest, California, Wakefield, Rhode Island, and Grenoble, France, have been certified as complying with the International Organization for Standardization Series
9000 Quality Standards (“ISO 9000”).
Raw Materials
There are no specialized raw materials that are particularly essential to the operation of the Company’s business. The Company’s manufacturing operations require
a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies, some of which are occasionally in short supply. In addition, use of certain of the Company’s products requires
reliable and cost-effective supply of certain raw materials. For example, end-users of the Company’s NMR systems require helium to operate those systems; shortages of helium could result in higher helium prices, and thus higher operating costs
for NMR systems, which could impact demand for those systems.
Some components used in the Company’s products
are manufactured by the Company. Other components, including superconducting magnets and electronic components, are purchased from other manufacturers. Most of the raw materials, components, and supplies purchased by the Company are available from a
number of different suppliers; however, a number of items—in particular, superconducting magnets for NMR systems—are purchased from limited or single sources of supply, and disruption of these sources could cause delays or reductions in
shipment of our products or increases in our costs, which could have an adverse effect on the Company’s financial condition or results of operations.
7
Research and Development
The Company is actively engaged in basic and applied research, development, and engineering programs designed to develop new products and to improve existing products.
During fiscal years 2002, 2001, and 2000, the Company spent $39.9 million, $35.6 million, and $31.8 million, respectively, on research, development, and engineering activities. Over this period, the focus of the Company’s research and
development activities has been shifting more toward products that serve life science applications. The Company intends to continue to conduct extensive research and development activities, with a continued emphasis on life science, although there
can be no assurance that it will be able to develop and market new products on a cost-effective and timely basis, that such products will compete favorably with products developed by others, or that the Company’s existing technology will not be
superseded by new discoveries or developments.
Customer Support and Service
The Company believes that its customer service and support are an integral part of its competitive strategy. As part of its support services, the Company’s
technical support staff provides individual assistance in solving analysis problems, integrating vacuum components, designing circuit boards, etc., depending on the business. The Company offers training courses and periodically sends its customers
information on applications development. The Company’s products generally include a 90-day to one-year warranty. Service contracts may be purchased by customers to cover equipment no longer under warranty. Service work not performed under
warranty or service contract is performed on a time-and-materials basis. The Company installs and services its products primarily through its own field service organization, although certain distributors and sales representatives are capable of
performing some field services.
Patent and Other Intellectual Property Rights
The Company has a policy of seeking patent, copyright, trademark, and trade secret protection in the United States and other countries for
developments, improvements, and inventions originating within its organization that are incorporated in the Company’s products or that fall within its fields of interest. As of September 27, 2002, the Company owned approximately 262 patents in
the United States and approximately 375 patents throughout the world, and had numerous patent applications on file with various patent agencies worldwide. The Company intends to continue to file patent applications as appropriate.
The Company relies on a combination of copyright, trade secret, and other laws, and contractual restrictions on disclosure,
copying, and transferring title to protect its proprietary rights. The Company has trademarks, both registered and unregistered, that are maintained and enforced to provide customer recognition for its products in the marketplace. The Company also
has agreements with third parties that provide for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and technology cross-licenses.
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’s compliance with these regulations is not expected to have a material effect upon the Company’s capital expenditures, earnings, or competitive position. For additional information on
environmental matters, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors—Environmental Matters.
Employees
At September 27, 2002, the Company had a total
of approximately 4,300 full-time and temporary employees and contract laborers worldwide—2,725 in North America, 800 in Europe, 250 in Asia, 425 in Australia, and 100 in Latin America.
8
Risk Factors
For additional information on risks relating to the Company and its business, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Risk Factors.
Executive Officers
The following table sets forth the names and ages of the Company’s executive officers, together with positions and offices held within the last five years by such
executive officers.
| Name
|
|
Age
|
|
Position (Business Experience)
|
|
Period
|
| Allen J. Lauer |
|
65 |
|
Chairman of the Board and Chief Executive Officer |
|
2002-Present |
| |
|
|
|
President and Chief Executive Officer, Director |
|
1999-2002 |
| |
|
|
|
Executive Vice President, Varian Associates, Inc. |
|
1990-1999 |
| |
| Garry W. Rogerson |
|
50 |
|
President and Chief Operating Officer |
|
2002-Present |
| |
|
|
|
Senior Vice President, Scientific Instruments |
|
2001-2002 |
| |
|
|
|
Vice President, Analytical Instruments |
|
1999-2001 |
| |
|
|
|
Vice President and General Manager, Chromatography Systems, Varian Associates, Inc. |
|
1994-1999 |
| |
| G. Edward McClammy |
|
53 |
|
Senior Vice President, Chief Financial Officer and Treasurer |
|
2002-Present |
| |
|
|
|
Vice President, Chief Financial Officer and Treasurer |
|
2001-2002 |
| |
|
|
|
Vice President and Chief Financial Officer |
|
1999-2001 |
| |
|
|
|
Vice President, Special Storage Products Group, Quantum Corporation |
|
1998-1999 |
| |
|
|
|
Vice President, Finance and Treasurer, Quantum Corporation |
|
1996-1998 |
| |
| A. W. Homan |
|
43 |
|
Vice President, General Counsel and Secretary |
|
1999-Present |
| |
|
|
|
Associate General Counsel, Varian Associates, Inc. |
|
1998-1999 |
| |
|
|
|
Assistant Secretary, Varian Associates, Inc. |
|
1993-1999 |
| |
|
|
|
Senior Corporate Counsel, Varian Associates, Inc. |
|
1993-1998 |
| |
| Franco N. Palomba |
|
41 |
|
Vice President and Controller |
|
2002-Present |
| |
|
|
|
Controller |
|
2001-2002 |
| |
|
|
|
Treasurer |
|
1999-2001 |
| |
|
|
|
Corporate Audit Manager, Varian Associates, Inc. |
|
1995-1999 |
| |
| Sergio Piras |
|
53 |
|
Vice President, Vacuum Technologies |
|
2000-Present |
| |
|
|
|
Vice President and General Manager, Vacuum Technologies—Torino |
|
1999-2000 |
| |
|
|
|
Vice President and General Manager, Vacuum Products—Torino, Varian Associates, Inc. |
|
1992-1999 |
| |
| C. Wilson Rudd |
|
50 |
|
Vice President, Electronics Manufacturing |
|
2000-Present |
| |
|
|
|
Vice President and General Manager, Electronics Manufacturing |
|
1999-2000 |
| |
|
|
|
Vice President and General Manager, Tempe Electronics Center, Varian Associates, Inc. |
|
1990-1999 |
The Company has manufacturing, warehouse,
research and development, sales, service, and administrative facilities which have an aggregate floor space of approximately 975,000 and 568,000 square feet in the United States and abroad, respectively, for a total of approximately 1,543,000 square
feet worldwide. Of these facilities, aggregate floor space of approximately 519,000 square feet is leased, and the remainder is owned by the Company. The Company believes that its facilities and equipment generally are well maintained, in good
operating condition, suitable for the Company’s purposes, and adequate for current operations.
9
The Company owns or leases 15 manufacturing facilities located throughout the
world. Scientific Instruments has manufacturing facilities in Palo Alto, California; Walnut Creek, California; Lake Forest, California; Harbor City, California; Ft. Collins, Colorado; Cary, North Carolina; Wakefield, Rhode Island; Melbourne,
Australia; Middelburg, Netherlands; and Grenoble, France. Vacuum Technologies has manufacturing facilities in Lexington, Massachusetts; and Turin, Italy. Electronics Manufacturing has manufacturing facilities in Tempe, Arizona; Poway, California;
and Rocklin, California. The Company owns or leases 56 sales and service facilities located throughout the world, 48 of which are located outside the United States, including in Argentina, Australia, Austria, Belgium, Brazil, Canada, China, England,
France, Germany, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Spain, Sweden, Switzerland, and Taiwan.
Item 3. Legal Proceedings
The Company is involved in pending
legal proceedings that are ordinary, routine and incidental to its business. While the ultimate outcome of these legal matters is not determinable, the Company believes that these matters are not reasonably likely to have a material adverse effect
on the Company’s financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not
applicable.
10
PART II
Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
| |
|
Fiscal Year 2002 Common Stock Prices
|
| |
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
| High |
|
$ |
33.29 |
|
$ |
37.94 |
|
$ |
39.23 |
|
$ |
36.19 |
| Low |
|
$ |
22.99 |
|
$ |
31.30 |
|
$ |
31.40 |
|
$ |
24.50 |
The Company’s common stock is traded on the Nasdaq National
Market under the trading symbol VARI.
The Company has never paid cash dividends on its capital stock. The
Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.
There were 3,803 holders of record of the Company’s common stock on November 15, 2002.
