Attached files
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 1, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-25395
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 77-0501994 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
35 Dory Road, Gloucester, Massachusetts | 01930-2297 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (978) 282-2000
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Shares of common stock outstanding at January 29, 2010: 74,352,456
Table of Contents
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
TABLE OF CONTENTS
Item Number |
Page Number | |||||
PART I. FINANCIAL INFORMATION |
||||||
Item 1. |
Financial Statements | |||||
Consolidated Balance Sheets at January 1, 2010 (unaudited) and October 2, 2009 | 1 | |||||
2 | ||||||
3 | ||||||
Notes to the Unaudited Consolidated Financial Statements | 4 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 17 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 24 | ||||
Item 4. |
Controls and Procedures | 25 | ||||
PART II. OTHER INFORMATION |
||||||
Item 1. |
Legal Proceedings | 26 | ||||
Item 1A. |
Risk Factors | 26 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||||
Item 3. |
Defaults Upon Senior Securities | 26 | ||||
Item 4. |
Submission of Matters to a Vote of Security Holders | 26 | ||||
Item 5. |
Other Information | 26 | ||||
Item 6. |
Exhibits | 27 | ||||
Signature | 28 |
Table of Contents
PART 1. FINANCIAL INFORMATION
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
January 1, 2010 |
October 2, 2009 |
|||||||
(unaudited) | ||||||||
(Amounts in thousands, except share data) |
||||||||
ASSETS | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 230,048 | $ | 192,148 | ||||
Short-term investments |
45,670 | 44,043 | ||||||
Accounts receivable, net |
92,489 | 115,002 | ||||||
Inventories |
112,198 | 100,764 | ||||||
Deferred income taxes |
18,511 | 19,601 | ||||||
Other current assets |
22,595 | 22,188 | ||||||
Total current assets |
521,511 | 493,746 | ||||||
Long-term investments |
103,192 | 86,439 | ||||||
Property, plant and equipment, net |
64,367 | 65,785 | ||||||
Goodwill |
12,280 | 12,280 | ||||||
Long-term deferred income taxes |
6,845 | 5,325 | ||||||
Other assets |
2,673 | 2,664 | ||||||
Total assets |
$ | 710,868 | $ | 666,239 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities |
||||||||
Current portion of long-term debt |
$ | 624 | $ | 610 | ||||
Accounts payable |
30,656 | 26,449 | ||||||
Accrued expenses |
24,032 | 22,812 | ||||||
Income taxes payable |
2,557 | 1,820 | ||||||
Product warranty |
3,932 | 3,943 | ||||||
Deferred revenue |
29,239 | 27,098 | ||||||
Total current liabilities |
91,040 | 82,732 | ||||||
Long-term accrued expenses and other liabilities |
71,175 | 66,285 | ||||||
Long-term debt |
1,431 | 1,592 | ||||||
Total liabilities |
163,646 | 150,609 | ||||||
Commitments, contingencies and guarantees (Note 14) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding |
| | ||||||
Common stock, $0.01 par value; 150,000,000 shares authorized; 95,086,106 shares issued and 73,370,276 shares outstanding at January 1, 2010; 94,519,926 shares issued and 72,804,096 shares outstanding at October 2, 2009 |
951 | 945 | ||||||
Capital in excess of par value |
627,583 | 612,930 | ||||||
Less: Cost of 21,715,830 shares of common stock held in treasury |
(714,877 | ) | (714,877 | ) | ||||
Retained earnings |
632,673 | 616,051 | ||||||
Accumulated other comprehensive income |
892 | 581 | ||||||
Total stockholders equity |
547,222 | 515,630 | ||||||
Total liabilities and stockholders equity |
$ | 710,868 | $ | 666,239 | ||||
The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.
1
Table of Contents
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
(Unaudited) | ||||||||
(Amounts in thousands, except per share data) |
||||||||
Revenue |
||||||||
Product |
$ | 127,461 | $ | 92,028 | ||||
Service |
13,807 | 15,413 | ||||||
Total revenue |
141,268 | 107,441 | ||||||
Cost of revenue |
||||||||
Product |
63,287 | 58,019 | ||||||
Service |
9,294 | 9,519 | ||||||
Total cost of revenue |
72,581 | 67,538 | ||||||
Gross profit |
68,687 | 39,903 | ||||||
Operating expenses |
||||||||
Research, development and engineering |
21,728 | 22,080 | ||||||
Marketing, general and administrative |
26,103 | 26,760 | ||||||
Restructuring |
| 6,249 | ||||||
Total operating expenses |
47,831 | 55,089 | ||||||
Operating income (loss) |
20,856 | (15,186 | ) | |||||
Interest income |
925 | 1,893 | ||||||
Interest expense |
(60 | ) | (178 | ) | ||||
Other expense, net |
(504 | ) | (82 | ) | ||||
Income (loss) before income taxes |
21,217 | (13,553 | ) | |||||
Provision for income taxes |
4,595 | 5 | ||||||
Net income (loss) |
$ | 16,622 | $ | (13,558 | ) | |||
Weighted average shares outstanding - basic |
73,700 | 72,715 | ||||||
Weighted average shares outstanding - diluted |
74,753 | 72,715 | ||||||
Net income (loss) per share - basic |
$ | 0.23 | $ | (0.19 | ) | |||
Net income (loss) per share - diluted |
$ | 0.22 | $ | (0.19 | ) |
The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.
2
Table of Contents
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
(Unaudited) | ||||||||
(Amounts in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 16,622 | $ | (13,558 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
3,938 | 3,993 | ||||||
Amortization of investment premiums |
283 | 159 | ||||||
Deferred income taxes |
(430 | ) | (423 | ) | ||||
Stock-based compensation |
5,307 | 5,849 | ||||||
Tax benefit (charge) from stock-based compensation |
1,855 | (360 | ) | |||||
Excess tax benefits from stock-based compensation |
(1,367 | ) | (13 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
22,224 | 8,878 | ||||||
Inventories |
(11,047 | ) | 20,589 | |||||
Other current assets |
(407 | ) | 1,126 | |||||
Accounts payable |
4,212 | (7,280 | ) | |||||
Accrued expenses |
7,819 | (7,203 | ) | |||||
Product warranty |
84 | (1,757 | ) | |||||
Deferred revenue |
1,475 | (2,275 | ) | |||||
Other |
(70 | ) | 833 | |||||
Net cash provided by operating activities |
50,498 | 8,558 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property, plant and equipment |
(2,909 | ) | (2,370 | ) | ||||
Proceeds from sales of investments |
4,233 | 1,034 | ||||||
Proceeds from maturities of investments |
12,165 | 25,718 | ||||||
Purchase of investments |
(35,007 | ) | (2,254 | ) | ||||
Net cash (used in) provided by investing activities |
(21,518 | ) | 22,128 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from the issuance of common stock upon exercise of options and issuance of stock under the employee stock purchase plan |
7,497 | 2,392 | ||||||
Excess tax benefits from stock-based compensation |
1,367 | 13 | ||||||
Repayment of long-term debt |
(147 | ) | (136 | ) | ||||
Net cash provided by financing activities |
8,717 | 2,269 | ||||||
Effects of exchange rates on cash |
203 | (2,611 | ) | |||||
Net increase in cash and cash equivalents |
37,900 | 30,344 | ||||||
Cash and cash equivalents at beginning of period |
192,148 | 139,679 | ||||||
Cash and cash equivalents at end of period |
$ | 230,048 | $ | 170,023 | ||||
The accompanying notes to the unaudited consolidated financial statements are an integral part of these statements.
3
Table of Contents
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business and Basis of Presentation
Varian Semiconductor Equipment Associates, Inc. (Varian Semiconductor, the Company, we, our, or us) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits to customers located both in the United States, or U.S., and in international markets.
The accompanying unaudited interim consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the U.S., or GAAP, for interim financial information and pursuant to the instruction to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission, or the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and the related notes thereto included in our Annual Report on Form 10-K filed by us with the SEC on November 24, 2009 for fiscal year 2009. In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the information required to be set forth therein. The results of operations for the three months ended January 1, 2010 are not necessarily indicative of the results to be expected for a full year or for any other period.
We evaluated subsequent events up to and including February 8, 2010, the date these financial statements were issued.
Note 2. Fair Value
In September 2006, the Financial Accounting Standards Board, or FASB, issued authoritative guidance for fair value measurements which defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value in the financial statements. The framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. In February 2008, the FASB issued authoritative guidance which allows for the delay of the effective date for one year of the authoritative guidance for fair value measurements for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We adopted the provisions of the guidance for financial assets and liabilities on October 4, 2008 but elected a partial deferral under the provision related to nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. The guidance had an immaterial impact on our consolidated financial statements when it was applied to non-financial assets and non-financial liabilities that are not measured at fair value on a recurring basis, beginning in the first quarter of fiscal year 2010.
