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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 29, 2006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-25393
VARIAN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 77-0501995 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
3120 Hansen Way, Palo Alto, California | 94304-1030 | |
(Address of Principal Executive Offices) | (Zip Code) |
(650) 213-8000
(Telephone Number)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of shares of the registrant’s common stock outstanding as of February 1, 2007 was 30,556,587.
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VARIAN, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2006
Page | ||||
PART I | Financial Information | |||
Item 1. | ||||
3 | ||||
4 | ||||
5 | ||||
Notes to the Unaudited Condensed Consolidated Financial Statements | 6 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||
Item 3. | 26 | |||
Item 4. | 27 | |||
PART II | ||||
Item 1A. | 29 | |||
Item 2. | 29 | |||
Item 6. | 29 |
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FINANCIAL INFORMATION
Item 1. | Financial Statements |
VARIAN, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(In thousands, except per share amounts)
Fiscal Quarter Ended | ||||||||
December 29, 2006 | December 30, 2005 | |||||||
Sales | ||||||||
Products | $ | 189,143 | $ | 168,539 | ||||
Services | 28,795 | 27,198 | ||||||
Total sales | 217,938 | 195,737 | ||||||
Cost of sales | ||||||||
Products | 102,020 | 95,231 | ||||||
Services | 16,219 | 14,585 | ||||||
Total cost of sales | 118,239 | 109,816 | ||||||
Gross profit | 99,699 | 85,921 | ||||||
Operating expenses | ||||||||
Selling, general and administrative | 61,201 | 56,576 | ||||||
Research and development | 15,610 | 13,939 | ||||||
Purchased in-process research and development | — | 756 | ||||||
Total operating expenses | 76,811 | 71,271 | ||||||
Operating earnings | 22,888 | 14,650 | ||||||
Interest income (expense) | ||||||||
Interest income | 1,269 | 1,095 | ||||||
Interest expense | (534 | ) | (537 | ) | ||||
Total interest income, net | 735 | 558 | ||||||
Earnings before income taxes | 23,623 | 15,208 | ||||||
Income tax expense | 8,268 | 5,549 | ||||||
Net earnings | $ | 15,355 | $ | 9,659 | ||||
Net earnings per share: | ||||||||
Basic | $ | 0.50 | $ | 0.31 | ||||
Diluted | $ | 0.49 | $ | 0.30 | ||||
Shares used in per share calculations: | ||||||||
Basic | 30,601 | 31,112 | ||||||
Diluted | 31,058 | 31,713 | ||||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except par value amounts)
December 29, 2006 | September 29, 2006 | |||||
ASSETS | ||||||
Current assets | ||||||
Cash and cash equivalents | $ | 141,303 | $ | 154,155 | ||
Accounts receivable, net | 170,411 | 177,037 | ||||
Inventories | 141,936 | 133,662 | ||||
Deferred taxes | 33,383 | 33,235 | ||||
Prepaid expense and other current assets | 17,194 | 15,728 | ||||
Total current assets | 504,227 | 513,817 | ||||
Property, plant and equipment, net | 111,089 | 112,528 | ||||
Goodwill | 187,772 | 181,563 | ||||
Intangible assets, net | 36,864 | 39,143 | ||||
Other assets | 15,443 | 14,543 | ||||
Total assets | $ | 855,395 | $ | 861,594 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Current portion of long-term debt | $ | 1,250 | $ | 2,500 | ||
Accounts payable | 74,157 | 73,138 | ||||
Deferred profit | 13,715 | 13,796 | ||||
Accrued liabilities | 166,636 | 169,063 | ||||
Total current liabilities | 255,758 | 258,497 | ||||
Long-term debt | 25,000 | 25,000 | ||||
Deferred taxes | 3,773 | 3,721 | ||||
Other liabilities | 19,358 | 22,336 | ||||
Total liabilities | 303,889 | 309,554 | ||||
Commitments and contingencies (Notes 5, 7, 8, 9, 10 and 11) | ||||||
Stockholders’ equity | ||||||
Preferred stock—par value $0.01, authorized—1,000 shares; issued—none | — | — | ||||
Common stock—par value $0.01, authorized—99,000 shares; issued and outstanding—30,227 shares at December 29, 2006 and 30,870 shares at September 29, 2006 | 316,892 | 319,090 | ||||
Retained earnings | 191,080 | 204,182 | ||||
Accumulated other comprehensive income | 43,534 | 28,768 | ||||
Total stockholders’ equity | 551,506 | 552,040 | ||||
Total liabilities and stockholders’ equity | $ | 855,395 | $ | 861,594 | ||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal Quarter Ended | ||||||||
December 29, 2006 | December 30, 2005 | |||||||
Cash flows from operating activities | ||||||||
Net earnings | $ | 15,355 | $ | 9,659 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 6,793 | 6,344 | ||||||
(Gain) loss on disposition of property, plant and equipment | (34 | ) | 89 | |||||
Purchased in-process research and development | — | 756 | ||||||
Share-based compensation expense | 2,845 | 1,969 | ||||||
Tax benefit from share-based plans | 1,205 | 1,856 | ||||||
Excess tax benefit from share-based plans | (1,173 | ) | (1,799 | ) | ||||
Deferred taxes | (829 | ) | (645 | ) | ||||
Changes in assets and liabilities, excluding effects of acquisitions: | ||||||||
Accounts receivable, net | 10,068 | 11,497 | ||||||
Inventories | (5,663 | ) | (3,628 | ) | ||||
Prepaid expenses and other current assets | (1,084 | ) | 1,804 | |||||
Other assets | 286 | (27 | ) | |||||
Accounts payable | (337 | ) | 3,849 | |||||
Deferred profit | (125 | ) | 1,431 | |||||
Accrued liabilities | (4,467 | ) | (13,412 | ) | ||||
Other liabilities | (448 | ) | 1,047 | |||||
Net cash provided by operating activities | 22,392 | 20,790 | ||||||
Cash flows from investing activities | ||||||||
Proceeds from sale of property, plant and equipment | 119 | 463 | ||||||
Purchase of property, plant and equipment | (2,054 | ) | (4,074 | ) | ||||
Purchase of businesses, net of cash acquired | (3,000 | ) | (51,304 | ) | ||||
Net cash used in investing activities | (4,935 | ) | (54,915 | ) | ||||
Cash flows from financing activities | ||||||||
Repayment of debt | (1,250 | ) | (1,250 | ) | ||||
Repurchase of common stock | (37,055 | ) | (15,262 | ) | ||||
Issuance of common stock | 2,353 | 8,976 | ||||||
Excess tax benefit from share-based plans | 1,173 | 1,799 | ||||||
Transfers to Varian Medical Systems, Inc. | (207 | ) | (131 | ) | ||||
Net cash used in financing activities | (34,986 | ) | (5,868 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 4,677 | (1,812 | ) | |||||
Net decrease in cash and cash equivalents | (12,852 | ) | (41,805 | ) | ||||
Cash and cash equivalents at beginning of period | 154,155 | 188,494 | ||||||
Cash and cash equivalents at end of period | $ | 141,303 | $ | 146,689 | ||||
See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Interim Condensed Consolidated Financial Statements
These unaudited interim condensed consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The September 29, 2006 balance sheet data was derived from audited financial statements, but does not include all disclosures required in audited financial statements by U.S. GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 29, 2006 filed with the SEC. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter ended December 29, 2006 are not necessarily indicative of the results to be expected for a full year or for any other periods.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Note 2. Description of Business and Basis of Presentation
The Company designs, develops, manufactures, markets, sells and services scientific instruments (including related software, consumable products, accessories and services) and vacuum products (and related accessories and services). These businesses primarily serve life science, industrial, academic and research customers.
Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian Associates, Inc. (“VAI”). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company and one share of common stock of Varian Semiconductor Equipment Associates, Inc. (“VSEA”), which was formerly operated as the Semiconductor Equipment business of VAI, for each share of VAI (the “Distribution”). VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (“VMS”). Transfers made to VMS under the terms of the Distribution are reflected as financing activities in the Unaudited Condensed Consolidated Statement of Cash Flows.
Note 3. Summary of Significant Accounting Policies
Fiscal Periods. The Company’s fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2007 will comprise the 52-week period ending September 28, 2007, and fiscal year 2006 was comprised of the 52-week period ended September 29, 2006. The fiscal quarters ended December 29, 2006 and December 30, 2005 each comprised 13 weeks.
Intangible Assets. In order to conform to the current-year presentation, cost of sales for the fiscal quarter ended December 30, 2005 have been revised to include amortization expense relating to certain acquisition-related intangible assets (acquired patents and core technology and existing technology) that had previously been included in selling, general and administrative expenses. Amortization expense relating to these intangible assets was $1.3 million and $1.0 million in the fiscal quarters ended December 29, 2006 and December 30, 2005, respectively.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue and Cost of Sales. In order to conform to the current year presentation, product revenue for the fiscal quarter ended December 30, 2005 has been revised to include $4.8 million that was previously recorded as service revenue. Similarly, product cost of sales for the fiscal quarter ended December 30, 2005 has been revised to include $4.6 million that was previously recorded as service cost of sales. These revisions had no impact on total revenue or total cost of sales for the fiscal quarter ended December 30, 2005.
Comprehensive Income. A summary of the components of the Company’s comprehensive income follows:
Fiscal Quarter Ended | |||||||
December 29, 2006 | December 30, 2005 | ||||||
(in thousands) | |||||||
Net earnings | $ | 15,355 | $ | 9,659 | |||
Other comprehensive income (loss): | |||||||
Currency translation adjustment | 14,766 | (7,306 | ) | ||||
Total other comprehensive income (loss) | 14,766 | (7,306 | ) | ||||
Total comprehensive income | $ | 30,121 | $ | 2,353 | |||
Note 4. Balance Sheet Detail
December 29, 2006 | September 29, 2006 | |||||
(In thousands) | ||||||
Inventories | ||||||
Raw materials and parts | $ | 67,913 | $ | 60,596 | ||
Work in process | 22,674 | 23,238 | ||||
Finished goods | 51,349 | 49,828 | ||||
$ | 141,936 | $ | 133,662 | |||
Note 5. Forward Exchange Contracts
The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in non-functional currencies. These contracts are accounted for under SFAS 133,Accounting for Derivative Instruments and Hedging Activities. Typically, gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balances being hedged. During the fiscal quarter ended December 29, 2006, net foreign currency losses relating to these arrangements were $0.3 million. During the fiscal quarter ended December 30, 2005, net foreign currency losses relating to these arrangements were $0.1 million. These amounts were recorded in selling, general and administrative expenses.
From time to time, the Company also enters into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under SFAS 133. At December 29, 2006, there were no outstanding foreign exchange forward contracts designated as cash flow hedges of forecasted transactions. During the fiscal quarters ended December 29, 2006 and December 30, 2005, no foreign exchange gains or losses from hedge ineffectiveness were recognized.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 29, 2006 follows:
Notional Sold | Notional Value Purchased | |||||
(in thousands) | �� | |||||
Euro | $ | — | $ | 72,592 | ||
Australian dollar | — | 32,926 | ||||
British pound | 16,592 | — | ||||
Japanese yen | 5,635 | — | ||||
Canadian dollar | 5,343 | — | ||||
Swiss franc | 2,522 | — | ||||
Danish krone | 859 | — | ||||
$ | 30,951 | $ | 105,518 | |||
Note 6. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for each of the Company’s reporting segments in the first quarter of fiscal year 2007 were as follow:
Scientific Instruments | Vacuum Technologies | Total Company | |||||||
(in thousands) | |||||||||
Balance as of September 29, 2006 | $ | 180,597 | $ | 966 | $ | 181,563 | |||
Contingent payments on prior-year acquisitions | 1,779 | — | 1,779 | ||||||
Foreign currency impacts and other adjustments | 4,430 | — | 4,430 | ||||||
Balance as of December 29, 2006 | $ | 186,806 | $ | 966 | $ | 187,772 | |||
The following intangible assets have been recorded and are being amortized by the Company:
December 29, 2006 | ||||||||||
Gross | Accumulated Amortization | Net | ||||||||
(in thousands) | ||||||||||
Intangible assets | ||||||||||
Existing technology | $ | 16,410 | $ | (6,501 | ) | $ | 9,909 | |||
Patents and core technology | 28,877 | (7,551 | ) | 21,326 | ||||||
Trade names and trademarks | 2,451 | (1,561 | ) | 890 | ||||||
Customer lists | 11,523 | (7,727 | ) | 3,796 | ||||||
Other | 2,927 | (1,984 | ) | 943 | ||||||
Total | $ | 62,188 | $ | (25,324 | ) | $ | 36,864 | |||
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 29, 2006 | ||||||||||
Gross | Accumulated Amortization | Net | ||||||||
(in thousands) | ||||||||||
Intangible assets | ||||||||||
Existing technology | $ | 15,054 | $ | (5,726 | ) | $ | 9,328 | |||
Patents and core technology | 29,321 | (6,573 | ) | 22,748 | ||||||
Trade names and trademarks | 2,419 | (1,209 | ) | 1,210 | ||||||
Customer lists | 11,325 | (6,783 | ) | 4,542 | ||||||
Other | 2,823 | (1,508 | ) | 1,315 | ||||||
$ | 60,942 | $ | (21,799 | ) | $ | 39,143 | ||||
Amortization expense relating to intangible assets was $2.3 million and $1.8 million during the fiscal quarters ended December 29, 2006 and December 30, 2005, respectively. At December 29, 2006, estimated amortization expense for the remainder of fiscal year 2007 and for each of the five succeeding fiscal years and thereafter follows:
Estimated Amortization Expense | |||
(in thousands) | |||
Nine months ending September 28, 2007 | $ | 6,102 | |
Fiscal year 2008 | 6,864 | ||
Fiscal year 2009 | 5,919 | ||
Fiscal year 2010 | 5,445 | ||
Fiscal year 2011 | 3,026 | ||
Fiscal year 2012 | 2,330 | ||
Thereafter | 7,178 | ||
Total | $ | 36,864 | |
Note 7. Restructuring Activities
During fiscal years 2005 and 2003, the Company committed to several restructuring plans in order to adjust its organizational structure, improve operational efficiencies and eliminate redundant or excess costs resulting from acquisitions or dispositions during those periods.
The following table sets forth changes in the Company’s restructuring liability relating to the foregoing plans during the first quarter of fiscal year 2007:
Employee- Related | Facilities- Related | Total | ||||||||||
(in thousands) | ||||||||||||
Balance at September 29, 2006 | $ | 233 | $ | 818 | $ | 1,051 | ||||||
Charges | 115 | — | 115 | |||||||||
Cash payments | (166 | ) | (35 | ) | (201 | ) | ||||||
Foreign currency impacts and other adjustments | 10 | — | 10 | |||||||||
Balance at December 29, 2006 | $ | 192 | $ | 783 | $ | 975 | ||||||
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under these restructuring plans, the Company has incurred $15.4 million in restructuring expense and $3.4 million in other related costs which related primarily to employee retention and relocation costs and accelerated depreciation of assets disposed of upon the closure of facilities.