Item 6. Selected Financial Data
| |
|
Fiscal Year
|
| |
|
2002
|
|
2001
|
|
|
2000
|
|
1999
|
|
1998
|
| (in millions, except per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Statement of Earnings Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Sales |
|
$ |
779.9 |
|
$ |
749.2 |
|
|
$ |
704.4 |
|
$ |
598.9 |
|
$ |
557.8 |
| Earnings before income taxes and cumulative effect of change in accounting principle |
|
$ |
81.2 |
|
$ |
72.6 |
|
|
$ |
70.8 |
|
$ |
13.7 |
|
$ |
38.9 |
| Income tax expense |
|
$ |
29.6 |
|
$ |
28.3 |
|
|
$ |
28.0 |
|
$ |
6.1 |
|
$ |
15.7 |
| Earnings before cumulative effect of change in accounting principle |
|
$ |
51.6 |
|
$ |
44.3 |
|
|
$ |
42.8 |
|
$ |
7.6 |
|
$ |
23.2 |
| Cumulative effect of change in accounting principle, net of tax |
|
$ |
— |
|
$ |
(7.5 |
) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
| Net earnings |
|
$ |
51.6 |
|
$ |
36.8 |
|
|
$ |
42.8 |
|
$ |
7.6 |
|
$ |
23.2 |
| Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Before cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
1.54 |
|
$ |
1.34 |
|
|
$ |
1.35 |
|
$ |
0.25 |
|
$ |
0.76 |
| Diluted |
|
$ |
1.48 |
|
$ |
1.29 |
|
|
$ |
1.26 |
|
$ |
0.24 |
|
$ |
0.76 |
| Cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
— |
|
$ |
(0.22 |
) |
|
$ |
— |
|
$ |
—
|
|
$ |
— |
| Diluted |
|
$ |
— |
|
$ |
(0.22 |
) |
|
$ |
— |
|
$ |
— |
|
$ |
— |
| After cumulative effect of change in accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
|
$ |
1.54 |
|
$ |
1.12 |
|
|
$ |
1.35 |
|
$ |
0.25 |
|
$ |
0.76 |
| Diluted |
|
$ |
1.48 |
|
$ |
1.07 |
|
|
$ |
1.26 |
|
$ |
0.24 |
|
$ |
0.76 |
| |
| |
|
Fiscal Year End
|
| |
|
2002
|
|
2001
|
|
|
2000
|
|
1999
|
|
1998
|
| Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
634.6 |
|
$ |
559.3 |
|
|
$ |
512.3 |
|
$ |
434.4 |
|
$ |
413.2 |
| Long-term debt |
|
$ |
37.6 |
|
$ |
39.7 |
|
|
$ |
45.5 |
|
$ |
51.2 |
|
$ |
— |
• |
|
Varian, Inc. was established as a separate, public company on April 2, 1999. The consolidated financial results for the six months ended April 2, 1999 and for
fiscal year 1998 (the “Pre-Spin Results”) were derived from the interim financial statements of VAI using the historical results of IB and include the accounts of IB after elimination of inter-business balances and transactions. The
Pre-Spin Results also include allocations of certain VAI corporate expenses to IB. These amounts were allocated to IB on a basis that was considered by management to reflect most fairly or reasonably the utilization of the services provided to
or the benefit obtained by IB. Typical measures and activity indicators used for allocation purposes included headcount, sales revenue, and payroll expense. The Company’s management believes that the methods used to allocate these amounts were
reasonable. However, these allocations were not necessarily indicative of the amounts that would have been recorded by the Company on a stand-alone basis. |
• |
|
For periods prior to April 3, 1999, earnings per share were calculated on a pro forma basis, assuming that the weighted-average number of shares outstanding
during the period equaled the number of shares of common stock outstanding as of the Distribution on April 2, 1999. Also, for computing pro forma diluted earnings per share, the additional shares issuable upon exercise of stock options were
determined using the treasury stock method based on the number of replacement stock options issued as of the Distribution on April 2, 1999. |
11
|
|
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, developed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing
services. 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”). For purposes of
providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS, and VSEA after the Distribution, the Company, VMS, and VSEA also entered into certain other agreements which include an Employee Benefits
Allocation Agreement, an Intellectual Property Agreement, and a Tax Sharing Agreement.
The Company’s fiscal
years reported are the 52- or 53-week periods which ended on the Friday nearest September 30. Fiscal year 2002 comprises the 52-week period ended on September 27, 2002. Fiscal year 2001 comprises the 52-week period ended on September 28, 2001.
Fiscal year 2000 comprises the 52-week period ended on September 29, 2000.
Caution Regarding Forward-Looking Statements
Throughout this Report, and particularly in “Item 1—Business” and “Item
7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there are forward-looking statements that are based upon management’s current expectations, estimates, and projections, and that reflect
management’s beliefs and assumptions based upon information available to management at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms.
We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These
forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance, or achievements could differ materially from those expressed
or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk
Factors.” We encourage you to read that section carefully. Other risks include: new product development, commercialization, performance, and acceptance; continued growth in Scientific Instruments sales and the impact on these sales of the
timing of shipments, installations, and the recognition of revenues on leading-edge NMR systems; renewed demand for vacuum products and contract electronics manufacturing; competitive products and pricing; economic conditions in the Company’s
product and geographic markets; continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; sustained or improved market investment in capital
equipment; the ability to successfully integrate acquired businesses; customers that operate in cyclical industries; government funding for research; and other risks detailed from time to time in the Company’s filings with the Securities and
Exchange Commission (the “SEC”). You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your
investment. We undertake no obligation to revise or update any forward-looking statement.
12
Results of Operations
Fiscal Year 2002 Compared to Fiscal Year 2001
Sales. Sales were $779.9 million in fiscal year 2002, an increase of 4.1% from sales of $749.2 million in fiscal year 2001. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics
Manufacturing segments increased (decreased) by 15.9%, (22.2%) and (3.0%), respectively. Sales for both fiscal years reflect the Company’s adoption of SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(“SAB 101”).
During fiscal year 2001, the Company adopted the provisions of SAB 101, which resulted
in a non-cash charge for the cumulative effect of a change in accounting principle in the amount of $7.5 million after taxes. Under SAB 101, the Company has recorded deferred profit of $21.0 million and $21.7 million at September 27, 2002 and
September 28, 2001, respectively. Deferred profit is comprised of deferred revenue related to systems that have been delivered but do not yet qualify for revenue recognition under SAB 101, net of the related deferred cost of sales.
Geographically, sales in North America of $475.0 million, Europe of $197.9 million, and the rest of the world of $107.0 million
in fiscal year 2002 represented increases (decreases) of 4.3%, 10.6%, and (7.0%), respectively, as compared to fiscal year 2001. The increase in North America primarily resulted from an increase in Scientific Instruments sales. This increase was
partially offset by the sales decline in Vacuum Technologies. The increase in Europe was primarily driven by growth in Scientific Instruments sales. The decrease in the rest of the world was primarily due to the decline of Vacuum Technologies sales
into the Pacific Rim and, to a lesser degree, lower Scientific Instruments demand in Latin America.
Gross
Profit. Gross profit was $295.7 million (representing 37.9% of sales) in fiscal year 2002, compared to $281.1 million (representing 37.5% of sales) in fiscal year 2001. The increase in gross profit percentage was driven
primarily by higher Electronics Manufacturing gross profit margins as a result of improved operational efficiency in fiscal year 2002 and higher costs from integrating an acquisition and higher start-up costs for new customers in fiscal year 2001.
This increase in fiscal year 2002 was partially offset by a lower gross profit percentage for Vacuum Technologies, which was negatively impacted by lower sales to industrial capital equipment and semiconductor equipment customers, and a lower gross
profit percentage for Scientific Instruments, due to proportionally higher revenues from nuclear magnetic resonance (“NMR”) systems, which had lower gross profit margins (but similar operating profit margins) compared to the overall
segment.
Sales and Marketing. Sales and marketing expenses were $132.3 million
(representing 17.0% of sales) in fiscal year 2002, compared to $130.6 million (representing 17.4% of sales) in fiscal year 2001. The decline as a percentage of sales resulted primarily from increased Scientific Instruments sales, particularly
high-field NMR systems which typically generate lower sales and marketing expenses as a percentage of sales. The decline is also attributable to programs undertaken in the second half of fiscal year 2001 to reduce sales and marketing costs.
Research and Development. Research and development expenses were $39.9 million
(representing 5.1% of sales) in fiscal year 2002, compared to $35.6 million (representing 4.8% of sales) in fiscal year 2001. Research and development expenses increased from fiscal year 2001 primarily because the Company continued to increase its
focus within the Scientific Instruments segment on new product development for life science applications.
General and Administrative. General and administrative expenses were $39.5 million (representing 5.1% of sales) in fiscal year 2002, compared to $41.1 million (representing 5.5% of sales) in fiscal year
2001. During fiscal year 2002, general and administrative expenses included $1.6 million in amortization of intangible assets, compared to $3.7 million in amortization of goodwill and intangible assets in fiscal year 2001. The decrease in
amortization resulted primarily from the Company’s adoption at the beginning of fiscal year 2002 of Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards No. (“FAS”) 142, Goodwill
and Other Intangible Assets, eliminating the amortization of goodwill, which was partially offset by new amortization of intangible assets from acquisitions made in the first half of fiscal year 2002.
13
Purchased In-Process Research and Development. In
connection with the acquisition of ANSYS Technologies, Inc. (“ANSYS”) in February 2002, the Company capitalized approximately $31.9 million in goodwill and identified intangible assets. In addition, the Company recorded a one-time charge
of $0.9 million for purchased in-process research and development in the second fiscal quarter ended March 29, 2002 relating to several ANSYS products which were in process at the time of the acquisition.
Net Interest Expense. Net interest expense was $1.9 million (representing 0.2% of sales) in fiscal year
2002, compared to $1.2 million (representing 0.2% of sales) in fiscal year 2001. The increase in net interest expense resulted primarily from lower interest rates on invested cash.
Taxes on Earnings. The effective income tax rate was 36.4% (36.0% excluding the impact of the purchased in-process research and development
charge) for fiscal year 2002, compared to 39.0% for fiscal year 2001. The fiscal year 2002 rate was lower than the fiscal year 2001 rate due mainly to reductions in tax rates in non-U.S. jurisdictions where the Company has significant manufacturing
operations.
Net Earnings. Net earnings were $51.6 million ($1.48 net earnings per
diluted share) in fiscal year 2002, compared to net earnings of $44.3 million ($1.29 net earnings per diluted share) in fiscal year 2001 prior to the cumulative effect of a change in accounting principle (SAB 101). The improvement in net earnings
resulted primarily from the items discussed above.