Fair Value Hierarchy
The accounting standard for fair value measurements specifies a hierarchy for disclosure of fair value measurement. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The three levels are defined as follows:
| Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities for the instrument or security to be valued. |
| Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data for substantially the full term of the asset or liability. |
| Level 3 inputs are derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable and are significant to the fair value of the assets or liabilities. |
This hierarchy requires the use of observable market data when available. We maintain policies and procedures to value instruments using the best and most relevant data available. Further, we used internal sources and considered external sources to assist us in valuing certain instruments.
4
Table of Contents
Determination of Fair Value
We measure fair value utilizing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following is a description of valuation methodologies we used to measure assets and liabilities at fair value, including an indication of the level in the fair value hierarchy.
Cash equivalents
We consider demand deposits and all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents and are classified as Level 1 in the valuation hierarchy. The carrying amounts of cash equivalents approximate estimated fair value due to the short-term maturities of those financial assets.
Securities available-for-sale
Securities are classified as Level 1 in the valuation hierarchy, where quoted prices are available in an active market. We may utilize an alternative pricing method (for example, matrix pricing) and quotations from bond dealers to assist in determining fair value for each security traded over-the-counter rather than on a securities exchange. Matrix pricing is a mathematical technique which considers information with respect to comparable bond and note transactions or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date, to determine fair value. Securities priced using such methods are generally classified as Level 2 and typically include U.S. Treasury and agency securities, corporate bonds and municipal bonds.
Deferred compensation
The deferred compensation liability represents our obligation to pay benefits under our non-qualified deferred compensation plan. The related investments, held in a Rabbi Trust, consist of equity securities, primarily mutual funds, and are classified as Level 1 in the valuation hierarchy. Realized gains (losses) to fair value of both the equity securities and the related deferred compensation liabilities are recorded in marketing, general and administrative expense.
Derivatives
In general, and where applicable, we use quoted prices in an active market for derivative assets and liabilities, which are traded on exchanges. These derivative assets and liabilities are classified as Level 1.
5
Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Balance at January 1, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | |||||||||
(Amounts in thousands) | ||||||||||||
Cash equivalents |
$ | 189,778 | $ | 189,778 | $ | | $ | | ||||
Short-term and long-term investments |
||||||||||||
U.S. Treasury and agency securities |
43,112 | | 43,112 | | ||||||||
Corporate bonds |
95,196 | | 95,196 | | ||||||||
Municipal bonds |
4,602 | | 4,602 | | ||||||||
Equity securities |
4,802 | 4,802 | | | ||||||||
Derivative assets |
821 | 821 | | | ||||||||
Total assets at fair value |
$ | 338,311 | $ | 195,401 | $ | 142,910 | $ | | ||||
Deferred compensation |
$ | 4,802 | $ | 4,802 | $ | | $ | | ||||
Total liabilities at fair value |
$ | 4,802 | $ | 4,802 | $ | | $ | | ||||
Balance at October 2, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | |||||||||
(Amounts in thousands) | ||||||||||||
Cash equivalents |
$ | 164,511 | $ | 164,511 | $ | | $ | | ||||
Short-term and long-term investments |
||||||||||||
U.S. Treasury and agency securities |
35,730 | | 35,730 | | ||||||||
Corporate bonds |
83,583 | | 83,583 | | ||||||||
Municipal bonds |
4,634 | | 4,634 | | ||||||||
Equity securities |
5,435 | 5,435 | | | ||||||||
Total assets at fair value |
$ | 293,893 | $ | 169,946 | $ | 123,947 | $ | | ||||
Deferred compensation |
$ | 5,435 | $ | 5,435 | $ | | $ | | ||||
Derivative liabilities |
1,207 | 1,207 | | | ||||||||
Total liabilities at fair value |
$ | 6,642 | $ | 6,642 | $ | | $ | | ||||
Non-Marketable Equity Investments
The portfolio of financial assets excludes a $1.2 million minority equity investment in two private companies which is accounted for under the cost method and is outside the scope of the accounting standard for fair value measurements. This equity investment is included in long-term investments on the consolidated balance sheet.
Note 3. Stock-Based Compensation
Stock-based compensation cost is measured at grant date and is based on the fair value of the award. The straight-line method is applied to all grants with service conditions, while the graded vesting method is applied to all grants with both service and performance conditions.
6
Table of Contents
The estimated fair value of our stock-based awards, less expected forfeitures, is amortized over the awards vesting period. The effect of recording stock-based compensation for the first three months of fiscal years 2010 and 2009 are as follows:
Fiscal Three Months Ended | |||||||
January 1, 2010 |
January 2, 2009 | ||||||
(Amounts in thousands) | |||||||
Effect of stock-based compensation on income by line item: |
|||||||
Cost of product revenue |
$ | 223 | $ | 303 | |||
Cost of service revenue |
156 | 245 | |||||
Research, development and engineering expense |
1,082 | 1,274 | |||||
Marketing, general and administrative expense |
3,846 | 4,027 | |||||
Provision for income taxes |
(1,018 | ) | | ||||
Total cost related to stock-based compensation |
$ | 4,289 | $ | 5,849 | |||
We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the options expected term, the expected annual dividend yield and the expected stock price volatility. Our expected term is calculated using historical data and assumes that all outstanding options will be exercised at the midpoint of the vest date and the full contractual term and is further adjusted for demographic data. We interpolate the risk-free interest rate from the U.S. Treasury zero-coupon bond that coincides with the expected term. We do not have a history of paying dividends, nor do we expect to in the future. We use a blended volatility, using our historical and implied volatility measures. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
Expected life (in years) |
3.7 | 3.7 | ||||||
Expected volatility |
51.5 | % | 50.4 | % | ||||
Risk-free interest rate |
1.7 | % | 1.8 | % | ||||
Expected dividend yield |
0.0 | % | 0.0 | % | ||||
Weighted-average grant date fair value |
$ | 12.29 | $ | 6.57 |
The following table summarizes stock option and restricted stock activity as of and for the three months ended January 1, 2010:
Stock Option Activity | Unvested Restricted Stock Award Activity |
Unvested Restricted Stock Unit Activity | ||||||||||||||||||||
Shares | Weighted- Average Exercise Price |
Weighted- Average Remaining Contractual Term |
Aggregate Intrinsic Value |
Shares | Weighted- Average Grant Date Fair Value |
Shares | Weighted- Average Grant Date Fair Value | |||||||||||||||
(In years) | (In thousands) | |||||||||||||||||||||
Outstanding at fiscal year end 2009 |
6,023,102 | $ | 23.33 | 624,940 | $ | 25.39 | 55,064 | $ | 24.53 | |||||||||||||
Granted |
385,650 | 31.34 | 454,274 | 33.87 | | | ||||||||||||||||
Exercised |
(440,371 | ) | 17.02 | |||||||||||||||||||
Restricted stock vested |
(125,809 | ) | 22.89 | | | |||||||||||||||||
Forfeited/expired/cancelled |
(3,871 | ) | 25.91 | (4,412 | ) | 24.46 | | | ||||||||||||||
Outstanding at January 1, 2010 |
5,964,510 | $ | 24.31 | 4.2 | $ | 74,476 | 948,993 | $ | 29.79 | 55,064 | $ | 24.53 | ||||||||||
Options vested and expected to vest at January 1, 2010 |
5,913,210 | $ | 24.30 | 4.2 | $ | 73,954 | ||||||||||||||||
Options exercisable at January 1, 2010 |
3,499,659 | $ | 22.10 | 3.1 | $ | 51,244 |
As of January 1, 2010, there were a total of 4,737,413 shares reserved for issuance under the 2006 Stock Incentive Plan. The aggregate intrinsic value is based on our closing stock price of $35.88 on December 31, 2009, and represents the amounts that would have been received by the option holders had all option holders exercised their options as of that date. Intrinsic value is defined as the difference between the market price on the date of exercise and the grant date price.
7
Table of Contents
As of January 1, 2010, the unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and restricted stock was $21.8 million and $25.4 million, respectively. These amounts will be recognized over an estimated weighted average amortization period of 2.7 years and 3.2 years, respectively.
The total intrinsic value of options exercised during the first three months of fiscal years 2010 and 2009 was $6.8 million and $0.2 million, respectively.
The total fair value of restricted stock grants that vested during the first three months of fiscal years 2010 and 2009 was $4.0 million and $2.5 million, respectively.