Note 8. Warranty and Indemnification Obligations
Product Warranties. The Company’s products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the related sale is recognized. The amount of liability to be recorded is based on management’s best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. Changes in the Company’s estimated liability for product warranty during the fiscal quarters ended December 29, 2006 and December 30, 2005 follow:
Fiscal Quarter Ended | ||||||||
December 29, 2006 | December 30, 2005 | |||||||
(in thousands) | ||||||||
Beginning balance | $ | 11,042 | $ | 10,723 | ||||
Charges to costs and expenses | 656 | 1,147 | ||||||
Warranty expenditures | (381 | ) | (1,127 | ) | ||||
Ending balance | $ | 11,317 | $ | 10,743 | ||||
Indemnification Obligations. FASB Interpretation No. (“FIN”) 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires a guarantor to recognize a liability for and/or disclose obligations it has undertaken in relation to the issuance of the guarantee. Under this guidance, arrangements involving indemnification clauses are subject to the disclosure requirements of FIN 45 only.
The Company is subject to certain indemnification obligations to VMS (formerly VAI) and VSEA in connection with the Instruments business as conducted by VAI prior to the Distribution (described in Note 2). These indemnification obligations cover a variety of aspects of the Company’s business, including, but not limited to, employee, tax, intellectual property, litigation and environmental matters. Certain of the agreements containing these indemnification obligations are disclosed as exhibits to the Company’s Annual Report on Form 10-K. The estimated fair value of these indemnification obligations is not considered to be material.
The Company is subject to certain indemnification obligations to Jabil in connection with the Company’s sale of its Electronics Manufacturing Business to Jabil. These indemnification obligations cover certain aspects of the Company’s conduct of the Electronics Manufacturing Business prior to its sale to Jabil, including, but not limited to, employee, tax, litigation and environmental matters. The agreement containing these indemnification obligations is disclosed as an exhibit to the Company’s Annual Report on Form 10-K. The estimated fair value of these indemnification obligations is not considered to be material.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s By-Laws require it to indemnify its officers and directors, as well as those who act as directors and officers of other entities at the request of the Company, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to the Company. In addition, the Company has entered into separate indemnity agreements with each director and officer that provide for indemnification of these directors and officers under certain circumstances. The form of these indemnity agreements is disclosed as an exhibit to the Company’s Annual Report on Form 10-K. The indemnification obligations are more fully described in these indemnity agreements and the Company’s By-Laws. The Company purchases insurance to cover claims or a portion of any claims made against its directors and officers. Since a maximum obligation is not explicitly stated in the Company’s By-Laws or these indemnity agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot reasonably be estimated. Historically, the Company has not made payments related to these indemnification obligations and the estimated fair value of these indemnification obligations is not considered to be material.
As is customary in the Company’s industry and as provided for in local law in the U.S. and other jurisdictions, many of the Company’s standard contracts provide remedies to customers and other third parties with whom the Company enters into contracts, such as defense, settlement or payment of judgment for intellectual property claims related to the use of its products. From time to time, the Company also agrees to indemnify customers, suppliers, contractors, lessors, lessees and others with whom it enters into contracts, against loss, expense and/or liability arising from various triggering events related to the sale and the use of the Company’s products and services, the use of their goods and services, the use of facilities and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time, the Company sometimes also agrees to indemnify these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. Claims made under such indemnification obligations have been insignificant and the estimated fair value of these indemnification obligations is not considered to be material.
Note 9. Debt and Credit Facilities
Credit Facilities. As of December 29, 2006, the Company and its subsidiaries had a total of $66.6 million in uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 29, 2006. Of the $66.6 million in uncommitted and unsecured credit facilities, a total of $40.0 million was limited for use by, or in favor of, certain subsidiaries at December 29, 2006, and a total of $18.5 million of this $40.0 million was being utilized in the form of bank guarantees and short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments and deposits made to the Company’s subsidiaries by customers for which separate liabilities were recorded in the consolidated financial statements at December 29, 2006. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.
Long-term Debt. As of December 29, 2006, the Company had $26.3 million in term loans outstanding with a U.S. financial institution, compared to $27.5 million at September 29, 2006. As of both December 29, 2006 and September 29, 2006, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.7% and 6.8% at December 29, 2006 and September 29, 2006, respectively. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in compliance with all restrictive covenants of the term loan agreements at December 29, 2006.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes future principal payments on borrowings under long-term debt outstanding as of December 29, 2006:
Nine Months Ending Sept. 28, 2007 | Fiscal Years | Total | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Long-term debt | $ | 1,250 | $ | 6,250 | $ | — | $ | 6,250 | $ | — | $ | 6,250 | $ | 6,250 | $ | 26,250 | ||||||||
Note 10. Defined Benefit Retirement Plans
Net Periodic Pension Cost. The components of net periodic pension cost relating to the Company’s defined benefit retirement plans follow:
Fiscal Quarter Ended | ||||||||
December 29, 2006 | December 30, 2005 | |||||||
(in thousands) | ||||||||
Service cost | $ | 334 | $ | 329 | ||||
Interest cost | 626 | 527 | ||||||
Expected return on plan assets | (512 | ) | (419 | ) | ||||
Amortization of prior service cost and actuarial gains and losses | 111 | 129 | ||||||
Net periodic pension cost | $ | 559 | $ | 566 | ||||
Employer Contributions. During the fiscal quarter ended December 29, 2006, the Company made contributions totaling $0.3 million to its defined benefit pension plans. The Company currently anticipates contributing an additional $1.0 million to these plans in the remaining nine months of fiscal year 2007.
Note 11. Contingencies
Environmental Matters. The Company’s operations are subject to various federal, state and local laws in the U.S. as well as laws in other countries regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company’s operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect on the Company’s capital expenditures, earnings or competitive position.
The Company and VSEA are each obligated (under the terms of the Distribution described in Note 2) to indemnify VMS for one-third of certain costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs) relating to environmental matters. In that regard, VMS has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at nine sites where VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring and/or remediation activities, in most cases under the direction of, or in consultation with, federal, state and/or local agencies in the U.S. at certain current VMS or former VAI facilities. The Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring and/or remediation costs (after adjusting for any insurance proceeds and taxes).
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 29, 2006, it was nonetheless estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 14 years as of December 29, 2006. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range and the Company therefore had an accrual of $1.3 million as of December 29, 2006.
As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of December 29, 2006, it was estimated that the Company’s share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $3.4 million to $12.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 29, 2006. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any other amount within the range and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $6.2 million at December 29, 2006. The Company therefore had an accrual of $4.2 million as of December 29, 2006, which represents the best estimate of its share of these future environmental- related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.
An insurance company has agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which the Company has an indemnification obligation and the Company therefore has a long-term receivable of $1.0 million (discounted at 4%, net of inflation) in other assets as of December 29, 2006, for the Company’s share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.
The Company believes that its reserves for the foregoing and other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified and related charges against or credits to earnings may be made. Although any ultimate liability arising from environmental-related matters could result in significant expenditures that, if aggregated and assumed to occur within a single fiscal year, would be material to the Company’s financial statements, the likelihood of such occurrence is considered remote. Based on information currently available and its best assessment of the ultimate amount and timing of environmental-related events, the Company believes that the costs of environmental-related matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.
