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
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For the quarterly period ended March 28, 2008
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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)
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State or other jurisdiction of
Incorporation or organization:
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IRS Employer
Identification No.:
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Delaware
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77-0501994
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35 Dory Road, Gloucester, Massachusetts
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01930
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(Address of principal executive offices)
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(Zip code)
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(978) 282-2000
(Registrants telephone number, including area code)
Indicate by checkmark 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, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
x
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Accelerated filer
¨
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Non-accelerated filer
¨
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Smaller reporting company
¨
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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 April 25, 2008: 74,145,607
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
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March 28,
2008
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September 28,
2007
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(Amounts in thousands, except share data)
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ASSETS
|
|
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Current assets
|
|
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|
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Cash and cash equivalents
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$
|
111,967
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|
|
$
|
109,514
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|
Short-term investments
|
|
|
57,042
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|
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88,384
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|
Accounts receivable, net
|
|
|
242,654
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|
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|
189,573
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|
Inventories
|
|
|
164,733
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|
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170,293
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|
Deferred income taxes
|
|
|
27,873
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|
|
|
27,907
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|
Other current assets
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14,898
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26,010
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|
|
|
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Total current assets
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619,167
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611,681
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|
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|
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Long-term investments
|
|
|
77,653
|
|
|
|
96,153
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|
Property, plant and equipment, net
|
|
|
70,208
|
|
|
|
73,980
|
|
Goodwill
|
|
|
12,280
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|
|
|
12,280
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|
Other assets
|
|
|
4,955
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|
|
|
4,994
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|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
784,263
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|
|
$
|
799,088
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|
|
|
|
|
|
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LIABILITIES AND STOCKHOLDERS EQUITY
|
|
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Current liabilities
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|
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Current portion of long-term debt
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|
$
|
533
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|
|
$
|
510
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|
Accounts payable
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|
47,114
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|
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|
49,863
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|
Accrued expenses
|
|
|
39,291
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|
|
|
50,478
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|
Income taxes payable
|
|
|
11,677
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|
|
|
4,811
|
|
Product warranty
|
|
|
11,505
|
|
|
|
12,183
|
|
Deferred revenue
|
|
|
51,059
|
|
|
|
54,742
|
|
|
|
|
|
|
|
|
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Total current liabilities
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161,179
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172,587
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Long-term accrued expenses and other liabilities
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62,762
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|
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53,904
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|
Deferred income taxes
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|
|
3,858
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|
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|
3,858
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|
Long-term debt
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|
2,488
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|
|
|
2,761
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|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
230,287
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|
|
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233,110
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|
|
|
|
|
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Commitments, contingencies and guarantees (Note 10)
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Stockholders equity
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Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding
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Common stock, $0.01 par value; 150,000,000 shares authorized; 93,179,020 shares issued and 73,536,987 outstanding at March 28, 2008;
92,716,665 shares issued and 75,752,315 outstanding at September 28, 2007
|
|
|
932
|
|
|
|
927
|
|
Capital in excess of par value
|
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|
564,843
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|
548,426
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Less: Cost of 19,642,033 and 16,964,350 shares of common stock held in treasury at March 28, 2008 and September 28, 2007,
respectively
|
|
|
(639,785
|
)
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|
|
(535,423
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)
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Retained earnings
|
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|
629,238
|
|
|
|
553,221
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|
Accumulated other comprehensive loss
|
|
|
(1,252
|
)
|
|
|
(1,173
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)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
553,976
|
|
|
|
565,978
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|
|
|
|
|
|
|
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Total liabilities and stockholders equity
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|
$
|
784,263
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|
|
$
|
799,088
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|
|
|
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|
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The accompanying notes to the unaudited consolidated financial statements are an integral part of these
statements.