Employee Stock Purchase Plan
Our employees who elect to participate in the Employee Stock Purchase Plan, or ESPP, are able to purchase common stock at the lower of 85% of the fair market value of our common stock on the first or last day of the applicable offering period. Typically, each offering period lasts six months. On November 24, 2008, we decided to suspend enrollment and participation in the ESPP as of January 1, 2009. We expect to lift the suspension when business conditions permit. As of January 1, 2010, there were a total of 828,266 shares of common stock reserved for issuance under the ESPP. The fair value of shares issued under the ESPP was estimated on the commencement date of each offering period using the Black-Scholes option-pricing model with the following assumptions:
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
Expected life (in years) |
| 0.5 | ||||||
Expected volatility |
0.0 | % | 49.0 | % | ||||
Risk-free interest rate |
0.0 | % | 2.1 | % | ||||
Expected dividend yield |
0.0 | % | 0.0 | % | ||||
Weighted-average grant date fair value |
$ | | $ | 10.44 |
Note 4. Cash, Cash Equivalents and Investments
We consider currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short-term maturities of those financial instruments. Cash equivalents at January 1, 2010 and October 2, 2009 were $189.8 million and $164.5 million, respectively.
Investments consist primarily of U.S. Treasury and government agency securities and corporate bonds with ratings AA or better. All investments have been classified as available-for-sale and are carried at fair value. Investments with contractual maturities greater than one year from the date of acquisition have been classified as long-term.
Net realized gain on investments for the three months ended January 1, 2010 was less than $0.1 million. As of January 1, 2010 and October 2, 2009, a net unrealized gain on investments of $0.9 million was recorded as accumulated other comprehensive income.
We determined that the unrealized losses at January 1, 2010, as aggregated by security type in the table below, are temporary. This assessment is based upon the nature of the investments and the causes of the unrealized losses. The investments are in corporate bonds and U.S. Treasury and agency securities, as stated in the investment policy. The unrealized losses relate to the decline in fair value due to differences between the securities interest rates at acquisition and current interest rates and the decline in credit worthiness of certain debtors.
8
Table of Contents
Unrealized losses on investments as of January 1, 2010 by investment category and length of time the investment has been in a continuous unrealized loss position are as follows:
In Loss Position for Less than 12 Months |
In Loss Position for 12 Months or More |
Total | |||||||||||||||||||
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||
U.S. Treasury and agency securities |
$ | 19,481 | $ | (84 | ) | $ | | $ | | $ | 19,481 | $ | (84 | ) | |||||||
Corporate Bonds |
29,418 | (157 | ) | 11,502 | (159 | ) | 40,920 | (316 | ) | ||||||||||||
Other |
| | 4,802 | (12 | ) | 4,802 | (12 | ) | |||||||||||||
Total |
$ | 48,899 | $ | (241 | ) | $ | 16,304 | $ | (171 | ) | $ | 65,203 | $ | (412 | ) | ||||||
Investments by security type at January 1, 2010 were as follows:
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value | ||||||||||
(Amounts in thousands) | |||||||||||||
U.S. Treasury and agency securities |
$ | 42,914 | $ | 282 | $ | (84 | ) | $ | 43,112 | ||||
Corporate Bonds |
94,505 | 1,007 | (316 | ) | 95,196 | ||||||||
Municipal Bonds |
4,582 | 20 | | 4,602 | |||||||||
Other |
5,964 | | (12 | ) | 5,952 | ||||||||
Total |
$ | 147,965 | $ | 1,309 | $ | (412 | ) | $ | 148,862 | ||||
Investments by security type at October 2, 2009 were as follows:
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value | ||||||||||
(Amounts in thousands) | |||||||||||||
U.S. Treasury and agency securities |
$ | 35,433 | $ | 298 | $ | (1 | ) | $ | 35,730 | ||||
Corporate bonds |
82,868 | 1,048 | (333 | ) | 83,583 | ||||||||
Municipal bonds |
4,598 | 36 | | 4,634 | |||||||||
Other |
6,663 | | (128 | ) | 6,535 | ||||||||
Total |
$ | 129,562 | $ | 1,382 | $ | (462 | ) | $ | 130,482 | ||||
The investment maturities are as follows:
Estimated Fair Value | ||||||
January 1, 2010 |
October 2, 2009 | |||||
(Amounts in thousands) | ||||||
Maturing within 1 year |
$ | 45,670 | $ | 44,043 | ||
Maturing between 1 year and 5 years |
103,192 | 86,439 | ||||
Total |
$ | 148,862 | $ | 130,482 | ||
Note 5. Computation of Net Income (Loss) Per Share
Basic net income (loss) per share is calculated using net income (loss) and the weighted average number of shares of common stock and participating unvested restricted stock outstanding during the reporting period. Diluted net income (loss) per share includes additional dilution from stock issuable pursuant to the exercise of outstanding stock options and non-participating unvested restricted stock. Options to purchase common shares with exercise prices that exceeded the market value of the underlying common stock are excluded from the computation of diluted earnings per share. For purposes of the diluted net income (loss) per share calculation, the additional shares issuable upon exercise of stock options are determined using the treasury stock method, which includes as assumed proceeds share-based compensation expense and the tax effect of such compensation.
9
Table of Contents
The calculation of assumed proceeds, used to determine diluted weighted average shares outstanding under the treasury stock method is adjusted by tax windfalls and shortfalls associated with outstanding stock awards. Windfalls and shortfalls are computed by comparing the tax deductible amount of outstanding stock awards to their grant date fair values and multiplying the result by the applicable statutory tax rate. A positive result creates a windfall, which increases the assumed proceeds and a negative result creates a shortfall, which reduces the assumed proceeds.
In the first quarter of fiscal year 2010, we retrospectively adopted the guidance for determining whether instruments granted in share-based payment transactions are participating securities and, therefore, should be included in computing earnings per share pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participating rights in undistributed earnings. Our restricted stock awards granted to employees are considered participating securities as they receive rights to non-forfeitable dividends or dividend equivalents at the same rate as common stockholders, thus are included in computing our earnings per share. The effect of this adoption did not alter previously reported basic and diluted earnings per share for the three months ended January 2, 2009.
A reconciliation of the numerator and denominator used in the net income (loss) per share calculations is presented as follows:
Fiscal Three Months Ended | |||||||
January 1, 2010 |
January 2, 2009 |
||||||
(Amounts in thousands, except per share data) |
|||||||
Numerator: |
|||||||
Net income (loss) |
$ | 16,622 | $ | (13,558 | ) | ||
Denominator: |
|||||||
Denominator for basic net income (loss) per share: |
|||||||
Weighted average shares outstanding |
73,700 | 72,715 | |||||
Effect of dilutive securities: |
|||||||
Stock options |
1,053 | | |||||
Denominator for diluted net income (loss) per share |
74,753 | 72,715 | |||||
Net income (loss) per share - basic |
$ | 0.23 | $ | (0.19 | ) | ||
Net income (loss) per share - diluted |
$ | 0.22 | $ | (0.19 | ) |
For the three month periods ended January 1, 2010 and January 2, 2009, 1.7 million and 3.6 million potentially dilutive shares, respectively, were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive.
Note 6. Accounts Receivable
Accounts receivable consist of the following:
January 1, 2010 |
October 2, 2009 |
|||||||
(Amounts in thousands) | ||||||||
Billed receivables |
$ | 93,841 | $ | 116,754 | ||||
Allowance for doubtful accounts |
(1,352 | ) | (1,752 | ) | ||||
Accounts receivable, net |
$ | 92,489 | $ | 115,002 | ||||
10
Table of Contents
Note 7. Inventories
The components of inventories are as follows:
January 1, 2010 |
October 2, 2009 | |||||
(Amounts in thousands) | ||||||
Raw materials and parts |
$ | 63,832 | $ | 67,853 | ||
Work in process |
21,458 | 13,133 | ||||
Finished goods |
26,908 | 19,778 | ||||
Total inventories |
$ | 112,198 | $ | 100,764 | ||
Note 8. Accrued Expenses
The components of accrued expenses are as follows:
January 1, 2010 |
October 2, 2009 | |||||
(Amounts in thousands) | ||||||
Accrued incentives |
$ | 3,955 | $ | 3,637 | ||
Accrued employee benefits |
5,528 | 5,041 | ||||
Accrued payroll |
3,178 | 4,725 | ||||
Accrued retirement benefits |
576 | 578 | ||||
Accrued restructuring costs |
816 | 790 | ||||
Other |
9,979 | 8,041 | ||||
Total accrued expenses |
$ | 24,032 | $ | 22,812 | ||
Note 9. Long-Term Accrued Expenses and Other Long-Term Liabilities
There were $71.2 million and $66.3 million in long-term accrued expenses and other long-term liabilities at January 1, 2010 and October 2, 2009, respectively. Included in these amounts were $50.2 million and $47.2 million, respectively, for long-term tax liabilities. In addition, post-employment liabilities, environmental and other costs not expected to be expended within the next year are included in long-term accrued expenses and other long-term liabilities. The current portion is recorded within accrued expenses.