Legal Proceedings. The Company is involved in pending legal proceedings that are ordinary, routine and incidental to its business. While the ultimate outcome of these legal matters is not determinable, the Company believes that these matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12. Stockholders’ Equity and Stock Plans
Share-Based Compensation Expense. The Company accounts for share-based awards in accordance with the provisions of SFAS 123(R),Share-Based Payment, which was adopted during the fiscal quarter ended December 30, 2005 using the modified prospective application method. The following table summarizes the amount of share-based compensation expense by award type as well as the effect of this expense on net earnings and net earnings per share:
Fiscal Quarter Ended | ||||||||
December 29, 2006 | December 30, 2005 | |||||||
(in thousands, except per share amounts) | ||||||||
Share-based compensation expense by award type: | ||||||||
Employee and non-employee director stock options | $ | (2,078 | ) | $ | (1,580 | ) | ||
Employee stock purchase plan | (195 | ) | (261 | ) | ||||
Restricted (nonvested) stock | (572 | ) | (128 | ) | ||||
Total share-based compensation expense (effect on earnings before income taxes) | (2,845 | ) | (1,969 | ) | ||||
Effect on income tax expense | 1,023 | 714 | ||||||
Effect on net earnings | $ | (1,822 | ) | $ | (1,255 | ) | ||
Effect on net earnings per share: | ||||||||
Basic | $ | (0.06 | ) | $ | (0.04 | ) | ||
Diluted | $ | (0.06 | ) | $ | (0.04 | ) | ||
Share-based compensation expenses have been included in the Company’s unaudited condensed consolidated statement of earnings as follows:
Fiscal Quarter Ended | ||||||
December 29, 2006 | December 30, 2005 | |||||
(in thousands) | ||||||
Cost of sales | $ | 108 | $ | 90 | ||
Selling, general and administrative | 2,609 | 1,773 | ||||
Research and development | 128 | 106 | ||||
Total | $ | 2,845 | $ | 1,969 | ||
Employee Stock Options.During the fiscal quarter ended December 29, 2006, the Company granted 305,000 stock options to employees having a weighted-average exercise price of $45.06 and an estimated grant date fair value (net of expected forfeitures) of $3.9 million. During the fiscal quarter ended December 30, 2005, the Company granted 478,000 stock options to employees having a weighted-average exercise price of $42.16 and an estimated grant date fair value (net of expected forfeitures) of $5.6 million.
As of December 29, 2006, the unrecorded deferred share-based compensation balance related to stock options was $8.5 million. This amount will be recognized as expense using the straight-line attribution method over an estimated weighted-average amortization period of 1.4 years.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restricted (Nonvested) Stock.In December 2006 and November 2005, the Company granted under the Omnibus Stock Plan 47,200 shares and 27,500 shares, respectively, of restricted (nonvested) common stock to its executive officers. The restricted stock granted during the first quarters of fiscal year 2007 and 2006 had an aggregate value of $2.1 million and $1.2 million, respectively, representing the fair market value of the restricted shares on their grant dates. These amounts are being recognized by the Company as share-based compensation expense ratably over their respective three-year vesting periods. During the fiscal quarter ended December 29, 2006 and December 30, 2005, the Company recognized $0.6 million and $0.1 million, respectively, in share-based compensation expense relating to restricted stock grants.
As of December 29, 2006, there was $2.7 million of total unrecognized compensation expense related to restricted share-based compensation arrangements granted under the OSP. This expense is expected to be recognized over a weighted-average period of 1.6 years.
Employee Stock Purchase Plan.During the fiscal quarters ended December 29, 2006 and December 30, 2005, employees purchased approximately 25,000 shares for $0.9 million and 29,000 shares for $0.9 million, respectively. As of December 29, 2006, a total of approximately 339,000 shares remained available for issuance under the ESPP.
Stock Repurchase Programs. In November 2005, the Company’s Board of Directors approved a stock repurchase program under which the Company was authorized to utilize up to $100 million to repurchase shares of its common stock. This repurchase program was effective through September 30, 2007, but was completed in December 2006. During the fiscal quarter ended December 29, 2006, the Company repurchased and retired 820,000 shares under this authorization at an aggregate cost of $37.1 million.
In January 2007, the Company’s Board of Directors approved a new stock repurchase program under which the Company is authorized to utilize up to $100 million to repurchase shares of its common stock. This repurchase program is effective through December 31, 2008.
Note 13. Net Earnings Per Share
Basic earnings per share are calculated based on net earnings and the weighted-average number of shares of common stock outstanding during the reported period. Diluted earnings per share are calculated similarly, except that the weighted-average number of common shares outstanding during the period increased by the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of potential common stock (including outstanding stock options, ESPP shares, non-employee director stock units and restricted stock) is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of share-based compensation as required by SFAS 123(R) in the fiscal quarters ended December 29, 2006 and December 30, 2005.
For the fiscal quarter ended December 29, 2006 and December 30, 2005, options to purchase 941,000 and 636,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:
Fiscal Quarter Ended | ||||
December 29, 2006 | December 30, 2005 | |||
(in thousands) | ||||
Weighted-average basic shares outstanding | 30,601 | 31,112 | ||
Net effect of dilutive potential common stock | 457 | 601 | ||
Weighted-average diluted shares outstanding | 31,058 | 31,713 | ||
Note 14. Industry Segments
The Company’s operations are grouped into two business segments: Scientific Instruments and Vacuum Technologies. The Scientific Instruments segment designs, develops, manufactures, markets, sells and services equipment and related software, consumable products, accessories and services for a broad range of life science and industrial applications requiring identification, quantification and analysis of the composition or structure of liquids, solids or gases. The Vacuum Technologies segment designs, develops, manufactures, markets, sells and services vacuum products and related accessories and services used to create, contain, control, measure and test vacuum environments in a broad range of life science and industrial applications requiring ultra-clean or high-vacuum environments. These segments were determined in accordance with SFAS 131,Disclosures about Segments of an Enterprise and Related Information.
General corporate costs include shared costs of legal, tax, accounting, treasury, insurance and other management costs. A portion of the indirect and common costs has been allocated to the segments through the use of estimates. Also, transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but might not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies might not be meaningful.
Sales | Pretax Earnings | |||||||||||||
Fiscal Quarter Ended | Fiscal Quarter Ended | |||||||||||||
December 29, 2006 | December 30, 2005 | December 29, 2006 | December 30, 2005 | |||||||||||
(in millions) | ||||||||||||||
Scientific Instruments | $ | 176.9 | $ | 161.3 | $ | 18.9 | $ | 12.6 | ||||||
Vacuum Technologies | 41.0 | 34.4 | 8.4 | 6.1 | ||||||||||
Total industry segments | 217.9 | 195.7 | 27.3 | 18.7 | ||||||||||
General corporate | — | — | (4.4 | ) | (4.1 | ) | ||||||||
Interest income | — | — | 1.2 | 1.1 | ||||||||||
Interest expense | — | — | (0.5 | ) | (0.5 | ) | ||||||||
Total | $ | 217.9 | $ | 195.7 | $ | 23.6 | $ | 15.2 | ||||||
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VARIAN, INC. AND SUBSIDIARY COMPANIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 15. Recent Accounting Pronouncements
In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which addresses accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the requirements of FIN 48 and is not yet able to determine whether its adoption in the first quarter of fiscal year 2008 will have a material impact on its financial condition or results of operations.
In September 2006, the SEC issued SAB 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related disclosures using both the rollover and the iron curtain approach. The rollover approach quantifies misstatements based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year of origin. Adjustment of financial statements would be required if either approach resulted in a material misstatement. SAB 108 applies to annual financial statements for fiscal years ending after November 15, 2006. The Company does not expect the adoption of SAB 108 to have a material impact on its financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies to previous accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 to have a material impact on its financial condition or results of operations.