Segments. Scientific Instruments
sales of $493.9 million in fiscal year 2002 increased 15.9% over fiscal year 2001 sales of $426.1 million. The revenue growth was primarily driven by increased sales of NMR systems, certain products selling into life science applications (which
accounted for approximately 46% of Scientific Instruments sales, compared to approximately 36% in the prior year), and the ANSYS acquisition in the second quarter of fiscal year 2002. Excluding sales from this and other businesses acquired in fiscal
year 2002, sales in fiscal year 2002 increased by 11% from fiscal year 2001. Earnings from operations in fiscal year 2002 were $54.4 million (11.0% of sales). Excluding the purchased in-process research and development charge, earnings from
operations of $55.3 million (11.2% of sales) increased from $42.3 million (9.9% of sales) in fiscal year 2001, primarily as a result of increased sales of products targeted toward life science applications and revenues from after-market products and
services, all of which typically have higher operating margins. During fiscal year 2002, operating expenses for Scientific Instruments included $1.5 million in amortization of intangible assets, compared to $3.3 million in amortization of goodwill
and intangible assets in fiscal year 2001. The decrease in amortization resulted primarily from the Company’s adoption at the beginning of fiscal year 2002 of FAS 142, eliminating the amortization of goodwill, which was partially offset by new
amortization of intangible assets from acquisitions made in the first half of fiscal year 2002. For fiscal year 2003, high single-digit sales growth is expected, with good growth in sales for life science applications and modest, if any, growth in
sales for chemical analysis applications. Operating profit margins are expected to move toward 12% as fiscal year 2003 progresses.
Vacuum Technologies sales of $111.1 million in fiscal year 2002 decreased 22.2% from fiscal year 2001 sales of $142.8 million. The revenue decrease was caused primarily by weak demand from semiconductor equipment and other
industrial capital equipment manufacturers. Earnings from operations in fiscal year 2002 of $16.8 million (15.1% of sales) were down from the $27.6 million (19.3% of sales) in fiscal year 2001. The lower earnings were primarily the result of lower
sales in fiscal year 2002. Single-digit growth in Vacuum Technologies sales is expected for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be in the mid-teens.
Electronics Manufacturing sales in fiscal year 2002 of $174.9 million decreased 3.0% from fiscal year 2001 sales of $180.3 million. The revenue decrease from the prior
year period was caused by weaker demand from communications and industrial customers, largely offset by increased sales to life science (such as health care equipment) companies (which accounted for approximately 46% of Electronics Manufacturing
sales, compared to approximately 33% in the prior year). Earnings from operations in fiscal year 2002 of $17.8 million (10.2% of sales) increased from $10.7 million (5.9% of sales) in fiscal year 2001. The higher earnings in fiscal year 2002 were
due to improved operational efficiency in fiscal year 2002 and higher costs from integrating an acquisition and higher start-up costs relating to new customers in fiscal year 2001. Single-digit growth in Electronics Manufacturing sales is expected
for fiscal year 2003. Operating profit margins for fiscal year 2003 are expected to be in the high single digits.
14
With respect to consolidated results for fiscal year 2003, the Company expects
high single-digit sales growth, with an operating profit percentage similar to fiscal year 2002. In addition, the Company expects to incur restructuring expenses of approximately $1.5 million in the first quarter of fiscal year 2003 as it realigns
resources to focus even more on life science applications.
Fiscal Year 2001 Compared to Fiscal Year 2000
Sales. Sales were $749.2 million in fiscal year 2001, an increase of 6.4% from
sales of $704.4 million in fiscal year 2000. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 6.1%, 2.7%, and 10.1%, respectively. Sales of $749.2 million reflect the
Company’s adoption of SAB 101.
In the fourth quarter of fiscal year 2001, the Company adopted the provisions
of SAB 101, which resulted in a non-cash charge for the cumulative effect of a change in accounting principle in the amount of $7.5 million after taxes. Also as a result of the adoption of SAB 101, deferred profit totaling $12.6 million was recorded
as of September 30, 2000 (the first day of fiscal year 2001). This amount was comprised of deferred revenue of $29.9 million related to systems previously shipped and recorded as revenue but which did not qualify for revenue recognition under SAB
101, net of the related deferred cost of sales of $17.3 million. The deferred profit balance was $21.7 million at September 28, 2001.
Geographically, sales in North America of $455.2 million, Europe of $178.9 million, and the rest of the world of $115.1 million in fiscal year 2001 represented increases (decreases) of 8.3%, (0.2%), and 9.8%, respectively,
as compared to fiscal year 2000. The increase in North America was due to sales growth in Scientific Instruments and Electronics Manufacturing, each of which grew 10.1%, which was only partially offset by flat sales in Vacuum Technologies. The
almost flat sales in Europe resulted mainly from the decline in the European currencies relative to the U.S. dollar compared to fiscal year 2000. The increase in the rest of the world was primarily due to sales growth in Scientific Instruments.
Gross Profit. Gross profit was $281.1 million (representing 37.5% of sales) in
fiscal year 2001, compared to $266.3 million (representing 37.8% of sales) in fiscal year 2000. The $14.8 million increase in gross profit resulted primarily from the higher sales compared to fiscal year 2000. Currency fluctuations contributed to
lower gross profit percentages for Scientific Instruments but contributed to higher gross profit percentages for Vacuum Technologies compared to fiscal year 2000. Electronics Manufacturing had lower gross profit percentages in fiscal year 2001
primarily as a result of the costs of integrating an acquisition and start-up costs for new customers.
Sales
and Marketing. Sales and marketing expenses were $130.6 million (representing 17.4% of sales) in fiscal year 2001, compared to $123.0 million (representing 17.5% of sales) in fiscal year 2000. The $7.6 million increase was
primarily to support the higher sales volume.
Research and Development. Research
and development expenses were $35.6 million (representing 4.8% of sales) in fiscal year 2001, compared to research and development expenses of $31.8 million (representing 4.5% of sales) in fiscal year 2000. Both Scientific Instruments and Vacuum
Technologies increased research and development expenses as they increased their focus on new product development for life science applications.
General and Administrative. General and administrative expenses were $41.1 million (representing 5.5% of sales) in fiscal year 2001, compared to $37.9 million
(representing 5.4% of sales) in fiscal year 2000. The increase in costs resulted primarily from increased goodwill amortization and other general and administrative costs of businesses acquired in fiscal years 2000 and 2001.
Net Interest Expense. Net interest expense was $1.2 million (representing 0.2% of sales) in fiscal year 2001
compared to $1.8 million (representing 0.3% of sales) in fiscal year 2000. The reduction in net interest expense resulted mainly from income on invested cash and reduced expenses from lower borrowing levels.
Taxes on Earnings. The effective income tax rate was 39.0% for fiscal year 2001, compared to 39.5% (39.0%
without the in-process research and development charge) for fiscal year 2000.
15
Net Earnings. Net earnings were $44.3 million
($1.29 diluted net earnings per share) in fiscal year 2001, prior to the cumulative effect of change in accounting principle (SAB 101), compared to net earnings of $42.8 million ($1.26 diluted net earnings per share) in fiscal year 2000. The net
earnings improvement resulted primarily from higher sales partially offset by higher operating expenses.
Segments. Scientific Instruments sales of $426.1 million in fiscal year 2001 increased 6.1% over fiscal year 2000 sales of $401.5 million. The revenue growth was primarily driven by demand for life
science products in NMR, liquid chromatography, molecular spectroscopy, and dissolution, as well as for certain chemical analysis products, but was negatively impacted by the strong U.S. dollar. Earnings from operations in fiscal year 2001 of $42.3
million (9.9% of sales) decreased from $44.0 million (11.0% of sales) in fiscal year 2000. The decrease in earnings from operations resulted primarily from the impact of SAB 101. Had the Company not adopted SAB 101, sales would have been $443.4
million and earnings from operations would have been $49.2 million (11.1% of sales).
Vacuum Technologies sales of
$142.8 million in fiscal year 2001 increased 2.7% over fiscal year 2000 sales of $139.1 million. The revenue growth was primarily driven by broad demand for research and life science applications partially offset by a continued slowing in demand for
semiconductor applications. Earnings from operations in fiscal year 2001 of $27.6 million (19.3% of sales) were up from $24.7 million (17.8% of sales) in 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 Turin, Italy factory, which sold approximately 55% of its output into the U.S.
Electronics Manufacturing sales in fiscal year 2001 of $180.3 million increased 10.1% over fiscal year 2000 sales of $163.8 million. Electronics Manufacturing experienced a slowing of demand from some
of its communications customers, which was more than offset by demand from new life science (such as medical device) 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 fiscal year 2001 of $10.7 million (5.9% of sales) decreased from $12.6 million (7.7% of sales) in fiscal year 2000. The decrease in earnings was primarily the result of the cost of integrating the
acquisition and start-up costs for new customers.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles requires management to exercise
certain judgments in selecting and applying accounting policies and methods. Following is a summary of what management considers to be the Company’s most critical accounting policies—those that are most important to the portrayal of its
financial condition and results of operations and that require management’s most difficult, subjective, or complex judgments—the effects of those accounting policies applied, and the judgments made in their application.
Revenue Recognition. The Company derives revenues from three sources: system sales, part sales,
and service contracts. Generally, the Company recognizes revenue when persuasive evidence of an arrangement exists, the product is delivered, title and risk of loss has passed to the customer, and collection of the resulting receivable is probable.
The Company’s sales are typically not subject to rights of return and, historically, sales returns have not been significant. System sales that do not involve unique customer acceptance terms or new specifications or technology with customer
acceptance provisions, and that involve installation services, are accounted for as multiple element arrangements, where the larger of the contractual billing hold back or the fair value of the installation service is deferred when the product is
delivered and recognized when the installation is complete. In all cases, the fair value of undelivered elements, such as accessories, is deferred until those items are delivered to the customer. For certain other system sales that do involve unique
customer acceptance terms or new specifications or technology with customer acceptance provisions, all revenue is generally deferred until customer acceptance. Revenue related to part sales is recognized when the parts have been shipped and title
and risk of loss have passed to the customer. Revenue related to service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue is included in accrued liabilities. Management determines
when and how much revenue may be recognized on a particular transaction in a particular period based on its best estimates of the fair value of undelivered elements and its judgment of when the Company’s performance obligations have been met.