Note 10. Product Warranties
We warrant that our products will be free from defects in materials and workmanship and will conform to our standard published specifications in effect at the time of delivery for a period of three to twelve months from the date the customer accepts the products. Additionally, we warrant that maintenance services will be performed in a workmanlike manner consistent with generally accepted industry standards for a period of 90 days from the completion of any agreed-upon services. We provide for the estimated cost of product warranties, the amount of which is based primarily upon historical information, at the time product revenue is recognized. Our warranty obligation is affected by a number of factors, including product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should these factors or other factors affecting warranty costs differ from our estimates, revisions to the estimated warranty liability would be required.
11
Table of Contents
Product warranty activity for the first three months of fiscal years 2010 and 2009 are as follows:
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
(Amounts in thousands) | ||||||||
Beginning Balance |
$ | 4,226 | $ | 8,339 | ||||
Accruals for warranties issued during the period |
1,496 | 1,883 | ||||||
Increase (decrease) to pre-existing warranties |
266 | (474 | ) | |||||
Settlements made during the period |
(1,687 | ) | (3,037 | ) | ||||
Ending Balance |
$ | 4,301 | $ | 6,711 | ||||
Current portion of product warranty |
$ | 3,932 | $ | 6,289 | ||||
Long-term portion of product warranty |
369 | 422 | ||||||
Total product warranty liability |
$ | 4,301 | $ | 6,711 | ||||
Note 11. Deferred Revenue
The components of deferred revenue are as follows:
January 1, 2010 |
October 2, 2009 | |||||
(Amounts in thousands) | ||||||
Fully deferred systems, installation and acceptance revenue |
$ | 11,012 | $ | 11,417 | ||
Extended warranties |
6,414 | 8,507 | ||||
Maintenance and service contracts |
4,129 | 4,787 | ||||
Other deferred revenue |
9,509 | 4,890 | ||||
Total deferred revenue |
$ | 31,064 | $ | 29,601 | ||
Current portion of deferred revenue |
$ | 29,239 | $ | 27,098 | ||
Long-term portion of deferred revenue |
1,825 | 2,503 | ||||
Total deferred revenue |
$ | 31,064 | $ | 29,601 | ||
Note 12. Restructuring
The semiconductor industry has historically experienced periodic downturns and in response, we have historically recorded restructuring charges in connection with cost reduction initiatives implemented in response to the industry downturns. Restructuring charges typically consist of severance, benefits and outplacement services offered to terminated employees and sometimes include charges for remaining lease payments on facilities that are closed. Prior to any restructuring announcements, the restructuring is approved by the appropriate level of management necessary to commit to the specific actions of the reduction in force.
We began relocating the European operations in Houten, the Netherlands to Schaffhausen, Switzerland, in the fiscal fourth quarter of 2008. The restructuring charge is comprised primarily of one-time termination benefits, and contract termination expense related to a facility lease. European restructuring activity, which is estimated to cost $2.5 million in total, is now significantly complete. The recognized cost of the European restructuring activity from the date of its commencement to January 1, 2010 is $2.5 million.
The following table summarizes the restructuring activity for the first three months of fiscal year 2009.
12
Table of Contents
Ongoing Benefit Arrangements |
One-time Termination Benefits |
Contract Termination Costs |
Other Associated Costs |
Total | |||||||||||||||
(Amounts in thousands) | |||||||||||||||||||
Accrued charges at October 3, 2008 |
$ | 184 | $ | 324 | $ | | $ | 75 | $ | 583 | |||||||||
Costs incurred |
4,393 | 1,053 | 438 | 365 | 6,249 | ||||||||||||||
Costs paid |
(3,935 | ) | (663 | ) | | (72 | ) | (4,670 | ) | ||||||||||
Non-cash settlements |
| | | (68 | ) | (68 | ) | ||||||||||||
Accrued charges at January 2, 2009 |
$ | 642 | $ | 714 | $ | 438 | $ | 300 | $ | 2,094 | |||||||||
Cash outlays related to one-time termination benefits and contract termination costs to exit the Houten facility will continue through fiscal years 2010 and 2014, respectively.
Note 13. Notes Payable
In February 2003, we purchased our previously leased facility located in Newburyport, Massachusetts. The purchase price consisted of cash payments totaling $3.4 million, the assumption of the sellers outstanding loan of $5.1 million and the transfer of other prepaid assets of $0.8 million. The loan has a fixed interest rate of 9.05% with monthly payments of principal and interest until the loan matures in January 2013. The loan may be prepaid in full. Prepayment would require us to pay a prepayment penalty equal to the greater of two percent of the outstanding principal balance or the excess of the present value of all future loan payments over the outstanding principal balance of the loan. As of January 1, 2010, we also had a standby letter of credit outstanding for $0.5 million as a guarantee for the debt on this facility. The $2.1 million carrying amount of the loan had an estimated fair value of $2.2 million at January 1, 2010. The fair value of the loan was estimated using a discounted cash flow analysis. The interest rate was estimated based on current market conditions and our financial condition at January 1, 2010.
Note 14. Commitments, Contingencies and Guarantees
As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was, serving in such capacity at our request. The term of the indemnification period is upon the later of (i) ten years after the person has ceased being an officer or director, or (ii) the termination of all pending or threatened actions, suits, proceedings or investigations. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have a director and officer insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of January 1, 2010.
We enter into indemnification agreements in the normal course of business. Pursuant to these agreements, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally our customers, in connection with any patent, or any copyright or other intellectual property infringement claim by any third party with respect to our products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments we could be required to make under these indemnification agreements may be unlimited. We believe the estimated fair value of these agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of January 1, 2010.
We also indemnify certain customers with respect to damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims related to the use of our products and services or resulting from the acts or omissions of us, our employees, officers, authorized agents or subcontractors. We have general and umbrella insurance policies that limit our exposure under these indemnification obligations and guarantees. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we have not recorded any liabilities for these agreements as of January 1, 2010.
Prior to the spin-off of Varian Semiconductor from Varian Associates, Inc., or VAI, Varian Semiconductors business was operated as the Semiconductor Equipment Business, or SEB, of VAI. On April 2, 1999, VAI contributed its SEB to Varian Semiconductor, its Instruments Business to Varian, Inc., or VI, and changed its name to Varian Medical Systems, Inc., or VMS. In connection with
13
Table of Contents
the spin-off from VAI, Varian Semiconductor, VMS and VI entered into certain agreements which include a Distribution Agreement, an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, and a Transition Services Agreement, (collectively, the Distribution Related Agreements) whereby Varian Semiconductor agreed to indemnify VMS and VI for any costs, liabilities or expenses relating to Varian Semiconductors legal proceedings. Under the Distribution Related Agreements, Varian Semiconductor has agreed to reimburse VMS for one-third of the costs, liabilities, and expenses, adjusted for any related tax benefits recognized or realized by VMS, with respect to certain legal proceedings relating to discontinued operations of VMS. We believe the estimated fair value of the indemnification agreements is minimal, except as already recorded on the financial statements.
Our operations are subject to various foreign, federal, state and/or local laws relating to the protection of the environment. These include laws regarding discharges into soil, water and air, and the generation, handling, storage, transportation and disposal of waste and hazardous substances. In addition, several countries are reviewing proposed regulations that would require manufacturers to dispose of their products at the end of a products useful life. These laws have the effect of increasing costs and potential liabilities associated with the conduct of certain operations.
We also enter into purchase order commitments in the normal course of business. As of January 1, 2010, we had approximately $70.5 million of purchase order commitments with various suppliers.
Environmental Remediation
VAI has been named by the United States Environmental Protection Agency and third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VAI is also involved in various stages of environmental investigation and/or remediation under the direction of, or in consultation with, foreign, federal, state and/or local agencies at certain current or former VAI facilities (including facilities disposed of in connection with VAIs sale of its Electron Devices business during fiscal year 1995, and the sale of its Thin Film Systems business during fiscal year 1997). The Distribution Related Agreements provide that each of VMS, Varian Semiconductor and VI will indemnify the others for one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon payment of these costs.
For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. Per the estimates provided by VMS, we have accrued $1.0 million in estimated environmental investigation and remediation costs for these sites and facilities as of January 1, 2010. As to other sites and facilities, sufficient knowledge has been gained to be able to reasonably estimate the scope and costs of future environmental activities. As such, we have accrued $4.0 million as of January 1, 2010, which represents future costs discounted at 7%, net of inflation, to cover our portion of these costs. This reserve is in addition to the $1.0 million as of January 1, 2010, as previously described.
As of January 1, 2010, our environmental liability, based upon future environmental-related costs estimated by VMS as of that date and included in current and long-term accrued expenses, totaled $5.0 million, of which $0.8 million is classified as current.
The amounts set forth in the foregoing paragraph are only estimates of anticipated future environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation and remediation activities and the large number of sites where VMS is undertaking such investigation and remediation activities. VMS believes that most of these cost ranges will narrow as investigation and remediation activities progress. We believe that our reserves are adequate, but as the scope of the obligations become more clearly defined, these reserves may be modified and related charges against income may be made.