In September 2006, the FASB issued SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability measured by the difference between the fair value of the plan assets and the benefit obligation. SFAS 158 also requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income in stockholders’ equity. Under SFAS 158, the Company will be required to initially recognize the funded status of its defined benefit postretirement plans and to provide additional required disclosures in the fourth quarter of fiscal year 2007. Based on valuations performed in fiscal year 2006, had the Company adopted the provisions of SFAS 158 in that period, the Company’s defined benefit pension plan liability would have increased by approximately $5.3 million and accumulated other comprehensive income would have decreased by approximately $3.6 million (net of taxes) as of September 29, 2006. The Company does not expect the adoption of SFAS 158 with respect to its other defined benefit postretirement plans to have a material impact on its financial condition or results of operations.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Caution Regarding Forward-Looking Statements
Throughout this Report, and particularly in thisItem 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations, there are forward-looking statements that are based upon our current expectations, estimates, and projections, and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms. These forward-looking statements include those relating to anticipated capital expenditures.
We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed inItem 1A—Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 29, 2006. We encourage you to read that section carefully.
Other risks and uncertainties that could cause actual results to differ materially from those in our forward-looking statements include, but are not limited to, the following: whether we will succeed in new product development, release, commercialization, performance and acceptance; whether we can achieve continued growth in sales in both life science and industrial applications; risks arising from the timing of shipments, installations and the recognition of revenues on certain magnetic resonance (“MR”) products, including nuclear magnetic resonance (“NMR”), MR imaging and Fourier Transform mass spectrometry (“FTMS”) systems and superconducting magnets; the impact of shifting product mix on profit margins; competitive products and pricing; economic conditions in our product and geographic markets; whether we will see continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; whether we will see sustained or improved market investment in capital equipment; whether we will see reduced demand from customers that operate in cyclical industries; the impact of any delay or reduction in government funding for research; our ability to successfully evaluate, negotiate and integrate acquisitions; the actual costs, timing and benefits of restructuring and other efficiency improvement activities; the timing and amount of discrete tax events; the timing and amount of stock-based compensation expense; and other risks detailed from time to time in our filings with the U.S. Securities and Exchange Commission (the “SEC”). We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events or otherwise.
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Results of Operations
First Quarter of Fiscal Year 2007 Compared to First Quarter of Fiscal Year 2006
Segment Results
Our operations are grouped into two reportable business segments: Scientific Instruments and Vacuum Technologies. The following table presents comparisons of our sales and operating earnings for each of those segments and in total for the first quarters of fiscal years 2007 and 2006:
Fiscal Quarter Ended | |||||||||||||||||||||
December 29, 2006 | December 30, 2005 | Increase (Decrease) | |||||||||||||||||||
$ | % of Sales | $ | % of Sales | $ | % | ||||||||||||||||
(dollars in millions) | |||||||||||||||||||||
Sales by Segment: | |||||||||||||||||||||
Scientific Instruments | $ | 176.9 | 81.2 | % | $ | 161.3 | 82.4 | % | $ | 15.6 | 9.7 | % | |||||||||
Vacuum Technologies | 41.0 | 18.8 | 34.4 | 17.6 | 6.6 | 19.2 | |||||||||||||||
Total company | $ | 217.9 | 100.0 | % | $ | 195.7 | 100.0 | % | $ | 22.2 | 11.3 | % | |||||||||
Operating Earnings by Segment: | |||||||||||||||||||||
Scientific Instruments | $ | 18.9 | 10.7 | % | $ | 12.7 | 7.8 | % | $ | 6.2 | 49.1 | % | |||||||||
Vacuum Technologies | 8.4 | 20.4 | 6.1 | 17.7 | 2.3 | 37.6 | |||||||||||||||
Total segments | 27.3 | 12.5 | 18.8 | 9.6 | 8.5 | 45.3 | |||||||||||||||
General corporate | (4.4 | ) | (2.0 | ) | (4.1 | ) | (2.1 | ) | (0.3 | ) | (6.4 | ) | |||||||||
Total company | $ | 22.9 | 10.5 | % | $ | 14.7 | 7.5 | % | $ | 8.2 | 56.2 | % | |||||||||
Scientific Instruments. The increase in Scientific Instruments sales was primarily attributable to higher sales volume, in particular from MR imaging systems, mass spectrometers and other analytical instruments. Sales increased into both life science and industrial applications. Scientific Instruments revenues for the first quarter of fiscal year 2006 do not include sales for the full quarter from PL International Limited (“Polymer Labs”), which was acquired in November 2005. Excluding the impact of Polymer Labs, Scientific Instruments sales in the first quarter of fiscal year 2007 increased by approximately 8% compared to the first quarter of fiscal year 2006.
Scientific Instruments operating earnings for the first quarter of fiscal year 2007 include restructuring and other related costs of $0.1 million, acquisition-related intangible amortization of $2.2 million, share-based compensation expense of $1.0 million and amortization of $0.3 million related to inventory written up in connection with the acquisition of IonSpec Corporation (“IonSpec”). In comparison, Scientific Instruments operating earnings for the first quarter of fiscal year 2006 include an in-process research and development charge of $0.8 million relating to the acquisition of Polymer Labs, acquisition-related intangible amortization of $1.8 million, share-based compensation expense of $1.0 million and amortization of $1.9 million related to inventory written up in connection with the acquisitions of Magnex Scientific Limited (“Magnex”) in November 2004 and Polymer Labs in November 2005. Excluding the impact of these items, the increase in operating earnings as a percentage of sales resulted primarily from sales volume leverage (as the higher sales volume improved the absorption rate of fixed and semi-variable costs), the transition to internally sourced magnets for MR products and a favorable mix shift toward higher-margin products including mass spectrometers, MR imaging systems and consumables.
Vacuum Technologies. Vacuum Technologies sales increased primarily as a result of higher sales volume, with double-digit sales growth into both life science and industrial applications.
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Vacuum Technologies operating earnings for the first quarters of fiscal year 2007 and 2006 include the impact of share-based compensation expense of $0.7 million and $0.3 million, respectively. Excluding the impact of these items, the increase in Vacuum Technologies operating earnings as a percentage of sales was primarily attributable to sales volume leverage.