1
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
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Fiscal Three Months Ended
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|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
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March 30,
2007
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(Amounts in thousands, except per share data)
|
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Revenue
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|
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|
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|
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|
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|
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Product
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$
|
234,962
|
|
|
$
|
219,863
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$
|
470,472
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|
|
$
|
422,213
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|
Service
|
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|
20,347
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|
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|
19,695
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38,876
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|
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41,172
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|
Royalty and license
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|
29
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|
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|
2,246
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|
|
|
46
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|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
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|
|
255,338
|
|
|
|
241,804
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|
|
|
509,394
|
|
|
|
467,427
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|
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Cost of revenue
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|
|
|
|
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|
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Product
|
|
|
121,480
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|
|
|
117,992
|
|
|
|
241,046
|
|
|
|
229,504
|
|
Service
|
|
|
12,613
|
|
|
|
12,968
|
|
|
|
24,899
|
|
|
|
26,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
134,093
|
|
|
|
130,960
|
|
|
|
265,945
|
|
|
|
256,130
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|
|
|
|
|
|
|
|
|
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|
|
|
|
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Gross profit
|
|
|
121,245
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|
|
|
110,844
|
|
|
|
243,449
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|
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|
211,297
|
|
|
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Operating expenses
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|
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Research and development
|
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|
28,539
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|
25,556
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|
57,282
|
|
|
|
49,779
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|
Marketing, general and administrative
|
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|
32,838
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|
|
|
32,557
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|
|
|
65,401
|
|
|
|
63,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
61,377
|
|
|
|
58,113
|
|
|
|
122,683
|
|
|
|
112,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
59,868
|
|
|
|
52,731
|
|
|
|
120,766
|
|
|
|
98,492
|
|
Interest income
|
|
|
2,378
|
|
|
|
6,001
|
|
|
|
5,540
|
|
|
|
11,956
|
|
Interest expense
|
|
|
(222
|
)
|
|
|
(207
|
)
|
|
|
(677
|
)
|
|
|
(537
|
)
|
Other income (expense), net
|
|
|
44
|
|
|
|
(22
|
)
|
|
|
93
|
|
|
|
693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
62,068
|
|
|
|
58,503
|
|
|
|
125,722
|
|
|
|
110,604
|
|
Provision for income taxes
|
|
|
28,014
|
|
|
|
20,080
|
|
|
|
48,001
|
|
|
|
35,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
34,054
|
|
|
$
|
38,423
|
|
|
$
|
77,721
|
|
|
$
|
75,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
74,106
|
|
|
|
81,996
|
|
|
|
74,518
|
|
|
|
82,562
|
|
Weighted average shares outstanding - diluted
|
|
|
75,252
|
|
|
|
83,751
|
|
|
|
76,002
|
|
|
|
84,246
|
|
Net income per share - basic
|
|
$
|
0.46
|
|
|
$
|
0.47
|
|
|
$
|
1.04
|
|
|
$
|
0.91
|
|
Net income per share - diluted
|
|
$
|
0.45
|
|
|
$
|
0.46
|
|
|
$
|
1.02
|
|
|
$
|
0.90
|
|
The accompanying notes to the unaudited consolidated financial statements are an integral part of these
statements.
2
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
|
(Amounts in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
77,721
|
|
|
$
|
75,415
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,392
|
|
|
|
6,976
|
|
Amortization of investment premium (discount)
|
|
|
152
|
|
|
|
(85
|
)
|
Deferred income taxes
|
|
|
34
|
|
|
|
102
|
|
Stock-based compensation
|
|
|
10,814
|
|
|
|
10,393
|
|
Tax benefit from stock-based compensation
|
|
|
1,771
|
|
|
|
6,667
|
|
Excess tax benefits from stock-based compensation
|
|
|
(1,664
|
)
|
|
|
(4,526
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(47,945
|
)
|
|
|
(55,677
|
)
|
Inventories
|
|
|
5,404
|
|
|
|
(45,079
|
)
|
Other current assets
|
|
|
11,112
|
|
|
|
(1,460
|
)
|
Accounts payable
|
|
|
(3,050
|
)
|
|
|
24,613
|
|
Accrued expenses
|
|
|
2,796
|
|
|
|
(3,792
|
)
|
Product warranty
|
|
|
(1,025
|
)
|
|
|
1,161
|
|
Deferred revenue
|
|
|
(5,526
|
)
|
|
|
14,253
|
|
Other
|
|
|
(713
|
)
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
58,273
|
|
|
|
28,633
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
(4,478
|
)
|
|
|
(5,721
|
)
|
Proceeds from sales and maturities of investments
|
|
|
107,565
|
|
|
|
102,236
|
|
Purchase of investments
|
|
|
(57,192
|
)
|
|
|
(86,673
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
45,895
|
|
|
|
9,842
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
3,837
|
|
|
|
30,313
|
|
Excess tax benefits from stock-based compensation
|
|
|
1,664
|
|
|
|
4,526
|
|
Repurchase of common stock
|
|
|
(104,362
|
)
|
|
|
(143,802
|
)
|
Repayment of long-term debt
|
|
|
(250
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(99,111
|
)
|
|
|
(109,191
|
)
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash
|
|
|
(2,604
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,453
|
|
|
|
(70,788
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
109,514
|
|
|
|
258,891
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
111,967
|
|
|
$
|
188,103
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes to the unaudited consolidated financial statements are an integral part of these
statements.