Although any ultimate liability arising from environmental-related matters described herein could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to our financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to management and our best assessment of the ultimate amount and timing of environmental-related events, our management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on our consolidated financial statements.
We evaluate our liability for environmental-related investigation and remediation in light of the liability and financial strength of potentially responsible parties and insurance companies where we believe that we have rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and remediation costs already incurred, and to be incurred in
14
Table of Contents
the future, have been asserted against various insurance companies and other third parties. VMS receives certain cash payments in the form of settlements and judgments from defendants, its insurers and other third parties from time to time. VMS has also reached an agreement with an insurance company under which the insurance company agreed to pay a portion of our past and future environmental-related expenditures. Accordingly, we have recorded a receivable for approximately $1.0 million at each of January 1, 2010 and October 2, 2009 which was included in Other assets in the Consolidated Balance Sheets. We believe that this receivable is recoverable because it is based on a binding, written settlement agreement with a solvent and financially viable insurance company and the insurance company has, in the past, paid the claims that VMS has made.
Legal Proceedings
We are currently a party to legal disputes. While we believe we have meritorious claims and/or defenses with respect to each dispute, we cannot predict the outcome of each such dispute. Management believes that the ultimate outcome of these disputes, individually and in the aggregate, will not have a material adverse effect on our financial condition or results of our operations.
Note 15. Comprehensive Income (Loss)
The following table reconciles net income (loss) to comprehensive income (loss), net of tax effect, for the first quarter of fiscal years 2010 and 2009:
Fiscal Three Months Ended | ||||||||
January 1, 2010 |
January 2, 2009 |
|||||||
(Amounts in thousands) | ||||||||
Net income (loss) |
$ | 16,622 | $ | (13,558 | ) | |||
Other comprehensive income (loss): |
||||||||
Unrealized gain (loss) on cash flow hedging instruments |
326 | (1,631 | ) | |||||
Reclassification adjustment for realized loss on cash flow hedging instruments included in net income (loss) |
| 1,537 | ||||||
Unrealized gain (loss) on investments |
10 | (17 | ) | |||||
Reclassification adjustment for realized (gain) loss on investments included in net income (loss) |
(25 | ) | 363 | |||||
Comprehensive income (loss) |
$ | 16,933 | $ | (13,306 | ) | |||
Note 16. Operating Segments and Geographic Information
We have determined that we operate in one business segment: the manufacturing, marketing and servicing of semiconductor processing equipment for ion implantation systems. Since we operate in one segment, all financial segment information can be found in the consolidated financial statements.
We expect that sales of our products to relatively few customers will continue to account for a high percentage of our revenue in the foreseeable future. In the first quarter of fiscal year 2010, revenue from four customers accounted for 32%, 12%, 11% and 10%, respectively, of our total revenue. In the first quarter of fiscal year 2009, revenue from two customers accounted for 32% and 19%, respectively, of our total revenue.
As of January 1, 2010, two customers represented 25% and 10%, respectively, of the total accounts receivable balance. As of October 2, 2009, two customers accounted for 23% and 21%, respectively, of the total accounts receivable balance.
15
Table of Contents
The following table summarizes revenue based on final geographic destination and long-lived assets by geography:
North America |
Europe | Japan | Taiwan | Korea | Other | Consolidated | |||||||||||||||
(Amounts in thousands) | |||||||||||||||||||||
Revenue Three months ended: |
|||||||||||||||||||||
January 1, 2010 |
$ | 24,918 | $ | 9,350 | $ | 4,005 | $ | 63,069 | $ | 20,971 | $ | 18,955 | $ | 141,268 | |||||||
January 2, 2009 |
$ | 39,916 | $ | 12,233 | $ | 28,433 | $ | 13,315 | $ | 9,288 | $ | 4,256 | $ | 107,441 | |||||||
Long-lived assets: |
|||||||||||||||||||||
January 1, 2010 |
$ | 67,198 | $ | 1,018 | $ | 125 | $ | 394 | $ | 4,963 | $ | 187 | $ | 73,885 | |||||||
October 2, 2009 |
$ | 66,890 | $ | 1,056 | $ | 150 | $ | 430 | $ | 5,024 | $ | 224 | $ | 73,774 |
Note 17. Income Taxes
Our effective tax rate is based on our expectation of annual earnings from operations in the U.S. and other tax jurisdictions throughout the world.
We recorded an income tax provision of $4.6 million for the fiscal three months ended January 1, 2010. Our income tax rate was 22% for the first three months of fiscal year 2010, which includes discrete charges. Discrete charges for the first three months of fiscal year 2010 were $0.5 million and primarily relate to interest accrued on uncertain tax positions and secondarily to foreign tax return adjustments. The discrete income tax expense related to these items in the first three months of fiscal year 2010 increased the tax rate by approximately 3%. The tax rate for the three months ended January 1, 2010 differed from the statutory tax rate of 35% primarily due to income earned in low tax jurisdictions. For the fiscal three months ended January 2, 2009, our income tax expense was $5 thousand. Our income tax rate was (0.04%) which included discrete charges of $0.4 million related to interest accrual and other discrete items. The discrete income tax expense related to these items in the first three months of fiscal year 2009 reduced the effective tax rate by approximately 4%.
The net increase in the reserve for unrecognized tax benefits during the first three months of fiscal year 2010 was $3.0 million for positions taken in the current year. As of January 1, 2010, the total amount of unrecognized tax benefits was $58.1 million, of which $56.0 million would impact the effective tax rate, if recognized. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets, relating to state tax credits which are fully offset by a valuation allowance. As of January 1, 2010, the total amount of accrued interest and penalties related to uncertain tax positions was $4.5 million. We will reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period. We include interest and penalties related to unrecognized tax benefits within our provision for income taxes.
We and our subsidiaries are subject to examination by federal, state and foreign tax authorities. The statute of limitations for our tax filings with federal, state and foreign tax authorities is generally open for fiscal years 2003 through the present. The Internal Revenue Service, or IRS, commenced an examination of fiscal year 2007 in December of 2008. The IRS completed examinations of certain refund claims filed for fiscal years 2002 to 2004 and we filed a protest of the refund claim audit findings with the Appeals Office of the IRS. The IRS audit of fiscal year 2007 is continuing. It is unknown whether agreement on the refund claims or resolution of the IRS audit of fiscal year 2007 will be reached within the next twelve months. The favorable resolution of the claims filed with the Appeals Office could result in a benefit to the tax provision of up to $5.8 million, excluding interest. Based on the status of the IRS audit, it is not possible to estimate the impact of the amount of any changes to our previously recorded uncertain tax positions. It is possible that up to $4.2 million of unrecognized tax positions, excluding interest and penalties, may be recognized within one year as the result of the lapse of statutes of limitations.
Note 18. Recent Accounting Pronouncements
In October 2009, the FASB issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are evaluating the effect these new standards will have on our consolidated financial statements.
16
Table of Contents
In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are evaluating the effect these new standards will have on our consolidated financial statements.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Form 10-Q contains certain forward-looking statements. For purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, any statements using the terms "believes," "anticipates, "expects," "plans" or similar expressions are forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. There are a number of important factors that could cause Varian Semiconductor Equipment Associates, Inc.s (Varian Semiconductor, the Company, we, our, or us) actual results to differ materially from those indicated by forward-looking statements made in this report and presented by management from time to time. Some of the important risks and uncertainties that may cause our financial results to differ are described under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended October 2, 2009, filed with the Securities and Exchange Commission, or SEC, on November 24, 2009.
The following information should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in "Item 1. Consolidated Financial Statements" of this quarterly report and the audited consolidated financial statements and notes thereto and the section titled "Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended October 2, 2009, filed with the SEC on November 24, 2009.
Overview
We are the leading supplier of ion implantation equipment used in the fabrication of semiconductor chips. We design, manufacture, market and service semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. The VIISta ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. We have shipped more than 4,000 systems worldwide.
We provide support, training, and after-market products and services that help our customers obtain high utilization and productivity, reduce operating costs and extend capital productivity of investments through multiple product generations. In fiscal year 2009, we were ranked number one in customer satisfaction in VLSI Research Inc.s customer survey for all large suppliers of wafer processing equipment, an honor received in twelve of the past thirteen years.
Our industry is cyclical. The business depends upon semiconductor manufacturers expectations and resulting capacity investments for future integrated circuit demand. Historically, our business has experienced significant volatility and we believe the semiconductor capital equipment business will continue to be volatile, largely due to fluctuations in the level of investment by logic, foundry and memory manufacturers. Our revenue has historically been derived from a limited number of customers, some of which require financing to continue upgrade and/or expansion plans that require the purchase of our tools. In fiscal year 2009, our business was adversely effected by the global economic downturn. Also, our after-market business was adversely affected as fabs ran at lower utilization levels, which required fewer parts, upgrades and services. Revenue increased by approximately 31% from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010, due to an improvement in end-user demand for semiconductor devices.