Consolidated Results
The following table presents comparisons of our sales and other selected consolidated financial results for the first quarters of fiscal years 2007 and 2006:
Fiscal Quarter Ended | |||||||||||||||||||||
December 29, 2006 | December 30, 2005 | Increase (Decrease) | |||||||||||||||||||
$ | % of Sales | $ | % of Sales | $ | % | ||||||||||||||||
(dollars in millions, except per share data) | |||||||||||||||||||||
Sales | $ | 217.9 | 100.0 | % | $ | 195.7 | 100.0 | % | $ | 22.2 | 11.3 | % | |||||||||
Gross profit | 99.7 | 45.7 | 85.9 | 43.9 | 13.8 | 16.0 | |||||||||||||||
Operating expenses: | |||||||||||||||||||||
Selling, general and administrative | 61.2 | 28.0 | 56.6 | 28.9 | 4.6 | 8.2 | |||||||||||||||
Research and development | 15.6 | 7.2 | 13.9 | 7.1 | 1.7 | 12.0 | |||||||||||||||
Purchased in-process research and development | — | — | 0.8 | 0.4 | (0.8 | ) | (100.0 | ) | |||||||||||||
Total operating expenses | 76.8 | 35.2 | 71.3 | 36.4 | 5.5 | 7.8 | |||||||||||||||
Operating earnings | 22.9 | 10.5 | 14.6 | 7.5 | 8.3 | 56.2 | |||||||||||||||
Interest income | 1.3 | 0.6 | 1.1 | 0.6 | 0.2 | 15.9 | |||||||||||||||
Interest expense | (0.5 | ) | (0.3 | ) | (0.5 | ) | (0.3 | ) | — | — | |||||||||||
Income tax expense | (8.3 | ) | (3.8 | ) | (5.5 | ) | (2.8 | ) | 2.8 | 49.0 | |||||||||||
Net Earnings | $ | 15.4 | 7.0 | % | $ | 9.7 | 4.9 | % | $ | 5.7 | 59.0 | % | |||||||||
Net earnings per diluted share | $ | 0.49 | $ | 0.30 | $ | 0.19 | |||||||||||||||
Sales. As discussed under the headingSegment Results above, sales by the Scientific Instruments and Vacuum Technologies segments in the first quarter of fiscal year 2007 increased by 9.7% and 19.2%, respectively, compared to the prior-year quarter. On a consolidated basis, sales grew 11.3% in the first quarter of fiscal year 2007, with double-digit sales growth for both industrial and life science applications. Revenues for the first quarter of fiscal year 2006 do not include sales for the full quarter from Polymer Labs, which was acquired in November 2005. Excluding the impact of Polymer Labs, sales in the first quarter of fiscal year 2007 increased by approximately 10% compared to the first quarter of fiscal year 2006.
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For geographic reporting purposes, we use four regions—North America (excluding Mexico), Europe (including the Middle East and Africa), Asia Pacific (including India) and Latin America (including Mexico). Sales by geographic region in the first quarters of fiscal years 2007 and 2006 were as follows:
Fiscal Quarter Ended | |||||||||||||||||||
December 29, 2006 | December 30, 2005 | Increase (Decrease) | |||||||||||||||||
$ | % of Sales | $ | % of Sales | $ | % | ||||||||||||||
(dollars in millions) | |||||||||||||||||||
Sales by Geographic Region: | |||||||||||||||||||
North America | $ | 74.7 | 34.3 | % | $ | 81.0 | 41.4 | % | $ | (6.3 | ) | (7.8 | )% | ||||||
Europe | �� | 96.1 | 44.1 | 75.5 | 38.6 | 20.6 | 27.3 | ||||||||||||
Asia Pacific | 39.1 | 17.9 | 29.8 | 15.2 | 9.3 | 31.1 | |||||||||||||
Latin America | 8.0 | 3.7 | 9.4 | 4.8 | (1.4 | ) | (14.8 | ) | |||||||||||
Total company | $ | 217.9 | 100.0 | % | $ | 195.7 | 100.0 | % | $ | 22.2 | 11.3 | % | |||||||
The increases in sales into Europe and Asia Pacific were primarily attributable to stronger demand across a broad range of our products, in particular, mass spectrometers, MR imaging systems and vacuum products. To a lesser extent, the acquisition of Polymer Labs also added to the growth in these regions. The reduction in sales into North America was primarily due to a general trend in many industries of manufacturing moving out of the U.S. for cost and tax reasons and softness in demand from pharmaceutical companies in the U.S., which was in part due to consolidations and a shift in pharmaceutical research and manufacturing to the Asia Pacific region. While both of these trends negatively impacted sales in North America in the first quarter of fiscal year 2007, they probably benefited us in Asia Pacific.
In addition to the factors described above, the decrease in North American sales and increase in European sales compared to the prior-year quarter were both more pronounced due to the timing of sales of certain low-volume, high-selling price MR products. We do not consider these geographic shifts to be indicative of any particular trend for MR products as a whole, but rather to be reflective of the variability in results that these low-volume, high-selling price MR products can create.
Gross Profit. Gross profit for the first quarter of fiscal year 2007 reflects the impact of $1.3 million in amortization expense relating to acquisition-related intangible assets, $0.3 million in amortization expense related to inventory written up in connection with the IonSpec acquisition and share-based compensation expense of $0.1 million. In comparison, gross profit for the first quarter of fiscal year 2006 reflects the impact of $1.0 million in amortization expense relating to acquisition-related intangible assets, $1.9 million in amortization expense related to inventory written up in connection with the Polymer Labs and Magnex acquisitions and share-based compensation expense of $0.1 million. Excluding the impact of these items, the gross profit percentage increased primarily as a result of sales volume leverage, the transition to internally sourced magnets for MR products and a favorable mix shift toward higher-margin products including mass spectrometers, MR imaging systems and consumables.
Selling, General and Administrative. Selling, general and administrative expenses for the first quarter of fiscal year 2007 included $0.9 million in amortization expense relating to acquisition-related intangible assets, $0.1 million in restructuring and other related costs and $2.6 million in share-based compensation expense. In comparison, selling, general and administrative expenses for the first quarter of fiscal year 2006 included $0.7 million in acquisition-related intangible amortization and $1.8 million in share-based compensation expense. Excluding the impact of these items, selling, general and administrative expenses were lower as a percentage of sales in the first quarter of fiscal year 2007 primarily as a result of sales volume leverage and cost reduction activities.
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Research and Development. Research and development expenses for the first quarters of fiscal year 2007 and fiscal year 2006 reflect the impact of share-based compensation expense of $0.1 million in both periods. Excluding these amounts, research and development expenses were relatively flat as a percentage of sales. The increase in research and development expenses in absolute dollars resulted primarily from acquisitions of Polymer Labs in the first quarter of fiscal year 2006 and IonSpec in the second quarter of fiscal 2006 and higher spending on new product development for primarily information rich detection products.
Restructuring Activities. During fiscal years 2005 and 2003, the Company committed to several restructuring plans in order to adjust its organizational structure, improve operational efficiencies and eliminate redundant or excess costs resulting from acquisitions or dispositions during those periods.
The following table sets forth changes in the Company’s restructuring liability relating to the foregoing plans during the first quarter of fiscal year 2007:
Employee- Related | Facilities- Related | Total | ||||||||||
(in thousands) | ||||||||||||
Balance at September 29, 2006 | $ | 233 | $ | 818 | $ | 1,051 | ||||||
Charges | 115 | — | 115 | |||||||||
Cash payments | (166 | ) | (35 | ) | (201 | ) | ||||||
Foreign currency impacts and other adjustments | 10 | — | 10 | |||||||||
Balance at December 29, 2006 | $ | 192 | $ | 783 | $ | 975 | ||||||
Under these restructuring plans, the Company has incurred $15.4 million in restructuring expense and $3.4 million in other related costs which related primarily to employee retention and relocation costs and accelerated depreciation of assets disposed of upon the closure of facilities.
Income Tax Expense.The effective income tax rate was 35.0% for the first quarter of fiscal year 2007, compared to 36.5% for the first quarter of fiscal year 2006. The effective tax rate for the first quarter of fiscal year 2006 was impacted by a non-deductible in-process research and development charge of $0.8 million. Excluding the impact of this charge, the effective income tax rates for the first quarter of fiscal year 2007 and the first quarter of fiscal year 2006 were consistent at approximately 35%.