3
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) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits to customers located both in
the United States (U.S.) and in international markets.
The accompanying unaudited interim consolidated financial statements have been prepared
by Varian Semiconductor in accordance with accounting principles generally accepted in the U.S. (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 (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 the annual report on Form 10-K filed by Varian Semiconductor with the SEC on November 21, 2007 for
the fiscal year ended September 28, 2007. 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 and six months ended March 28, 2008 are not necessarily indicative of the results to be expected for a full year or for any other period.
Note 2. Stock-Based Compensation
Varian Semiconductor applies the
provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share Based Payment
. SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee and director services. Stock-based
compensation cost is measured at grant date and 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.
The effect of recording stock-based compensation for the three and six months ended March 28, 2008 and March 30, 2007
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
|
(Amounts in thousands except per share amounts)
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
2,473
|
|
|
$
|
2,768
|
|
|
$
|
4,547
|
|
|
$
|
5,449
|
|
Restricted stock
|
|
|
3,122
|
|
|
|
2,789
|
|
|
|
5,647
|
|
|
|
4,426
|
|
Employee Stock Purchase Plan
|
|
|
345
|
|
|
|
253
|
|
|
|
620
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
5,940
|
|
|
|
5,810
|
|
|
|
10,814
|
|
|
|
10,393
|
|
Less: Tax effect on stock-based compensation
|
|
|
(2,704
|
)
|
|
|
(1,989
|
)
|
|
|
(4,234
|
)
|
|
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on income
|
|
$
|
3,236
|
|
|
$
|
3,821
|
|
|
$
|
6,580
|
|
|
$
|
7,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.09
|
|
|
$
|
0.08
|
|
Effect of stock-based compensation on income by line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
263
|
|
|
$
|
359
|
|
|
$
|
482
|
|
|
$
|
732
|
|
Cost of service revenue
|
|
|
276
|
|
|
|
325
|
|
|
|
508
|
|
|
|
545
|
|
Research and development expense
|
|
|
1,200
|
|
|
|
1,050
|
|
|
|
2,200
|
|
|
|
1,962
|
|
Marketing, general and administrative expense
|
|
|
4,201
|
|
|
|
4,076
|
|
|
|
7,624
|
|
|
|
7,154
|
|
Provision for income taxes
|
|
|
(2,704
|
)
|
|
|
(1,989
|
)
|
|
|
(4,234
|
)
|
|
|
(3,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost related to stock-based compensation
|
|
$
|
3,236
|
|
|
$
|
3,821
|
|
|
$
|
6,580
|
|
|
$
|
7,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
Varian Semiconductor estimates 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. Varian Semiconductor has determined that a blended volatility, using Varian Semiconductors historical and implied volatility measures and a peer group implied volatility, best reflects expected volatility over the
expected term of the option. Varian Semiconductor believes that the approach utilized to develop the underlying assumptions is appropriate in calculating the fair values of Varian Semiconductors stock options granted. Estimates of fair value
are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. As of March 28, 2008, there were a total of 8,039,704 shares of common stock reserved for issuance under the 2006 Stock
Incentive Plan.