We believe that our management team has the industry experience to quickly and effectively react to sizing adjustments required by the volatility in the market. At this time, we are adding capacity to satisfy the increase in demand for our equipment. We will continue to closely monitor the industry, and make further capacity adjustments to our business as necessary.
We believe that we have the financial strength and liquidity to continue investing in product development such that we can continue to maintain our leading industry position. As of January 1, 2010, we had $378.9 million in cash and investments and approximately $2.1 million in debt. Furthermore, we generated approximately $50.5 million in cash from operations during the first three months of fiscal year 2010.
17
Table of Contents
Our business is tied closely to our market share and the total available market for ion implanters. Calendar year 2008 semiconductor capital expenditure reports show that the total available market for ion implanters decreased by approximately 40% versus calendar year 2007.
Wafer size and market. Most advanced devices below 90nm are produced on 300mm wafers. Memory manufacturers typically produce integrated circuits used for flash and dynamic random access memory, or DRAM, which store and retrieve information, while logic manufacturers typically produce integrated circuits used to process data. Foundry manufacturers have the capability to produce both memory and logic wafers.
Market Share and Total Available Market. The table below shows our calendar year 2008 and 2007 market share, as reported by Gartner Dataquest in April 2009 and April 2008, respectively. Market share estimates are calculated on a subset of revenue, and information reported by Gartner Dataquest may not be consistent on a company by company basis. The table below also shows the total available market for ion implanter sales in calendar years 2008 and 2007, also reported by Gartner Dataquest in April 2009 and April 2008, respectively. The total available market represents estimated worldwide total revenue for ion implanters sold during each calendar year.
Market Share Calendar Year Ended |
Total Available Market Calendar Year Ended | |||||||||||
December 31, 2008 |
December 31, 2007 |
December 31, 2008 |
December 31, 2007 | |||||||||
(Amounts in millions) | ||||||||||||
By market |
||||||||||||
Medium current |
41.5 | % | 56.6 | % | $ | 281 | $ | 454 | ||||
High current |
78.1 | % | 77.8 | % | 371 | 672 | ||||||
High energy |
22.8 | % | 12.8 | % | 79 | 147 | ||||||
Ultra high dose |
100.0 | % | 100.0 | % | 67 | 64 | ||||||
Overall |
61.5 | % | 64.5 | % | $ | 798 | $ | 1,337 | ||||
Market share and total available market research data is also published by VLSI Research Inc. In May 2009, VLSI Research Inc. reported that our overall market share was 65% and that the total available market was $757.8 million for calendar year 2008. Calendar year 2009 market share reports are expected to be released in April 2010.
We estimate our market share on a regular basis. We do so based on extensive information, including our own revenues, competitor orders and other key information such as tool move-ins at the fabs. Our market share estimates are usually closely aligned with those of Gartner Dataquest. Revenue recognition disparities do not normally cause significant swings in calculations of market share. However, we believe the significant decline in semiconductor capital equipment business in 2008 caused revenue recognition delays from 2007 shipments to distort 2008 market share metrics. Our information indicates that based on a competitor's delayed revenue recognition, a significant portion of their medium current tool shipments in 2007 was not recognized as revenue until 2008. As such, we believe our 2008 medium current market share, if normalized for these shipments, would be approximately flat from 2007 and our overall 2008 market share would be several percentage points higher than our overall 2007 market share. Since 2007 we have not lost a medium current customer. Our high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes (65nm and below). We began developing single wafer high current tools in 1994 and are currently the industry leader. The increase in high energy market share is primarily related to customer mix in the total available market for high energy tools. Our position in the ultra high-dose market has resulted from the success of our new plasma doping tool, known as the VIISta PLAD, which is currently used by memory manufacturers.
Critical Accounting Policies and Significant Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles, or GAAP, in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, we evaluate our estimates, including those related to revenues, inventories, accounts receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies. We continue to have the same critical accounting policies and estimates as are described in Item 7 in the Annual Report on Form 10-K for the fiscal year
18
Table of Contents
ended October 2, 2009, filed with the SEC on November 24, 2009. We operate in a highly cyclical and competitive industry that is influenced by a variety of diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and geographic and macroeconomic trends. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors discussed in Item 1A - Risk Factors in our 2009 Annual Report on Form 10-K filed with the SEC on November 24, 2009.
Results of Operations
Revenue
The following table sets forth revenue by category for the three month periods ended January 1, 2010 and January 2, 2009:
Fiscal Three Months Ended | |||||||||||||
January 1, 2010 |
January 2, 2009 |
Change | Percent Change |
||||||||||
(Amounts in thousands) | |||||||||||||
Revenue |
|||||||||||||
Product |
$ | 127,461 | $ | 92,028 | $ | 35,433 | 39 | % | |||||
Service |
13,807 | 15,413 | (1,606 | ) | -10 | % | |||||||
Revenue |
$ | 141,268 | $ | 107,441 | $ | 33,827 | 31 | % | |||||
Revenue by territory |
|||||||||||||
Asia Pacific |
$ | 107,000 | $ | 55,292 | $ | 51,708 | 94 | % | |||||
North America |
24,918 | 39,916 | (14,998 | ) | -38 | % | |||||||
Europe |
9,350 | 12,233 | (2,883 | ) | -24 | % | |||||||
Revenue |
$ | 141,268 | $ | 107,441 | $ | 33,827 | 31 | % | |||||
Product
During the first quarter of fiscal year 2010, product revenue was $127.5 million, compared to $92.0 million for the same period a year ago. Overcapacity in the memory market, along with the global credit crisis and the decline in end-user demand for semiconductors, caused our customers to significantly decrease their spending for our products in the first quarter of fiscal year 2009. On a unit basis, the number of tools recorded in revenue increased 38% for the first quarter of fiscal year 2010, compared to the first quarter of fiscal year 2009. This increase was most notable in the medium current market. In addition, revenue from parts and upgrades sales during the first quarter of fiscal year 2010 increased 50%, compared to the same period a year ago due to higher utilization levels at most of our foundry and memory customers.
Service
Service revenue during the first quarter of fiscal year 2010 was $13.8 million, compared to $15.4 million for the same period a year ago. This decrease is primarily related to a decrease in service contract revenue. During fiscal year 2009, many customers cancelled or reduced fixed-priced service contract arrangements, we believe, to reduce fab operating costs during the global economic crisis which had an impact on our service revenue in the first quarter of fiscal year 2010. Some of the decline in contract revenue is offset by additional on-call paid service and parts revenue.
Revenue by Territory
The Asia Pacific region accounts for a significant percentage of our revenues. The increase in revenue from this region for the first quarter of fiscal year 2010 as compared to the same period in fiscal year 2009 is due to increased demand from our foundry customers, who are primarily based in this region. Sales to North American and European customers in the first quarter of fiscal year 2010 decreased compared to the same period in fiscal year 2009 due to decreased demand from logic customers. Overall, the most significant driver of change from the first quarter of fiscal year 2009 to the first quarter of fiscal year 2010 was the increase in foundry business, which we believe was caused by an increase in end-user demand for electronics.
19
Table of Contents
Customers
During the first quarter of fiscal year 2010, revenue from four customers accounted for 32%, 12%, 11% and 10%, respectively, of our total revenue, compared to two customers accounting for 32% and 19% of our total revenue, respectively, during the first quarter of fiscal year 2009. We expect that sales of our products to relatively few customers will continue to account for a high percentage of our revenue in the foreseeable future.
Fluctuations in the timing and mix of product shipments, customer requirements for systems, and the completion of the installation of the product will continue to have a significant impact on the timing and amount of revenue in any given reporting period (see also the factors discussed in Item 1A - Risk Factors in our 2009 Annual Report on Form 10-K filed with the SEC on November 24, 2009).
Shipment Mix
Our tools are used by logic, memory and foundry manufacturers of integrated circuits. Logic manufacturers make chips that process information, while memory manufacturers make chips that store information. Both memory and logic manufacturers are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Virtually all of our tool shipments are 300 mm tools, which began to replace 200 mm tools at the end of the 1990s. The following table sets forth tool shipments by market, as a percent of total tool shipments, for the first quarter of fiscal years 2010 and 2009. Percentages are based on the number of tools shipped during the respective period.