Net Earnings. Net earnings for the first quarter of fiscal year 2007 reflect the impact of $2.8 million in share-based compensation expense, $2.2 million in acquisition-related intangible amortization, $0.1 million in restructuring and other related costs and $0.3 million in amortization related to inventory written up in connection with recent acquisitions. Net earnings for the first quarter of fiscal year 2006 reflect the impact of $2.0 million in share-based compensation expense, $1.8 million in acquisition-related intangible amortization, $1.9 million in amortization related to inventory written up in connection with recent acquisitions and an in-process research and development charge of $0.8 million. Excluding the impact of these items, the increase in net earnings resulted primarily from higher sales volume, improved gross profit margins and lower operating expenses as a percentage of sales in the first quarter of fiscal year 2007.
Liquidity and Capital Resources
We generated $22.4 million of cash from operating activities in the first quarter of fiscal year 2007, compared to $20.8 million generated in the first quarter of fiscal year 2006. The slight increase in cash from operating activities was primarily driven by a relative increase in accrued liabilities ($9.0 million) and higher net earnings ($5.7 million), partially offset by a relative decrease in accounts payable ($4.2 million) and minor relative increases (decreases) in several other asset (liability) balances during the first quarter of fiscal year 2007. The relative increase in accrued liabilities was primarily due to a larger increase in contract advances from customers during the first quarter of fiscal year 2007 as compared to the first quarter of fiscal year 2006. The relative decrease in accounts payable was primarily due to the timing of vendor payments.
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We used $4.9 million of cash for investing activities in the first quarter of fiscal year 2007, which compares to $54.9 million used for investing activities in the first quarter of fiscal year 2006. The decrease in cash used for investing activities in the first quarter of fiscal year 2007 was primarily the result of lower acquisition-related payments. During the first quarter of fiscal year 2006, acquisition-related payments totaled $51.3 million and included $42.4 million for the acquisition of Polymer Labs and $5.9 million for a contingent consideration payment relating to the acquisition of certain product lines from Digilab LLC in fiscal year 2004.
We used $35.0 million of cash for financing activities in the first quarter of fiscal year 2007, which compares to $5.9 million used for financing activities in the first quarter of fiscal year 2006. The increase in cash used for financing activities was primarily due to higher expenditures to repurchase and retire common stock (such expenditures were made in both periods as a result of a continued effort to utilize excess cash to reduce the number of outstanding common shares). Compared to the year-ago quarter, lower proceeds from the issuance of common stock due to lower stock option exercise volume also contributed to the net increase in cash used for financing activities during the first quarter of fiscal year 2007.
As of December 29, 2006, we had a total of $66.6 million in uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 29, 2006. Of the $66.6 million in uncommitted and unsecured credit facilities, a total of $40.0 million was limited for use by, or in favor of, certain subsidiaries at December 29, 2006, and a total of $18.5 million of this $40.0 million was being utilized in the form of bank guarantees and short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments and deposits made to our subsidiaries by customers for which separate liabilities were recorded in our unaudited condensed consolidated financial statements at December 29, 2006. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.
As of December 29, 2006, we had $26.3 million in term loans outstanding, compared to $27.5 million at September 29, 2006. As of both December 29, 2006 and September 29, 2006, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.7% and 6.8% at December 29, 2006 and September 29, 2006, respectively. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. We were in compliance with all restrictive covenants of the term loan agreements at December 29, 2006.
In connection with the IonSpec acquisition, we have accrued but not yet paid a portion of the purchase price that has been retained to secure the sellers’ indemnification obligations. As of December 29, 2006, retained amounts for the IonSpec acquisition totaled $1.4 million, which is due to be paid (net of any indemnification claims) in equal installments in February 2007 and February 2008.
As of December 29, 2006, up to a maximum of $42.0 million could be payable through February 2009 under contingent consideration arrangements relating to acquired businesses. Amounts subject to these arrangements can be earned over the respective measurement period, depending on the performance of the acquired business relative to certain financial targets.
The following table summarizes key terms of outstanding contingent consideration arrangements as of December 29, 2006:
Acquired business | Remaining | Measurement period | Measurement period end date | |||
IonSpec | $14.0 million | 3 years | February 2009 | |||
Magnex | $5.0 million | 3 years | November 2007 | |||
Polymer Labs | $23.0 million | 3 years | November 2008 |
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The Distribution Agreement provides that we are responsible for certain litigation to which VAI was a party, and further provides that we will indemnify VMS and VSEA for one-third of the costs, expenses, and other liabilities relating to certain discontinued, former, and corporate operations of VAI, including certain environmental liabilities (see Note 11 of the Notes to the Unaudited Condensed Consolidated Financial Statements).
We had no material non-cancelable commitments for capital expenditures as of December 29, 2006. In the aggregate, we currently anticipate that our capital expenditures will be 3% of sales or less for the full fiscal year 2007.
In November 2005, our Board of Directors approved a stock repurchase program under which we were authorized to utilize up to $100 million to repurchase shares of our common stock. This repurchase program was effective until September 30, 2007, but was completed in December 2006. During the first quarter of fiscal year 2007, we repurchased and retired 820,000 shares at an aggregate cost of $37.1 million.
In January 2007, our Board of Directors approved a new stock repurchase program under which we are authorized to utilize up to $100 million to repurchase shares of our common stock. This repurchase program is effective until December 31, 2008.
Our liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industries in which we compete and global economies. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with our current cash balance and borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next 12 months.
Contractual Obligations and Other Commercial Commitments
The following table summarizes the amount and estimated timing of future cash expenditures relating to principal payments on outstanding debt, minimum rentals due for certain facilities and other leased assets under long-term, non-cancelable operating leases as of December 29, 2006:
Nine Months Ending Sept. 28, 2007 | Fiscal Years | Total | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Operating leases | $ | 5,865 | $ | 5,969 | $ | 3,942 | $ | 2,685 | $ | 1,926 | $ | 1,806 | $ | 5,426 | $ | 27,619 | ||||||||
Long-term debt (including current portion) | 1,250 | 6,250 | — | 6,250 | — | 6,250 | 6,250 | 26,250 | ||||||||||||||||
Total contractual cash obligations | $ | 7,115 | $ | 12,219 | $ | 3,942 | $ | 8,935 | $ | 1,926 | $ | 8,056 | $ | 11,676 | $ | 53,869 | ||||||||
In addition to the non-cancelable contractual obligations included in the above table, we had cancelable commitments to purchase certain superconducting magnets intended for use with NMR systems totaling $3.2 million, net of deposits paid, as of December 29, 2006. In the event that these commitments are canceled for reasons other than the supplier’s default, we may be responsible for reimbursement of actual costs incurred by the supplier.
As of December 29, 2006, we did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of some contingent event, except for contingent payments of up to a maximum of $42.0 million related to acquisitions as discussed underLiquidity and Capital Resources above, the specific amounts of which are not currently determinable.
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Recent Accounting Pronouncements
In June 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which addresses accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the requirements of FIN 48 and are not yet able to determine whether its adoption in the first quarter of fiscal year 2008 will have a material impact on our financial condition or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin No. (“SAB”) 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires companies to evaluate the materiality of identified unadjusted errors on each financial statement and related disclosures using both the rollover and the iron curtain approach. The rollover approach quantifies misstatements based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year of origin. Adjustment of financial statements would be required if either approach resulted in a material misstatement. SAB 108 applies to annual financial statements for fiscal years ending after November 15, 2006. We do not expect the adoption of SAB 108 to have a material impact on our financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies to previous accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material impact on our financial condition or results of operations.