These judgments and estimates impact reported revenues.
16
Allowances for Doubtful Accounts Receivable. The
Company sells its products and extends trade credit to a large number of customers. These customers are dispersed across many different industries and geographies and, historically, no single customer has accounted for 10% or more of the
Company’s total revenues. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from them. Although bad debt write-offs have historically not been significant, allowances are established for
amounts that are considered to be uncollectible. These allowances represent management’s best estimates and are based on management’s judgment after considering a number of factors including third-party credit reports, actual payment
history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from these best estimates, changes in allowances for doubtful accounts might become
necessary.
Inventory Valuation. Inventories are stated at the lower of cost or
market, with cost being computed on an average-cost basis. Provisions are made to write down potentially excess, obsolete or slow moving inventories to their net realizable value. These provisions are based on management’s best estimates after
considering historical demand, projected future demand (including current backlog), inventory purchase commitments, industry and market trends and conditions, and other factors. In the event that actual excess, obsolete or slow moving inventories
differ from these best estimates, changes to inventory reserves might become necessary.
Product
Warranty. The Company’s products are generally subject to warranties, and liabilities are therefore established for the estimated future costs of repair or replacement in cost of sales at the time the related sale is
recognized. These liabilities are adjusted based on management’s best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. In the event that actual experience differs from
these best estimates, changes in the Company’s warranty liabilities might become necessary.
Environmental
Liabilities. As discussed more fully below under the heading “Risk Factors—Environmental Matters,” under the terms of the Distribution, the Company and VSEA are each obligated to indemnify VMS for one-third
of certain environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs). The liabilities recorded by the Company relating to these
matters are based on management’s best estimates after considering currently available information regarding the cost and timing of remediation efforts, related legal matters, insurance recoveries and other environmental-related events. As
additional information becomes available, these amounts are adjusted accordingly. Should the cost or timing of remediation efforts, legal matters, insurance recoveries, or other environmental-related events (including any which may be currently
unidentified) differ from the Company’s current expectations and best estimates, changes to the Company’s reserves for environmental matters might become necessary.
Liquidity and Capital Resources
The Company generated
$80.6 million of cash from operating activities in fiscal year 2002, which compares to $64.0 million in fiscal year 2001. The increase in cash from operating activities resulted primarily from improved net earnings and improved working capital
utilization.
The Company used $76.6 million of cash for investing activities in fiscal year 2002, which compares
to $42.9 million in fiscal year 2001. This increase in cash used for investing activities in fiscal year 2002 was primarily due to acquisitions completed during that period.
The Company generated $0.3 million of cash from financing activities in fiscal year 2002, which compares to $0.3 million used for financing activities in fiscal year 2001.
During fiscal year 2002, the Company established a three-year unsecured revolving bank credit facility in the
amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of September 27, 2002. Borrowings under this credit facility bear interest at rates of LIBOR plus 1.25% to 2.0% depending on certain
financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings of the Company and require the maintenance by the Company of certain levels of financial performance.
The Company was in compliance with all such covenants and requirements.
17
As of September 27, 2002, the Company and its subsidiaries had $51.2 million in
uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of September 27, 2002. All of these credit
facilities contain certain conditions and events of default customary for such facilities, with which the Company was in compliance. Of the $51.2 million in uncommitted and unsecured credit facilities, a total of $30.6 million was limited for use by
or in favor of certain subsidiaries. As of September 27, 2002, a total of $10.6 million of these facilities was being utilized in the form of bank guarantees or short-term standby letters of credit related to subsidiary activity. No amounts had
been drawn by beneficiaries under these guarantees and letters of credit as of September 27, 2002, and separate liabilities were recorded in the Consolidated Financial Statements at that date for advance payments or customer deposits.
As of September 27, 2002, the Company had $37.5 million in term loans outstanding compared to $43.5 million at September
28, 2001. As of September 27, 2002 and September 28, 2001, fixed interest rates on the term loans ranged from 6.7% to 7.2% and 6.7% to 7.5%, respectively. The weighted-average interest rates on the term loans were 6.9% at September 27, 2002 and
September 28, 2001. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. For fiscal year 2002, the Company was
in compliance with all restrictive covenants of the term loan agreements. The Company also had other long-term notes payable of $3.5 million as of September 27, 2002 with an interest rate of 0.9% and $2.6 million as of September 28, 2001 with
an interest rate of 0.7%.
Future principal payments on long-term debt outstanding on September 27, 2002 were
$3.3 million, $2.8 million, $3.7 million, $3.7 million, $2.5 million, and $25.0 million during fiscal years 2003, 2004, 2005, 2006, 2007, and thereafter, respectively.
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 below under the heading “Risk
Factors—Environmental Matters”).
In connection with certain acquisitions, the Company has accrued but
not yet paid certain purchase price amounts which have been “held back” to secure the sellers’ indemnification obligations. These “holdback” amounts, which are due to be paid at various times through fiscal year 2004 (net of
any indemnification claims), totaled approximately $1.5 million at September 27, 2002. In addition to the “holdback” payments, the Company is also obligated to pay additional cash purchase price amounts in the event that contingent
financial or operational milestones are met by the acquired businesses. As of September 27, 2002, up to a maximum of $15.4 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Any contingent
payments made will be recorded as additional goodwill at the time they are earned.
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. Although the Company’s cash requirements will fluctuate based on the
timing and extent of these factors, 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.
18
Contractual Obligations and Other Commercial Commitments
The following table summarizes future principal payments on outstanding long-term debt and minimum rentals due for certain facilities and
other leased assets under long-term, non-cancelable operating leases as of September 27, 2002:
| |
|
Fiscal Years
|
| |
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Thereafter
|
|
Total
|
| (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term debt (including current portion) |
|
$ |
3,321 |
|
$ |
2,763 |
|
$ |
3,686 |
|
$ |
3,686 |
|
$ |
2,500 |
|
$ |
25,000 |
|
$ |
40,956 |
| Operating leases |
|
|
6,716 |
|
|
4,677 |
|
|
3,861 |
|
|
2,826 |
|
|
1,986 |
|
|
28,144 |
|
|
48,210 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total contractual cash obligations |
|
$ |
10,037 |
|
$ |
7,440 |
|
$ |
7,547 |
|
$ |
6,512 |
|
$ |
4,486 |
|
$ |
53,144 |
|
$ |
89,166 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the above, the Company had cancelable commitments to
purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $36 million, net of deposits paid, as of September 27, 2002. In the event that these commitments are canceled for reasons other than
the supplier’s default, the Company would be responsible for reimbursement of actual costs incurred by the supplier. As of September 27, 2002, the Company did not have any off-balance sheet commercial commitments that could result in a
significant cash outflow upon the occurrence of some contingent event, except for contingent payments of up to a maximum of $15.4 million related to acquisitions as discussed under “Liquidity and Capital Resources” above, the specific
timing and amounts of which are not currently determinable.
Recent Accounting Pronouncements
In July 2001, the FASB issued FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible Assets. FAS 141
eliminates pooling-of-interests accounting prospectively and provides guidance on purchase accounting related to the recognition of intangible assets. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only
approach. FAS 141 is effective for all business combinations completed after June 30, 2001. Under FAS 142, goodwill must be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Upon adoption of FAS
142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 must cease, and intangible assets acquired prior to July 1, 2001 that do not meet the new criteria for recognition as intangibles under FAS 141 must
be reclassified to goodwill. Adoption of FAS 142 was required for the Company’s fiscal year 2003. The Company elected to early adopt the provisions of FAS 142 on the first day of fiscal year 2002 (September 29, 2001). In accordance with
FAS 142, the Company ceased amortizing goodwill with a net carrying value totaling $85.9 million as of that date, including certain intangible assets previously classified as purchased intangible assets. In connection with the adoption of FAS 142,
the Company performed a transitional impairment test and determined that there was no impairment of goodwill.
In
August 2001, the FASB issued FAS 143, Accounting for Asset Retirement Obligations, which is effective for the Company’s fiscal year 2003. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The Company does not expect the adoption of FAS 143 to have a significant impact on its financial condition or results of operations.
In October 2001, the FASB issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
which supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting Principles Board Opinion No. (“APB”) 30, Reporting the Results of
Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. While FAS 144 carries forward many of the provisions of FAS 121 and APB 30, some of
the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and amortized over their remaining service period, and the standard broadens the presentation of discontinued
operations. FAS 144 is effective for the Company’s fiscal year 2003. The Company does not expect the adoption of FAS 144 to have a significant impact on its financial condition or results of operations.
19
In April 2002, the FASB issued FAS 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, which is effective for transactions occurring after May 15, 2002. FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from
extinguishment of debt. FAS 44 set forth industry-specific transitional guidance that did not apply to the Company. FAS 145 amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. FAS 145 also makes technical corrections to certain existing pronouncements that are not substantive in nature. The adoption of FAS 145 in the third quarter of fiscal year 2002 did
not have a significant impact on the Company’s financial condition or results of operations.
In July 2002,
the FASB issued FAS 146, Accounting for Exit or Disposal Activities. FAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance set forth in Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The scope of FAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are
involuntarily terminated. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of FAS 146 to have a significant impact on its financial condition or results of operations.
Risk Factors
Customer Demand. Demand for the Company’s products depends upon, among other factors, the level of capital expenditures by current and prospective customers, the rate of economic growth in
the markets in which we compete, and the competitiveness of our products and services. Changes in any of these factors could have an adverse effect on the Company’s financial condition or results of operations.