Fiscal Three Months Ended | ||||||
January 1, 2010 |
January 2, 2009 |
|||||
By market |
||||||
Memory |
17 | % | 23 | % | ||
Logic |
16 | % | 65 | % | ||
Foundry |
67 | % | 12 | % | ||
Shipments |
100 | % | 100 | % | ||
Cost of Product Revenue
Cost of product revenue was $63.3 million and gross margin was 50% for the first quarter of fiscal year 2010, compared to cost of product revenue of $58.0 million and gross margin of 37% for the first quarter of fiscal year 2009. A favorable change in the mix of spare parts, upgrades and tool sales had a 7% impact on gross margin in the first quarter of fiscal year 2010. Improved factory absorption resulting from an increased level of business affected gross margin by 3%, or $4.0 million. Additionally, the sudden decline in business in fiscal year 2009 resulted in certain inventory related charges that were not necessary in the first quarter of fiscal year 2010. The absence of these charges had a 2% favorable impact, or $3.0 million, on gross margin in the first quarter of fiscal year 2010, compared to the same period a year ago.
Cost of Service Revenue
Cost of service revenue was $9.3 million and gross margin was 33% for the first quarter of fiscal year 2010, compared to cost of service revenue of $9.5 million and gross margin of 38% for the first quarter of fiscal year 2009. Cost of service revenue primarily consists of service contract costs. Thus, fluctuations in service margins are mainly attributed to the change in service contract margins, which are influenced by contract type and regional mix. The reduction in service contract margins is due to a lower mix of higher-margin contracts.
Research, Development and Engineering
Research, development and engineering expense was $21.7 million for the first quarter of fiscal year 2010, compared to $22.1 million for the first quarter of fiscal year 2009. Although we have reduced our discretionary spending in response to the industry downturn, we continue to maintain our investments in new product development and growth initiatives.
Marketing, General and Administrative
Marketing, general and administrative expense was $26.1 million for the first quarter of fiscal year 2010, compared to $26.8 million for the first quarter of fiscal year 2009. The decrease was primarily due to lower levels of tool evaluation activity, partially offset by an increase in the cost of variable compensation plans that were suspended in fiscal year 2009 and reinstated in the first quarter of fiscal year 2010.
20
Table of Contents
Restructuring Costs
The semiconductor industry has historically experienced periodic downturns and in response, we have historically recorded restructuring charges in connection with cost reduction initiatives implemented in response to the industry downturns. Restructuring charges typically consist of severance, benefits and outplacement services offered to terminated employees and sometimes include charges for remaining lease payments on facilities that are closed. Prior to any restructuring announcements, the restructuring is approved by the appropriate level of management necessary to commit to the specific actions of the reduction in force.
We began relocating the European operations in Houten, the Netherlands to Schaffhausen, Switzerland, in the fiscal fourth quarter of 2008. The restructuring charge is comprised primarily of one-time termination benefits, and contract termination expense related to a facility lease. European restructuring activity, which is estimated to cost $2.5 million in total, is now significantly complete. The recognized cost of the European restructuring activity from the date of its commencement to January 1, 2010 is $2.5 million.
The following table summarizes the restructuring activity for the first three months of fiscal year 2009.
Ongoing Benefit Arrangements |
One-time Termination Benefits |
Contract Termination Costs |
Other Associated Costs |
Total | |||||||||||||||
(Amounts in thousands) | |||||||||||||||||||
Accrued charges at October 3, 2008 |
$ | 184 | $ | 324 | $ | | $ | 75 | $ | 583 | |||||||||
Costs incurred |
4,393 | 1,053 | 438 | 365 | 6,249 | ||||||||||||||
Costs paid |
(3,935 | ) | (663 | ) | | (72 | ) | (4,670 | ) | ||||||||||
Non-cash settlements |
| | | (68 | ) | (68 | ) | ||||||||||||
Accrued charges at January 2, 2009 |
$ | 642 | $ | 714 | $ | 438 | $ | 300 | $ | 2,094 | |||||||||
Cash outlays related to one-time termination benefits and contract termination costs to exit the Houten facility will continue through fiscal years 2010 and 2014, respectively.
Interest Income and Interest Expense
During the first quarter of fiscal year 2010, we earned $0.9 million in net interest income, compared to $1.7 million for the same period of fiscal year 2009. The decrease in net interest income for the first quarter of fiscal year 2010 was primarily due to a decrease in interest rates as a result of global economic conditions.
Other Expense, Net
Other expense, net was $0.5 million and $0.1 million for the first quarter of fiscal years 2010 and 2009, respectively. The increase in expense is primarily related to foreign currency exchange losses.
Provision for Income Taxes
Our effective tax rate is based on our expectation of annual earnings from operations in the U.S. and other tax jurisdictions throughout the world.
We recorded an income tax provision of $4.6 million for the fiscal three months ended January 1, 2010. Our income tax rate was 22% for the first three months of fiscal year 2010, which includes discrete charges. Discrete charges for the first three months of fiscal year 2010 were $0.5 million and primarily relate to interest accrued on uncertain tax positions and secondarily to foreign tax return adjustments. The discrete income tax expense related to these items in the first three months of fiscal year 2010 increased the tax rate by approximately 3%. The tax rate for the three months ended January 1, 2010 differed from the statutory tax rate of 35% primarily due to income earned in low tax jurisdictions. For the fiscal three months ended January 2, 2009, our income tax expense was $5 thousand. Our income tax rate was (0.04%) which included discrete charges of $0.4 million related to interest accrual and other discrete items. The discrete income tax expense related to these items in the first three months of fiscal year 2009 reduced the effective tax rate by approximately 4%.
The net increase in the reserve for unrecognized tax benefits during the first three months of fiscal year 2010 was $3.0 million for positions taken in the current year. As of January 1, 2010, the total amount of unrecognized tax benefits was $58.1 million, of which $56.0 million would impact the effective tax rate, if recognized. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective rate consists of items that are offset by deferred tax assets, relating to state tax credits which are fully offset by a valuation allowance. As of January 1, 2010, the total amount of accrued interest and penalties related to uncertain tax positions was $4.5 million. We will reexamine the tax provision and the effect of estimated unrecognized tax benefits on our financial position at the end of each reporting period. We include interest and penalties related to unrecognized tax benefits within our provision for income taxes.
21
Table of Contents
We and our subsidiaries are subject to examination by federal, state and foreign tax authorities. The statute of limitations for our tax filings with federal, state and foreign tax authorities is generally open for fiscal years 2003 through the present. The Internal Revenue Service, or IRS, commenced an examination of fiscal year 2007 in December of 2008. The IRS completed examinations of certain refund claims filed for fiscal years 2002 to 2004 and we filed a protest of the refund claim audit findings with the Appeals Office of the IRS. The IRS audit of fiscal year 2007 is continuing. It is unknown whether agreement on the refund claims or resolution of the IRS audit of fiscal year 2007 will be reached within the next twelve months. The favorable resolution of the claims filed with the Appeals Office could result in a benefit to the tax provision of up to $5.8 million, excluding interest. Based on the status of the IRS audit, it is not possible to estimate the impact of the amount of any changes to our previously recorded uncertain tax positions. It is possible that up to $4.2 million of unrecognized tax positions, excluding interest and penalties, may be recognized within one year as the result of the lapse of statutes of limitations.
Net Income (Loss)
As a result of the foregoing factors, in the first quarter of fiscal year 2010, we recorded net income of $16.6 million compared to net loss of $13.6 million for the same period of fiscal year 2009. Net income per diluted share was $0.22 for the first quarter of fiscal year 2010, compared to net loss per diluted share of $0.19 for the first quarter of fiscal year 2009.
Liquidity and Capital Resources
We generated $50.5 million of cash from operations during the first three months of fiscal year 2010, compared to $8.6 million of cash generated from operations during the first three months of fiscal year 2009. Cash generated by operations in the first three months of fiscal year 2010 was primarily a result of a reduction in accounts receivables of $22.2 million, net income of $16.6 million and an increase in accrued expenses of $7.8 million; partially offset by an increase of inventory of $11.0 million. The decrease in accounts receivable is related to the timing of shipments and payments from customers, including the receipt of payments from customers for whom certain extended terms had been granted in previous quarters. The increase in inventory is due to an increase in demand for systems. The increase in accrued expenses is primarily due to the reinstatement of variable compensation plans, which were suspended in fiscal year 2009 due to the economic downturn. Cash generated by operations in the first three months of fiscal year 2009 was primarily a result of reductions in inventory of $20.6 million and accounts receivables of $8.9 million; partially offset by a net loss of $13.6 million, decreases of $7.3 million in accounts payable, primarily driven by lower payments for materials for the lower tool build plan, and $7.2 million in accrued expenses.
We used $21.5 million in investing activities during the first three months of fiscal year 2010, compared to $22.1 million generated in the first three months of fiscal year 2009. In the first three months of fiscal year 2010, we used $35.0 million in the purchase of investments and $2.9 million in the purchase of property, plant and equipment; offset by proceeds from maturities and sales of investments of $16.4 million. An increase in cash generated by operations contributed to the increased purchase of investments during the first quarter of fiscal year 2010. In the first three months of fiscal year 2009, we received proceeds from maturities of investments of $25.7 million, partially offset by $2.3 million used for the purchase of investments and $2.4 million used for the purchase of property, plant and equipment during the same period.