In September 2006, the FASB issued SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability measured by the difference between the fair value of the plan assets and the benefit obligation. SFAS 158 also requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income in stockholders’ equity. Under SFAS 158, we will be required to initially recognize the funded status of our defined benefit postretirement plans and to provide additional required disclosures in the fourth quarter of fiscal year 2007. Based on valuations performed in fiscal year 2006, had we adopted the provisions of SFAS 158 in that period, our defined benefit pension plan-related liability would have increased by $5.3 million and accumulated other comprehensive income would have decreased by approximately $3.6 million (net of taxes) as of September 29, 2006. We do not expect the adoption of SFAS 158 with respect to our other defined benefit postretirement plans to have a material impact on our financial condition or results of operations.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Exchange Risk. We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in non-functional currencies. From time to time, we also enter into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. The success of our hedging activities depends on our ability to forecast balance sheet exposures and transaction activity in various foreign currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. However, we believe that in most cases any such gains or losses would be substantially offset by losses or gains from the related foreign exchange forward contracts. We therefore believe that the direct effect of an immediate 10% change in the exchange rate between the U.S. dollar and all other currencies is not reasonably likely to have a material adverse effect on our financial condition or results of operations.
At December 29, 2006, there were no outstanding forward contracts designated as cash flow hedges of forecasted transactions. During the first quarter of fiscal year 2007, no foreign exchange gains or losses from cash flow hedge ineffectiveness were recognized.
Our foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 29, 2006 follows:
Notional Sold | Notional Value Purchased | |||||
(in thousands) | ||||||
Euro | $ | — | $ | 72,592 | ||
Australian dollar | — | 32,926 | ||||
British pound | 16,592 | — | ||||
Japanese yen | 5,635 | — | ||||
Canadian dollar | 5,343 | — | ||||
Swiss franc | 2,522 | — | ||||
Danish krone | 859 | — | ||||
$ | 30,951 | $ | 105,518 | |||
Interest Rate Risk. We have no material exposure to market risk for changes in interest rates. We invest any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to our financial condition or results of operations. We enter into debt obligations principally to support general corporate purposes, including working capital requirements, capital expenditures and acquisitions. At December 29, 2006, our debt obligations had fixed interest rates.
Based upon rates currently available to us for debt with similar terms and remaining maturities, the carrying amounts of long-term debt approximate their estimated fair values.
Although payments under certain of our operating leases for our facilities are tied to market indices, we are not exposed to material interest rate risk associated with our operating leases.
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Debt Obligations.
Principal Amounts and Related Weighted-Average Interest Rates By Year of Maturity
Nine Months Ending Sept. 28, 2007 | Fiscal Years | Total | ||||||||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | Thereafter | |||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Long-term debt (including current portion) | $ | 1,250 | $ | 6,250 | $ | — | $ | 6,250 | $ | — | $ | 6,250 | $ | 6,250 | $ | 26,250 | ||||||||||||||||
Average interest rate | 7.2 | % | 6.7 | % | — | % | 6.7 | % | — | % | 6.7 | % | 6.7 | % | 6.7 | % |
Defined Benefit Retirement Plans. Most of our retirement plans, including all U.S.-based plans, are defined contribution plans. However, we also provide defined benefit pension plans in certain countries outside of the U.S. Our obligations under these defined benefit plans will ultimately be settled in the future and are therefore subject to estimation. Defined benefit pension accounting under SFAS 87,Employers’ Accounting for Pensions, is intended to reflect the recognition of future benefit costs over the employees’ estimated service periods based on the terms of the pension plans and the investment and funding decisions made by us.
For our defined benefit pension plans, we make assumptions regarding several variables including the expected long-term rate of return on plan assets and the discount rate in order to determine defined benefit pension plan expense for the year. This expense is referred to as “net periodic pension cost.” We assess the expected long-term rate of return on plan assets and discount rate assumption for each defined benefit plan based on relevant market conditions as prescribed by SFAS 87 and make adjustments to the assumptions as appropriate. On an annual basis, we analyze the rates of return on plan assets and discount rates used and determine that these rates are reasonable. For rates of return, this analysis is based on a review of the nature of the underlying assets, the allocation of those assets and their historical performance relative to the overall markets in the countries where the related plans are effective. Historically, our assumed asset allocations have not varied significantly from the actual allocations. Discount rates are based on the prevailing market long-term interest rates in the countries where the related plans are effective. As of September 29, 2006, the estimated long-term rate of return on our defined benefit pension plan assets ranged from 0.5% to 6.5% (weighted-average of 5.4%), and the assumed discount rate for our defined benefit pension plan obligations ranged from 2.3% to 5.1% (weighted-average of 4.8%).
If any of these assumptions were to change, our net periodic pension cost would also change. We incurred net periodic pension cost relating to our defined benefit pension plans of $2.3 million in fiscal year 2006, $1.6 million in fiscal year 2005 (excluding a settlement loss) and $2.7 million in fiscal year 2004 (excluding curtailment gains), and expect our net periodic pension cost to be approximately $2.2 million in fiscal year 2007. A one percent decrease in the weighted-average estimated return on plan assets or assumed discount rate would increase our net periodic pension cost for fiscal year 2007 by $1.1 million or $0.4 million, respectively. As of September 29, 2006, our projected benefit obligation relating to defined benefit pension plans was $52.1 million. A one percent decrease in the weighted-average estimated discount rate would increase this obligation by $12.7 million.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures. Based on the evaluation of our 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”)) required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, our Chief Executive Officer and the Chief Financial Officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q (December 29, 2006), our disclosure controls and procedures were effective.
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Inherent Limitations on the Effectiveness of Controls. The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the first quarter of our fiscal year 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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OTHER INFORMATION
Item 1A. | Risk Factors |
See Item 1A—Risk Factors presented in our Annual Report on Form 10-K for the fiscal year ended September 29, 2006, which we encourage you to carefully consider.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(c) January 2007 Stock Repurchase Program. In January 2007, our Board of Directors approved a new stock repurchase program under which we are authorized to utilize up to $100 million to repurchase shares of our common stock. This new repurchase program is effective until December 31, 2008.
November 2005 Stock Repurchase Program.The following table summarizes information relating to our stock repurchases during the first quarter of fiscal year 2007:
Fiscal Month | Shares Repurchased | Average Price Per Share | Total Value of Shares Repurchased as Part of Publicly Announced Plan (1)(2) | Maximum Total Value of Shares that May Yet Be Purchased Under the Plan | |||||||
(In thousands, except per share amounts) | |||||||||||
Balance – September 29, 2006 | $ | 37,021 | |||||||||
September 30, 2006 – October 27, 2006 | — | $ | — | $ | — | 37,021 | |||||
October 28, 2006 – November 24, 2006 | 327 | 45.98 | 15,059 | 21,962 | |||||||
November 25, 2006 – December 29, 2006 | 493 | 44.55 | 21,962 | $ | — | ||||||
Total shares repurchased | 820 | $ | 45.12 | $ | 37,021 | ||||||
(1) | In November 2005, our Board of Directors approved a stock repurchase program under which we were authorized to utilize up to $100 million to repurchase shares of our common stock. This repurchase program was effective through September 30, 2007, but was completed in December 2006. |
(2) | Excludes commissions on repurchases. |
Item 6. | Exhibits |
(a) | Exhibits. |
Exhibit | Exhibit Description | Incorporated by Reference | Filed | |||||||
Form | Date | Exhibit Number | ||||||||
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||||||
32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||||||
32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
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, INC. (Registrant) | ||||||||
Date: February 5, 2007 | By: | /s/ G. EDWARD MCCLAMMY | ||||||
G. Edward McClammy | ||||||||
Senior Vice President, Chief Financial Officer and Treasurer | ||||||||
(Duly Authorized Officer and Principal Financial Officer) |
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