In the case of our Scientific Instruments and Vacuum Technologies segments, we must continue to assess and predict customer needs,
regulatory requirements, and evolving technologies. We must develop new products, including enhancements to existing products, new services, and new applications, successfully commercialize, manufacture, market, and sell these products, and protect
our intellectual property in these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely effected.
In the case of the Company’s Electronics Manufacturing segment, we must respond quickly to our customers’ changing requirements. Customers may change, delay, or cancel orders for many
reasons, including lack of success of their products or business strategies and economic conditions in the markets they serve. In addition, some customers, including start-up companies, have limited product histories and financial resources, which
make them riskier customers for us. We must determine, based on our judgment and our customers’ estimates of their future requirements, what levels of business we will accept, what start-up costs to incur for new customers or products,
production schedules, component procurement commitments, personnel needs, and other resource requirements. All of these decisions require predictions about the future and judgments that could be wrong. Cancellations, reductions, or delays in orders
by a significant customer or group of customers, or their inability to meet financial commitments with respect to orders or shipments, could have an adverse impact on the Company’s financial condition or results of operations.
Variability of Operating Results. The Company experiences some
cyclical patterns in sales of its products. Generally, sales and earnings in the first quarter of the Company’s fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in our
first fiscal quarter (October to December) and many customers defer December deliveries until the next calendar year, our second fiscal quarter. Our fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the
other three quarters, primarily because many customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced by other factors, including general economic conditions, acquisitions, and new product
introductions. Consequently, our results of operations may fluctuate significantly from quarter to quarter.
20
For most of the Company’s products, we operate on a short backlog, as short
as a few days for some products and less than a fiscal quarter for most others. We also experience significant shipments in the last month of each quarter, in part because of how our customers place orders and schedule shipments. This can make it
difficult for us to forecast our results of operations.
Certain of our leading-edge NMR systems, probes, and
components (together accounting for less than 10% of the Company’s revenues and operating profits) sell for high prices and on long lead-times. These systems and components are complex; require development of new technologies and, therefore,
significant research and development resources; are often intended for evolving leading-edge research applications; often have customer-specific features, custom capabilities, and specific acceptance criteria; and, in the case of NMR systems,
require superconducting magnets that can be difficult to manufacture. These superconducting magnets are not manufactured by us, so our ability to ship, install and obtain customer acceptance of our leading-edge NMR systems is dependent upon the
superconducting magnet supplier’s timely development, delivery and installation of magnets that perform to customer specifications. If we are unable to meet these challenges, it could have an adverse effect on the Company’s financial
condition or results of operations. In addition, all of these factors can make it difficult for us to forecast shipment, installation and acceptance of leading-edge NMR systems and probes, which in turn can make it difficult for us to forecast the
timing of revenue recognition and the achieved gross profit margin on these systems.
Competition. The industries in which the Company operates—scientific instruments, vacuum technologies, and electronics manufacturing—are highly competitive. In each of these industries, we
compete against many U.S. and non-U.S. companies, most with global operations. Some of our competitors have greater financial resources than we have, which may enable them to respond more quickly to new or emerging technologies, take advantage of
acquisition opportunities, compete on price, or devote greater resources to research and development, engineering, manufacturing, marketing, sales, or managerial activities. Others have greater name recognition and geographic and market presence or
lower cost structures than the Company. In addition, weaker demand and excess capacity in our industries could cause greater price competition as our competitors seek to maintain sales volumes and market share. Additionally, in the case of
electronics manufacturing, current and prospective customers continually evaluate the merits of manufacturing products internally; there is substantial excess manufacturing capacity in the industry; certain competitors manufacture or are seeking to
manufacture outside the U.S. where there can be significant cost advantages, and certain customers may be willing to move to “off-shore” manufacturing for cost reasons; larger competitors might have greater direct buying power from
suppliers; and electronics manufacturing processes are generally not subject to significant intellectual property protection. For all of the foregoing reasons, competition could result in lower revenues due to lost sales or price reductions, lower
margins, and loss of market share, which could have an adverse effect on the Company’s financial condition or results of operations.
Key Suppliers. Some items purchased by the Company for the manufacture of its products, including superconducting magnets used in NMR systems, are purchased from limited or single sources of
supply. The loss of a key supplier or the inability to obtain certain key raw materials or components could cause delays or reductions in shipments of our products or increase our costs, which could have an adverse effect on the Company’s
financial condition or results of operations.
We have experienced and could again experience delivery delays in
superconducting magnets used in NMR systems, which has and could again cause delays in our product shipments. In addition, end-users of our NMR systems require helium to operate those systems; shortages of helium could result in higher helium
prices, and thus higher operating costs for NMR systems, which could impact demand for those systems.
The
Company’s Electronics Manufacturing segment uses electronic components in the manufacture of its products. These components can be more or less difficult and expensive to obtain, depending on the overall demand for these components as a result
of general economic cycles or other factors. Consequently, the Electronics Manufacturing segment’s results of operations may fluctuate over time.
Business Interruption. The Company’s facilities, operations, and systems could be impacted by fire, flood, terrorism, or other natural or man-made disasters. In
particular, we have significant facilities in areas prone to earthquakes, such as our production facilities and headquarters in California. Due to the limited
21
availability, broad exclusions, and prohibitive costs, we do not have insurance policies that would cover losses resulting from an earthquake. If any of our facilities or surrounding areas were
to be significantly damaged in an earthquake, it could disrupt our operations, delay shipments, and cause us to incur significant repair or replacement costs, which could have an adverse effect on the Company’s financial condition or results of
operations.
The Company’s employees based in certain foreign countries are subject to collective bargaining
agreements. Of these, the Company’s employees in Australia are subject to a collective bargaining agreement that will need to be renewed in April 2003. A work stoppage, strike, or other labor action at this or other facilities of the Company
could have an adverse effect on the Company’s financial condition or results of operations.
Intellectual
Property. The Company’s success depends on its intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and licensing arrangements to establish and
protect that intellectual property, but these protections might not be available in all countries, might not be enforceable, might not fully protect our intellectual property, and might not provide meaningful competitive advantages. Moreover, we
might be required to spend significant resources to police and enforce our intellectual property rights, and we might not detect infringements of those intellectual property rights. If we fail to protect our intellectual property and enforce our
intellectual property rights, our competitive position could suffer, which could have an adverse effect on the Company’s financial condition or results of operations.
Third parties might claim that the Company infringes their intellectual property rights, and we may be unaware of intellectual property rights that we are infringing. Any
litigation regarding intellectual property of others could be costly and could divert personnel and resources from our operations. Claims of intellectual property infringement might also require us to develop non-infringing alternatives or enter
into royalty-bearing license agreements. We also might be required to pay damages or be enjoined from developing, manufacturing, or selling infringing products. We sometimes rely on licenses to avoid these risks, but we cannot be assured that these
licenses will be available in the future or on favorable terms. Failure to protect against these risks could have an adverse effect on the Company’s financial condition or results of operations.
Acquisitions. The Company has acquired companies and operations, and intends to acquire companies and
operations in the future, as part of its growth strategy. Acquisitions must be carefully evaluated and negotiated if they are to be successful. Once completed, acquired operations must be carefully integrated to realize expected synergies,
efficiencies, and financial results. Some of the challenges in doing this include retaining key employees, managing operations in new geographic areas, retaining key customers, and managing transaction costs. All of this must be done without
diverting management and other resources from other operations and activities. Failure to successfully evaluate, negotiate, and integrate acquisitions could have an adverse effect on the Company’s financial condition or results
of operations.
Foreign Operations and Currency Exchange Rates. A significant
portion of the Company’s sales, manufacturing activities, and employees are outside of the United States. As a result, the Company is subject to various risks, including the following: duties, tariffs, and taxes; restrictions on currency
conversions, fund transfers, or profit repatriations; import, export, and other trade restrictions; protective labor regulations and union contracts; compliance with local laws and regulations; travel and transportation difficulties; and adverse
developments in political or economic environments in countries where we operate. Additionally, the U.S. dollar value of the Company’s net sales varies with currency exchange rate fluctuations, although the Company’s manufacturing
operations in other countries often act as a natural hedge against the profitability impact of currency exchange fluctuations relative to the U.S. dollar. These risks could have an adverse effect on the Company’s financial condition or results
of operations.
Key Personnel. The Company’s success depends upon the efforts
and abilities of key personnel, including research and development, engineering, manufacturing, finance, administrative, marketing, sales, and management personnel. The availability of qualified personnel can vary significantly based on factors such
as the strength of the general economy. However, even in weak economic periods, there is still intense competition for personnel with certain expertise in the geographic areas where we compete for personnel.
22
In addition, certain employees have significant institutional and proprietary technical knowledge, which could be difficult to quickly replace. Failure to attract and retain qualified personnel,
who generally do not have employment agreements or post-employment non-competition agreements, could have an adverse effect on the Company’s financial condition or results of operations.
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, we do not currently anticipate that the
Company’s compliance with these regulations will have a material effect upon the Company’s capital expenditures, earnings, or competitive position.
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 nine sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring,
and/or remediation activities under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities. Under the terms of the Distribution, the Company and VSEA are each
obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs).
For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further
environmental-related activities or to estimate the future costs of such activities if undertaken. As of September 27, 2002, it was nonetheless estimated that the Company’s share of the future exposure for environmental-related costs for these
sites and facilities ranged in the aggregate from $1.8 million to $4.9 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 September 27, 2002. 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 $1.8 million as
of September 27, 2002.
As to other sites and facilities, sufficient knowledge has been gained to be able to
better estimate the scope and costs of future environmental-related activities. As of September 27, 2002, it was estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in
the aggregate from $6.3 million to $13.6 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 September 27,
2002. 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-related cost than any other amount within the range, and that the amount
and timing of these future costs were reliably determinable. Together, these amounts totaled $7.6 million at September 27, 2002. The Company therefore accrued $5.1 million as of September 27, 2002, which represents the best estimate of its share of
these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.8 million described in the preceding paragraph.