During the first three months of fiscal year 2010, we generated $8.7 million of cash from financing activities, primarily due to $7.5 million of cash received from the issuance of common stock upon the exercise of stock options. During the first three months of fiscal year 2009, we generated $2.3 million of cash from financing activities, primarily from $2.4 million of cash received from the issuance of common stock upon the exercise of stock options.
In October 2004, our Board of Directors authorized the repurchase of up to $100.0 million of our common stock on the open market, subject to the discretion of management. Subsequently, the Board of Directors voted on increases to the amount of funds that may be expended in repurchasing our common stock to a total of $800.0 million. The program does not have a fixed expiration date. As of January 1, 2010, $85.6 million remained available for repurchases under the existing repurchase authorization. Our stock repurchase plan is influenced by our growth and investment plans, stage in the industry cycle, attractiveness of share price, and liquidity needs.
Our liquidity is affected by many factors, some based on the normal operations of the business and others related to the uncertainties of the industry and global economies. We believe that cash, cash equivalents and investments of $378.9 million at January 1, 2010 will be sufficient to satisfy working capital requirements, commitments for capital expenditures and other purchase commitments, environmental contingencies and cash requirements through at least the next twelve months.
22
Table of Contents
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations
Under GAAP, some obligations and commitments are not required to be included in the consolidated balance sheets and statements of operations. These obligations and commitments, while entered into in the normal course of business, may have a material impact on liquidity. We have various contractual obligations impacting our liquidity. The following table summarizes our future payments under contractual obligations at January 1, 2010:
Payment Due by Period | ||||||||||||||||||
Total | Less Than 1 Year |
1-3 Years | 3-5 Years | More Than 5 Years |
Other | |||||||||||||
(Amounts in thousands) | ||||||||||||||||||
Long-term debt and interest expense |
$ | 2,355 | $ | 785 | $ | 1,570 | $ | | $ | | $ | | ||||||
Operating lease obligations |
4,159 | 2,162 | 1,683 | 314 | | | ||||||||||||
Purchase obligations (a) |
70,460 | 70,305 | 155 | | | | ||||||||||||
Non-current income tax payable (b) |
50,244 | | | | | 50,244 | ||||||||||||
Other long-term liabilities (c) |
20,976 | | 3,052 | 683 | 2,641 | 14,600 | ||||||||||||
Total contractual cash obligations |
$ | 148,194 | $ | 73,252 | $ | 6,460 | $ | 997 | $ | 2,641 | $ | 64,844 | ||||||
(a) | Purchase obligations represent agreements to purchase materials or other goods and capital expenditures for the construction or purchase of property, plant and equipment. |
(b) | Represents the non-current tax payable obligation pursuant to the authoritative guidance for accounting for uncertainty in income taxes. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes and therefore included this amount in the Other column. |
(c) | Included in other long-term liabilities are liabilities for post-employment and post-retirement benefits, deferred compensation, warranty provision, environmental reserve and other obligations. For certain long-term obligations we are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations and therefore we include these amounts in the Other column. |
Transactions with Affiliates and Related Parties
Operations prior to April 2, 1999 had been part of the former Varian Associates, Inc., or VAI, now known as Varian Medical Systems, Inc., or VMS (See Note 14. Commitments, Contingencies and Guarantees in the accompanying notes to the unaudited interim consolidated financial statements). During the first three month periods of fiscal years 2010 and 2009, we were charged $0.3 million and $0.2 million, respectively, by VMS in settlement of these obligations.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board, or FASB, issued new standards for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are evaluating the effect these new standards will have on our consolidated financial statements.
In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are effective for us beginning in the first quarter of fiscal year 2011, however early adoption is permitted. We are evaluating the effect these new standards will have on our consolidated financial statements.
23
Table of Contents
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Foreign Currency Exchange Risk
As a multinational company, we face exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as our business practices evolve and could impact our financial results. We use derivative instruments to protect our foreign operations from fluctuations in earnings and cash flows caused by volatility in currency exchange rates. We hedge our current exposures and a portion of our anticipated foreign currency exposures with foreign currency forward contracts having terms of up to twelve months.
We have established balance sheet and forecasted transaction currency risk management programs to protect against fluctuations in fair value and the volatility of future cash flows caused by changes in the exchange rates. These programs reduce, but do not always entirely eliminate, the impact of currency exchange movements. Historically, our primary exposures have resulted from non-U.S. dollar denominated sales and purchases in Asia Pacific and Europe. We do not use derivative instruments for trading or speculative purposes.
The table below presents the notional amounts (at the contract exchange rates), the weighted-average contractual foreign currency exchange rates and the estimated fair value of our contracts outstanding as of January 1, 2010 and October 2, 2009.
January 1, 2010 | October 2, 2009 | |||||||||||||||||
Notional Value |
Contract Rate |
Estimated Fair Value - Gain (Loss) |
Notional Value |
Contract Rate |
Estimated Fair Value - Gain (Loss) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||||
Foreign currency purchase contracts: |
||||||||||||||||||
Singapore Dollar |
$ | 1,505 | 1.38 | $ | (27 | ) | $ | 1,460 | 1.43 | $ | 24 | |||||||
Korean Won |
1,291 | 1,162.76 | (3 | ) | 6,289 | 1,182.13 | 15 | |||||||||||
Euro |
897 | 1.51 | (45 | ) | 1,143 | 1.43 | 23 | |||||||||||
Total foreign currency purchase contracts |
$ | 3,693 | $ | (75 | ) | $ | 8,892 | $ | 62 | |||||||||
Foreign currency sell contracts: |
||||||||||||||||||
Japanese Yen |
$ | 17,537 | 88.97 | $ | 678 | $ | 17,946 | 92.00 | $ | (445 | ) | |||||||
Korean Won |
16,037 | 1,150.00 | 217 | 13,318 | 1,250.50 | (806 | ) | |||||||||||
Israeli Shekel |
1,009 | 3.78 | 5 | 1,053 | 3.80 | (7 | ) | |||||||||||
New Taiwan Dollar |
764 | 32.40 | (4 | ) | 640 | 32.70 | (11 | ) | ||||||||||
Total foreign currency sell contracts |
$ | 35,347 | $ | 896 | $ | 32,957 | $ | (1,269 | ) | |||||||||
Total contracts |
$ | 39,040 | $ | 821 | $ | 41,849 | $ | (1,207 | ) | |||||||||
Interest Rate Risk
Although payments under certain of our overseas borrowing facilities are tied to market indices, we are not exposed to material interest rate risk from these borrowing facilities. We have no material cash flow exposure due to rate changes for cash equivalents and short-term investments. We do not believe that a 10% change in interest rates would have a material impact on the fair value of our investment portfolio or our interest income. We maintain cash investments primarily in U.S. Treasury, government agency and investment-grade corporate and municipal securities, as well as short-term time deposits with investment grade financial institutions. Cash equivalents at January 1, 2010 and October 2, 2009 were $189.8 million and $164.5 million, respectively. At January 1, 2010 and October 2, 2009, our short-term investments were $45.7 million and $44.0 million, respectively, and consisted primarily of corporate bonds and government agency and U.S. Treasury securities with ratings of AA or better. At January 1, 2010 and October 2, 2009, our long-term investments were $103.2 million and $86.4 million, respectively, and consisted primarily of U.S. Treasury, government agency, and corporate bonds with ratings of AA or better.
24
Table of Contents
Commodity Price Risk
We are not exposed to material commodity price risk.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The management of Varian Semiconductor, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures of Varian Semiconductor as of January 1, 2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of Varian Semiconductors disclosure controls and procedures as of January 1, 2010, the Chief Executive Officer and Chief Financial Officer concluded that, as of such date, Varian Semiconductors disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
No change in Varian Semiconductors internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 1, 2010 that has materially affected, or is reasonably likely to materially affect, Varian Semiconductors internal control over financial reporting.
25
Table of Contents
PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
Information required by this Item is provided in Note 14. Commitments, Contingencies and Guarantees to the unaudited interim consolidated financial statements under Part I, Item 1 and is incorporated herein by reference.
ITEM 1A. | Risk Factors |
Our business is subject to a number of risks, including those identified in Item 1A. Risk Factors of our 2009 Annual Report on Form 10-K, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of January 1, 2010, there have been no material changes to the risk factors disclosed in our most recent Annual Report on Form 10-K, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
ITEM 5. | OTHER INFORMATION |
Not applicable.
26
Table of Contents
ITEM 6. | EXHIBITS |
10.1 | Form of Restricted Stock Units Agreement is incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on December 10, 2009. | |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
27
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
Registrant
By: | /S/ ROBERT J. HALLIDAY | |
Robert J. Halliday | ||
Executive Vice President, Chief Financial Officer and Treasurer | ||
(Principal Financial Officer and Duly Authorized Officer) |
Date: February 8, 2010
28