23
At September 27, 2002, the Company’s reserve for environmental-related
costs, based upon future environmental-related costs estimated by the Company as of that date, was calculated as follows:
| |
|
Recurring Costs
|
|
Non-Recurring Costs
|
|
Total Anticipated Future Costs
|
|
| (in millions) |
|
|
|
|
|
|
|
|
|
|
| Fiscal Year |
|
|
|
|
|
|
|
|
|
|
| 2003 |
|
$ |
0.3 |
|
$ |
0.9 |
|
$ |
1.2 |
|
| 2004 |
|
|
0.3 |
|
|
0.3 |
|
|
0.6 |
|
| 2005 |
|
|
0.3 |
|
|
0.2 |
|
|
0.5 |
|
| 2006 |
|
|
0.3 |
|
|
0.1 |
|
|
0.4 |
|
| 2007 |
|
|
0.3 |
|
|
0.2 |
|
|
0.5 |
|
| Thereafter |
|
|
4.9 |
|
|
1.3 |
|
|
6.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Total costs |
|
$ |
6.4 |
|
$ |
3.0 |
|
|
9.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
| Less imputed interest |
|
|
(2.5 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Reserve amount |
|
|
6.9 |
|
| Less current portion |
|
|
(1.2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| Long term (included in Other liabilities) |
|
$ |
5.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
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,
monitoring, and remediation activities and the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.
An insurance company agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which the Company has an indemnity obligation, and the Company therefore has
a $1.3 million receivable in Other assets as of September 27, 2002 for the Company’s share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.
We believe that the Company’s reserves for the foregoing and 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 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 our best assessment of the ultimate amount and timing of environmental-related events, we believe that the costs of environmental-related matters are not reasonably likely to have a material adverse effect on the
Company’s financial condition or results of operations.
Governmental
Regulations. The Company’s businesses are subject to many governmental regulations in the U.S. and other countries, including with respect to protection of the environment, employee health and safety, labor matters,
product safety, medical devices, import, export, competition, and sales to governmental entities. These regulations are complex and change frequently. We incur significant costs to comply with governmental regulations, and failure to comply could
result in suspension of or restrictions on our operations, product recalls, fines and other civil and criminal penalties, private party litigation, and damage to our reputation, which could have an adverse effect on the Company’s financial
condition or results of operations.
24
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency
Exchange Risk
The Company typically hedges its foreign currency exposures associated with certain assets and
liabilities denominated in non-functional currencies and with certain forecasted foreign currency cash flows. The success of the Company’s hedging activities depends on its ability to forecast transaction activity in various currencies. To the
extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. However, any such gains or losses would be substantially offset by losses or gains
from the related foreign exchange forward contracts. 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 foreign exchange
forward contracts generally range from one to 12 months in original maturity.
At September 27, 2002, forward
contracts to sell Japanese yen having an aggregate notional value of $6.6 million were designated as cash flow hedges of forecasted sale transactions. These contracts were deemed to be highly effective, and as a result, a loss of $0.2 million (net
of tax) on these contracts is included in accumulated other comprehensive loss in stockholders’ equity. A summary of all forward exchange contracts that were outstanding as of September 27, 2002 follows:
| |
|
Notional Value Sold
|
|
Notional Value Purchased
|
| (in thousands) |
|
|
|
|
|
|
| Euro |
|
$ |
— |
|
$ |
30,018 |
| Australian dollar |
|
|
— |
|
|
15,959 |
| Japanese yen |
|
|
10,498 |
|
|
— |
| Canadian dollar |
|
|
8,181 |
|
|
— |
| British pound |
|
|
4,210 |
|
|
— |
| Swedish krona |
|
|
— |
|
|
2,877 |
| |
|
|
|
|
|
|
| Total |
|
$ |
22,889 |
|
$ |
48,854 |
| |
|
|
|
|
|
|
Interest Rate Risk
The Company has no material exposure to market risk for changes in interest rates. The Company invests any excess cash 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 September 27, 2002, the Company’s debt obligations had fixed interest rates.
Based upon rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of long-term debt and notes payable approximate their estimated
fair values.
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
| |
|
Fiscal Year
|
|
| (dollars in thousands) |
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Thereafter
|
|
|
Total
|
|
| Long-term debt (including current portion) |
|
$ |
3,321 |
|
|
$ |
2,763 |
|
|
$ |
3,686 |
|
|
$ |
3,686 |
|
|
$ |
2,500 |
|
|
$ |
25,000 |
|
|
$ |
40,956 |
|
| Average interest rate |
|
|
6.2 |
% |
|
|
6.7 |
% |
|
|
4.9 |
% |
|
|
4.9 |
% |
|
|
7.2 |
% |
|
|
6.7 |
% |
|
|
6.4 |
% |
25
Item 8. Financial Statements and Supplementary Data
The response
to this Item is submitted as a separate section to this Report. See Item 15—Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
The
information required by this Item with respect to the Company’s executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption “Executive Officers.” The
information required by this Item with respect to the Company’s directors and nominees for directors is incorporated herein by reference from the information provided under the heading “Proposal One—Election of Directors” of the
Company’s Proxy Statement. The information required by Item 405 of Regulation S-K is incorporated herein by reference from the information provided under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” of the
Company’s Proxy Statement.
Item 11. Executive Compensation
The information required by
this Item is incorporated herein by reference from the information provided under the heading “Executive Compensation Information” of the Company’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from the information provided under the headings “Equity Compensation Plan Information” and “Stock Ownership of
Certain Beneficial Owners” of the Company’s Proxy Statement.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Controls and Procedures
Within the 90-day period prior
to the filing of this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial
Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods
specified in SEC rules and forms. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the disclosure controls subsequent to the date of that evaluation.
27
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
| |
(a) |
|
The following documents are filed as a part of this Report: |
| |
(1) |
|
Consolidated Financial Statements: (see Index on page F-1 of this Report) |
| |
• |
|
Report of Independent Accountants |
| |
• |
|
Consolidated Statement of Earnings for fiscal years 2002, 2001, and 2000 |
| |
• |
|
Consolidated Balance Sheet at fiscal year end 2002 and 2001 |
| |
• |
|
Consolidated Statement of Stockholders’ Equity for fiscal years 2002, 2001, and 2000 |
| |
• |
|
Consolidated Statement of Cash Flows for fiscal years 2002, 2001, and 2000 |
| |
• |
|
Notes to the Consolidated Financial Statements |
| |
(2) |
|
Consolidated Financial Statement Schedule: (see Index on page F-1 of this Report) |
The following Financial Statement Schedule of the registrant and its subsidiaries for fiscal years 2002, 2001, and 2000 is filed as a part of this Report and should be
read in conjunction with the Consolidated Financial Statements of the registrant and its subsidiaries.
| Schedule
|
|
|
| II |
|
Valuation and Qualifying Accounts. |
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is given in the Consolidated Financial Statements or the Notes thereto.
| Exhibit No.
|
|
Description
|
| 2.1 |
|
Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 3.1 |
|
Restated Certificate of Incorporation (as amended) of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the registrant’s
Form 10-Q for the quarter ended April 2, 1999). |
| |
| 3.2 |
|
By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant’s Form 10-Q for the quarter ended April 2,
1999). |
| |
| 4.1 |
|
Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant’s Form 10/A filed on March 8, 1999).
|
| |
| 4.2 |
|
Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by
reference to Exhibit 4.2 of the registrant’s Form 10/A filed on March 8, 1999). |
| |
| 4.3 |
|
First Amendment to Rights Agreement, dated as of November 2, 2001, between Varian, Inc. and First Chicago Trust Company of New York (incorporated herein by
reference to Exhibit 2 of the registrant’s Form 8-A/A filed on November 21, 2001). |
| |
| 10.1 |
|
Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian,
Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.2 |
|
Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.
(incorporated herein by reference to Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.3 |
|
Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. (incorporated
herein by reference to Exhibit 10.3 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
28
| Exhibit No.
|
|
Description
|
| 10.4 |
|
Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999 (incorporated herein by reference to
Exhibit 10.6 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.5* |
|
Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant’s Form 10 filed on February 12, 1999).
|
| |
| 10.6* |
|
First Amendment to Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.19 of the registrant’s Form 10-Q for the quarter
ended December 28, 2001). |
| |
| 10.7* |
|
Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant’s Form 10/A filed on February 12,
1999). |
| |
| 10.8* |
|
Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of the registrant’s Form 10-K for the
year ended October 1, 1999). |
| |
| 10.9* |
|
Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended March
31, 2000). |
| |
| 10.10* |
|
Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to Exhibit 10.8 of the registrant’s
Form 10/A filed on March 8, 1999). |
| |
| 10.11* |
|
Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer (incorporated herein by reference to
Exhibit 10.10 of the registrant’s Form 10-K for the year ended October 1, 1999). |
| |
| 10.12* |
|
Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated herein by reference to Exhibit 10.1 of the
registrant’s Form 10-Q for the quarter ended July 2, 1999). |
| |
| 10.13* |
|
Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras (incorporated herein by reference to
Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended March 31, 2000). |
| |
| 10.14* |
|
Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and C. Wilson Rudd (incorporated herein by reference to
Exhibit 10.3 of the registrant’s Form 10-Q for the quarter ended March 31, 2000). |
| |
| 10.15* |
|
Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan (incorporated herein by reference to
Exhibit 10.11 of the registrant’s Form 10-K for the year ended October 1, 1999). |
| |
| 10.16* |
|
Amended and Restated Change in Control Agreement, dated as of April 9, 2001, between Varian, Inc. and Garry W. Rogerson (incorporated herein by reference to
Exhibit 10.22 of the registrant’s Form 10-Q for the quarter ended June 29, 2001). |
| |
| 10.17* |
|
Description of Compensatory Arrangements Between Registrant and Non-Employee Directors. |
| |
| 10.18* |
|
Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by reference to Exhibit 10.17 of the
registrant’s Form 10-K for the year ended September 28, 2001). |
| |
| 18.1 |
|
Preferability letter regarding inventory accounting principle change (incorporated herein by reference to Exhibit 18.1 of the registrant’s Form 10-K for
the year ended September 29, 2000). |
| |
| 21 |
|
Subsidiaries of the Registrant. |
| |
| 23 |
|
Consent of Independent Accountants. |
| |
| 99.1 |
|
Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
| |
| 99.2 |
|
Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
* |
|
Management contract or compensatory plan or arrangement. |
None.
29
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) |
| |
| Dated: December 5, 2002 |
|
|
|
By: |
|
/s/ G. Edward McClammy
|
| |
|
|
|
|
|
|
|
G. Edward McClammy
Senior Vice President, Chief
Financial Officer and Treasurer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature
|
|
Title
|
|
Date
|
| |
| /s/ Allen J. Lauer
Allen J. Lauer |
|
Chairman of the Board and Chief Executive Officer
(Principal Executive
Officer) |
|
December 5, 2002 |
| |
| /s/ G. Edward McClammy
G. Edward McClammy |
|
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer) |
|
December 5, 2002 |
| |
| /s/ Franco N. Palomba
Franco N. Palomba |
|
Vice President and Controller
(Principal Accounting Officer) |
|
December 5, 2002 |
| |
| /s/ Richard U. De Schutter
Richard U. De Schutter |
|
Director |
|
December 5, 2002 |
| |
| /s/ John G. McDonald
John G. McDonald |
|
Director |
|
December 5, 2002 |
| |
| /s/ Wayne R. Moon
Wayne R. Moon |
|
Director |
|
December 5, 2002 |
| |
| /s/ Elizabeth E. Tallett
Elizabeth E. Tallett |
|
Director |
|
December 5, 2002 |
30
CERTIFICATIONS
I, Allen J. Lauer, certify that:
| |
1. |
|
I have reviewed this annual report on Form 10-K of Varian, Inc.; |
| |
2. |
|
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this annual report; |
| |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| |
4. |
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| |
b) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and |
| |
c) |
|
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date; |
| |
5. |
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| |
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
| |
6. |
|
The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| |
| /s/ Allen J. Lauer
|
| Allen J. Lauer Chairman of the Board and Chief Executive Officer |
31
CERTIFICATIONS
I, G. Edward McClammy, certify that:
| |
1. |
|
I have reviewed this annual report on Form 10-K of Varian, Inc.; |
| |
2. |
|
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made not misleading with respect to the period covered by this annual report; |
| |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
| |
4. |
|
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| |
a) |
|
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
| |
b) |
|
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the “Evaluation Date”); and |
| |
c) |
|
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date; |
| |
5. |
|
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent functions): |
| |
a) |
|
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,
summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| |
b) |
|
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
|
| |
6. |
|
The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
| |
| /s/ G. Edward McClammy
|
| G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer |
32
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated by reference into this Report:
| Exhibit No.
|
|
Description
|
| 2.1 |
|
Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and
Varian, Inc. (incorporated herein by reference to Exhibit 2.1 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 3.1 |
|
Restated Certificate of Incorporation (as amended) of Varian, Inc. (incorporated herein by reference to Exhibits 3.1 and 3.2 of the registrant’s Form
10-Q for the quarter ended April 2, 1999). |
| |
| 3.2 |
|
By-Laws of Varian, Inc. (incorporated herein by reference to Exhibit 3.3 of the registrant’s Form 10-Q for the quarter ended April 2,
1999). |
| |
| 4.1 |
|
Specimen Common Stock certificate (incorporated herein by reference to Exhibit 4.1 of the registrant’s Form 10/A filed on March 8, 1999).
|
| |
| 4.2 |
|
Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by
reference to Exhibit 4.2 of the registrant’s Form 10/A filed on March 8, 1999). |
| |
| 4.3 |
|
First Amendment to Rights Agreement, dated as of November 2, 2001, between Varian, Inc. and First Chicago Trust Company of New York (incorporated herein by
reference to Exhibit 2 of the registrant’s Form 8-A/A filed on November 21, 2001). |
| |
| 10.1 |
|
Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian,
Inc. (incorporated herein by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.2 |
|
Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.
(incorporated herein by reference to Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.3 |
|
Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.
(incorporated herein by reference to Exhibit 10.3 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.4 |
|
Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999 (incorporated herein by reference to
Exhibit 10.6 of the registrant’s Form 10-Q for the quarter ended April 2, 1999). |
| |
| 10.5* |
|
Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.9 of the registrant’s Form 10 filed on February 12, 1999).
|
| |
| 10.6* |
|
First Amendment to Varian, Inc. Omnibus Stock Plan (incorporated herein by reference to Exhibit 10.19 of the registrant’s Form 10-Q for the quarter
ended December 28, 2001). |
| |
| 10.7* |
|
Varian, Inc. Management Incentive Plan (incorporated herein by reference to Exhibit 10.10 of the registrant’s Form 10/A filed on February 12,
1999). |
| |
| 10.8* |
|
Amended and Restated Varian, Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.8 of the registrant’s Form 10-K for the
year ended October 1, 1999). |
| |
| 10.9* |
|
Varian, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.1 of the registrant’s Form 10-Q for the quarter ended March
31, 2000). |
| |
| 10.10* |
|
Form of Indemnity Agreement between Varian, Inc. and its Directors and Officers (incorporated herein by reference to Exhibit 10.8 of the registrant’s
Form 10/A filed on March 8, 1999). |
| |
| 10.11* |
|
Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Allen J. Lauer (incorporated herein by reference to
Exhibit 10.10 of the registrant’s Form 10-K for the year ended October 1, 1999). |
| |
| 10.12* |
|
Change in Control Agreement, dated as of April 16, 1999, between Varian, Inc. and G. Edward McClammy (incorporated herein by reference to Exhibit 10.1 of the
registrant’s Form 10-Q for the quarter ended July 2, 1999). |
33
| Exhibit No.
|
|
Description
|
| 10.13* |
|
Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and Sergio Piras (incorporated herein by reference to
Exhibit 10.2 of the registrant’s Form 10-Q for the quarter ended March 31, 2000). |
| |
| 10.14* |
|
Amended and Restated Change in Control Agreement, dated as of February 25, 2000, between Varian, Inc. and C. Wilson Rudd (incorporated herein by reference to
Exhibit 10.3 of the registrant’s Form 10-Q for the quarter ended March 31, 2000). |
| |
| 10.15* |
|
Amended and Restated Change in Control Agreement, dated as of April 2, 1999, between Varian, Inc. and Arthur W. Homan (incorporated herein by reference to
Exhibit 10.11 of the registrant’s Form 10-K for the year ended October 1, 1999). |
| |
| 10.16* |
|
Amended and Restated Change in Control Agreement, dated as of April 9, 2001, between Varian, Inc. and Garry W. Rogerson (incorporated herein by reference to
Exhibit 10.22 of the registrant’s Form 10-Q for the quarter ended June 29, 2001). |
| |
| 10.17* |
|
Description of Compensatory Arrangements Between Registrant and Non-Employee Directors. |
| |
| 10.18* |
|
Description of Certain Compensatory Arrangements Between Registrant and Executive Officers (incorporated herein by reference to Exhibit 10.17 of the
registrant’s Form 10-K for the year ended September 28, 2001). |
| |
| 18.1 |
|
Preferability letter regarding inventory accounting principle change (incorporated herein by reference to Exhibit 18.1 of the registrant’s Form 10-K for
the year ended September 29, 2000). |
| |
| 21 |
|
Subsidiaries of the Registrant. |
| |
| 23 |
|
Consent of Independent Accountants. |
| |
| 99.1 |
|
Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
| |
| 99.2 |
|
Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
* |
|
Management contract or compensatory plan or arrangement. |
34
VARIAN, INC. AND SUBSIDIARY COMPANIES
ANNUAL REPORT ON FORM 10-K
INDEX OF CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULE
The following Consolidated Financial Statements of the registrant and its
subsidiaries are required to be included in Item 8:
| |
|
Page
|
| Report of Independent Accountants |
|
F-2 |
| Consolidated Statement of Earnings for fiscal years 2002, 2001, and 2000 |
|
F-3 |
| Consolidated Balance Sheet at fiscal year end 2002 and 2001 |
|
F-4 |
| Consolidated Statement of Stockholders’ Equity for fiscal years 2002, 2001, and 2000 |
|
F-5 |
| Consolidated Statement of Cash Flows for fiscal years 2002, 2001, and 2000 |
|
F-6 |
| Notes to the Consolidated Financial Statements |
|
F-7 |
The following Consolidated Financial Statement Schedule of the
registrant and its subsidiaries for fiscal years 2002, 2001, and 2000 is filed as a part of this Report as required to be included in Item 15(a) and should be read in conjunction with the Consolidated Financial Statements of the registrant and
its subsidiaries:
| Schedule
|
|
|
|
Page
|
| II |
|
Valuation and Qualifying Accounts |
|
F-26 |
All other required schedules are omitted because of the absence of
conditions under which they are required or because the required information is given in the Consolidated Financial Statements or the Notes thereto.
F-1
VARIAN, INC. AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Varian, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Varian, Inc. and its subsidiaries at September 27, 2002 and September 28, 2001, and the results of their operations and their cash flows for each of the three years in the
period ended September 27, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management;
our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.
| |
| /s/ PricewaterhouseCoopers LLP
|
| PricewaterhouseCoopers LLP |
San Jose, California
October 23, 2002
F-2
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
| |
|
Fiscal Year
|
| |
|
2002
|
|
2001
|
|
|
2000
|
| Sales |
|
$ |
779,893 |
|
$ |
749,201 |
|
|
$ |
704,440 |
| Cost of sales |
|
|
484,200 |
|
|
468,084 |
|
|
|
438,164 |
| |
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
295,693 |
|
|
281,117 |
|
|
|
266,276 |
| |
|
|
|
|
|
|
|
|
|
|
| Operating expenses |
|
|
|
|
|
|
|
|
|
|
| Sales and marketing |
|
|
132,304 |
|
|
130,568 |
|
|
|
123,002 |
| Research and development |
|
|
39,918 |
|
|
35,632 |
|
|
|
31,806 |
| General and administrative |
|
|
39,509 |
|
|
41,068 |
|
|
|
37,934 |
| Purchased in-process research and development |
|
|
890 |
|
|
— |
|
|
|
980 |
| |
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
212,621 |
|
|
207,268 |
|
|
|
193,722 |
| |
|
|
|
|
|
|
|
|
|
|
| Operating earnings |
|
|
83,072 |
|
|
73,849 |
|
|
|
72,554 |
| Interest expense, net |
|
|
1,905 |
|
|
1,221 |
|
|
|
1,787 |
| |
|
|
|
|
|
|
|
|
|
|
| Earnings before income taxes and cumulative effect of change in accounting principle |
|
|
81,167 |
|
|
72,628 |
|
|
|
70,767 |
| Income tax expense |
|
|
29,540 |
|
|
28,325 |
|
|
|
27,982 |
| |
|
|
|
|
|
|
|
|
|
|
| Earnings before cumulative effect of change in accounting principle |
|
|
51,627 |
|
|
44,303 |
|
|
|
42,785 |
| Cumulative effect of change in accounting principle, net of tax of $4,767 |
|
|
— |
|
|
(7,455 |
) |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
$ |
51,627 |
|
$ |
36,848 |
|
|
$ |
42,785 |
| |
|
|
|
|
|
|
|
|
|
|
| Net earnings per share: |
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
|
|
|
|
|
|
|
|
| Before cumulative effect of change in accounting principle |
|
$ |
1.54 |
|
$ |
1.34 |
|
|
$ |
1.35 |
| Cumulative effect of change in accounting principle, net of tax |
|
|
— |
|
|
(0.22 |
) |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
| After cumulative effect of change in accounting principle |
|
$ |
1.54 |
|
$ |
1.12 |
|
|
$ |
1.35 |
| |
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
|
|
|
|
|
|
|
|
|
| Before cumulative effect of change in accounting principle |
|
$ |
1.48 |
|
$ |
1.29 |
|
|
$ |
1.26 |
| Cumulative effect of change in accounting principle, net of tax |
|
|
— |
|
|
(0.22 |
) |
|
|
— |
| |
|
|
|
|
|
|
|
|
|
|
| After cumulative effect of change in accounting principle |
|
$ |
1.48 |
|
$ |
1.07 |
|
|
$ |
1.26 |
| |
|
|
|
|
|
|
|
|
|
|
| Shares used in per share calculations: |
|
|
|
|
|
|
|
|
|
|
| Basic |
|
|
33,578 |
|
|
33,013 |
|
|
|
31,742 |
| |
|
|
|
|
|
|
|
|
|
|
| Diluted |
|
|
34,928 |
|
|
34,470 |
|
|
|
33,853 |
| |
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements.
F-3
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
(In thousands, except par value amounts)
| |
|
Fiscal Year End
|
|
| |
|
2002
|
|
|
2001
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| |
| Current assets |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
65,145 |
|
|
$ |
59,879 |
|
| Accounts receivable, net |
|
|
168,958 |
|
|
|
158,280 |
|
| Inventories |
|
|
116,252 |
|
|
|
119,498 |
|
| Deferred taxes |
|
|
30,644 |
|
|
|
26,303 |
|
| Other current assets |
|
|
16,084 |
|
|
|
11,084 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
397,083 |
|
|
|
375,044 |
|
| Property, plant and equipment, net |
|
|
105,871 |
|
|
|
90,528 |
|
| Goodwill |
|
|
115,922 |
|
|
|
85,906 |
|
| Intangible assets, net |
|
|
12,153 |
|
|
|
4,019 |
|
| Other assets |
|
|
3,575 |
|
|
|
3,760 |
|
| |
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
634,604 |
|
|
$ |
559,257 |
|
| |
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |
| Current liabilities |
|
|
|
|
|
|
|
|
| Current portion of long-term debt |
|
$ |
3,321 |
|
|
$ |
6,424 |
|
| Accounts payable |
|
|
52,086 |
|
|
|
48,728 |
|
| Deferred profit |
|
|
20,952 |
|
|
|
21,705 |
|
| Accrued liabilities |
|
|
122,819 |
|
|
|
124,754 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
199,178 |
|
|
|
201,611 |
|
| Long-term debt |
|
|
37,635 |
|
|
|
39,656 |
|
| Deferred taxes |
|
|
8,191 |
|
|
|
2,801 |
|
| Other liabilities |
|
|
9,879 |
|
|
|
9,918 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
254,883 |
|
|
|
253,986 |
|
| |
|
|
|
|
|
|
|
|
| |
| Commitments and contingencies (Notes 6, 11, and 15) |
|
|
|
|
|
|
|
|
| |
| Stockholders’ equity |
|
|
|
|
|
|
|
|
| Preferred stock—par value $0.01, authorized—1,000 shares; issued—none |
|
|
— |
|
|
|
— |
|
| Common stock—par value $0.01, authorized—99,000 shares; issued and outstanding—33,951 shares at September
27, 2002 and 33,224 shares at September 28, 2001 |
|
|
251,904 |
|
|
|
236,660 |
|
| Retained earnings |
|
|
144,419 |
|
|
|
92,792 |
|
| Accumulated other comprehensive loss |
|
|
(16,602 |
) |
|
|
(24,181 |
) |
| |
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
379,721 |
|
|
|
305,271 |
|
| |
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
|
$ |
634,604 |
|
|
$ |
559,257 |
|
| |
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements.
F-4
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
| |
|
Common Stock
|
|
|
Retained Earnings
|
|
Treasury Stock at Cost
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
Total
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
|
|
|
| Balance, fiscal year end 1999 |
|
30,563 |
|
|
$ |
190,839 |
|
|
$ |
13,159 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
203,998 |
|
| Net transfers from VMS |
|
— |
|
|
|
1,095 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
1,095 |
|
| Issuance of common stock |
|
2,544 |
|
|
|
28,575 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
28,575 |
|
| Tax benefits from stock option exercises |
|
— |
|
|
|
12,025 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
12,025 |
|
| Repurchase of common stock |
|
— |
|
|
|
— |
|
|
|
— |
|
|
(9,696 |
) |
|
|
— |
|
|
|
(9,696 |
) |
| Retirement of treasury stock |
|
(273 |
) |
|
|
(9,696 |
) |
|
|
— |
|
|
9,696 |
|
|
|
— |
|
|
|
— |
|
| Currency translation adjustment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
(22,676 |
) |
|
|
(22,676 |
) |
| Net earnings |
|
— |
|
|
|
— |
|
|
|
42,785 |
|
|
— |
|
|
|
— |
|
|
|
42,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, fiscal year end 2000 |
|
32,834 |
|
|
|
222,838 |
|
|
|
55,944 |
|
|
— |
|
|
|
(22,676 |
) |
|
|
256,106 |
|
| Issuance of common stock |
|
390 |
|
|
|
5,466 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
5,466 |
|
| Tax benefits from stock option exercises |
|
— |
|
|
|
8,356 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
8,356 |
|
| Currency translation adjustment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
(1,505 |
) |
|
|
(1,505 |
) |
| Net earnings |
|
— |
|
|
|
— |
|
|
|
36,848 |
|
|
— |
|
|
|
— |
|
|
|
36,848 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, fiscal year end 2001 |
|
33,224 |
|
|
|
236,660 |
|
|
|
92,792 |
|
|
— |
|
|
|
(24,181 |
) |
|
|
305,271 |
|
| Issuance of common stock |
|
777 |
|
|
|
10,739 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
10,739 |
|
| Tax benefits from stock option exercises |
|
— |
|
|
|
6,086 |
|
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
6,086 |
|
| Repurchase of common stock |
|
— |
|
|
|
— |
|
|
|
— |
|
|
(1,581 |
) |
|
|
— |
|
|
|
(1,581 |
) |
| Retirement of treasury stock |
|
(50 |
) |
|
|
(1,581 |
) |
|
|
— |
|
|
1,581 |
|
|
|
— |
|
|
|
— |
|
| Currency translation adjustment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
7,810 |
|
|
|
7,810 |
|
| Cash flow hedge fair value adjustments |
|
— |
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
(231 |
) |
|
|
(231 |
) |
| Net earnings |
|
— |
|
|
|
— |
|
|
|
51,627 |
|
|
— |
|
|
|
— |
|
|
|
51,627 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, fiscal year end 2002 |
|
33,951 |
|
|
$ |
251,904 |
|
|
$ |
144,419 |
|
$ |
— |
|
|
$ |
(16,602 |
) |
|
$ |
379,721 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the
Consolidated Financial Statements.
F-5
VARIAN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
| |
|
Fiscal Year
|
|
| |
|
2002
|
|
|
2001
|
|
|
2000
|
|
| Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| Net earnings |
|
$ |
51,627 |
|
|
$ |
36,848 |
|
|
$ |
42,785 |
|
| Adjustments to reconcile net earnings to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative effect of change in accounting principle, net of tax |
|
|
— |
|
|
|
7,455 |
|
|
|
— |
|
| Depreciation and amortization |
|
|
21,331 |
|
|
|
21,503 |
|
|
|
17,709 |
|
| Loss (gain) on disposition of property, plant and equipment |
|
|
307 |
|
|
|
238 |
|
|
|
(33 |
) |
| Purchased in-process research and development |
|