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 Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Expected life (in years)
|
|
|
3.6
|
|
|
|
4.1
|
|
Expected volatility
|
|
|
45.5
|
%
|
|
|
37.9
|
%
|
Risk-free interest rate
|
|
|
3.2
|
%
|
|
|
4.8
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Weighted-average grant date fair value
|
|
$
|
13.60
|
|
|
$
|
9.75
|
|
The following table summarizes the stock option and restricted stock activity as of and for the six months ended
March 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity
|
|
Unvested Restricted
Stock Activity
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date Fair
Value
|
|
|
|
|
|
|
|
(In years)
|
|
(In thousands)
|
|
|
|
|
|
Outstanding at September 28, 2007
|
|
4,447,453
|
|
|
$
|
20.36
|
|
|
|
|
|
|
1,074,513
|
|
|
$
|
24.13
|
Granted
|
|
684,290
|
|
|
|
37.38
|
|
|
|
|
|
|
233,870
|
|
|
|
38.67
|
Options exercised
|
|
(140,164
|
)
|
|
|
15.49
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(261,548
|
)
|
|
|
23.16
|
Forfeited/expired/cancelled
|
|
(75,120
|
)
|
|
|
29.16
|
|
|
|
|
|
|
(28,608
|
)
|
|
|
21.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 28, 2008
|
|
4,916,459
|
|
|
|
22.74
|
|
4.6
|
|
$
|
37,567
|
|
1,018,227
|
|
|
$
|
27.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at March 28, 2008
|
|
4,779,579
|
|
|
|
22.44
|
|
4.6
|
|
$
|
37,298
|
|
|
|
|
|
|
Options exercisable at March 28, 2008
|
|
2,658,833
|
|
|
$
|
16.28
|
|
3.6
|
|
$
|
30,171
|
|
|
|
|
|
|
During the three months ended March 28, 2008, Varian Semiconductor awarded 10,000 restricted stock units and
7,712 restricted stock units were released. The number of restricted stock units outstanding as of March 28, 2008 was 36,992.
As of March 28,
2008, the unrecognized compensation cost related to unvested stock options was $24.8 million before estimated forfeitures. This unrecognized balance will be recognized over an estimated weighted average amortization period of 2.9 years.
As of March 28, 2008, the unrecognized compensation cost related to unvested restricted stock was $27.2 million before estimated forfeitures. This unrecognized
balance will be recognized over an estimated weighted average amortization period of 2.7 years.
The total intrinsic value of options exercised during the
three and six month periods ended March 28, 2008 was $1.4 million and $3.0 million, respectively. The total intrinsic value of options exercised during the three and six month periods ended March 30, 2007 was $14.5 million and $24.9
million, respectively. Intrinsic value is defined as the difference between the market price on the date of exercise and the grant date price.
5
The total fair value of restricted stock grants that vested during the three and six month periods ended March 28,
2008 was $3.4 million and $10.2 million, respectively. The total fair value of restricted stock grants that vested during the three and six month periods ended March 30, 2007 was $1.5 million and $3.3 million, respectively.
Employee Stock Purchase Plan
Employees of Varian Semiconductor, who
elect to participate in the Employee Stock Purchase Plan (ESPP), are able to purchase common stock at the lower of 85% of the fair market value of Varian Semiconductors common stock on the first or last day of the applicable
offering period. Typically, each offering period lasts six months. There were 52,931 shares purchased under the ESPP during the six months ended March 28, 2008. As of March 28, 2008 there were a total of 993,610 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 Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
Expected life (in years)
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected volatility
|
|
|
57.3
|
%
|
|
|
41.5
|
%
|
Risk-free interest rate
|
|
|
3.3
|
%
|
|
|
5.1
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Weighted-average grant date fair value
|
|
$
|
11.22
|
|
|
$
|
8.20
|
|
Note 3. Computation of Net Income Per Share
Basic net income per share is calculated based on net income and the weighted average number of shares of common stock outstanding during the reporting period. Diluted net income per share includes additional dilution
from stock issuable pursuant to the exercise of stock options outstanding and 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, as these options are anti-dilutive. For purposes of the diluted net income per share calculation, the additional shares issuable upon exercise of stock options are determined using the treasury stock method
which, as required by SFAS No. 123(R), includes as assumed proceeds share-based compensation expense and the tax effect of such compensation.
A
reconciliation of the numerator and denominator used in the net income per share calculations is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Six Months Ended
|
|
|
March 28,
2008
|
|
March 30,
2007
|
|
March 28,
2008
|
|
March 30,
2007
|
|
|
(Amounts in thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
34,054
|
|
$
|
38,423
|
|
$
|
77,721
|
|
$
|
75,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
74,106
|
|
|
81,996
|
|
|
74,518
|
|
|
82,562
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
1,146
|
|
|
1,755
|
|
|
1,484
|
|
|
1,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income per share
|
|
|
75,252
|
|
|
83,751
|
|
|
76,002
|
|
|
84,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.46
|
|
$
|
0.47
|
|
$
|
1.04
|
|
$
|
0.91
|
Net income per share - diluted
|
|
$
|
0.45
|
|
$
|
0.46
|
|
$
|
1.02
|
|
$
|
0.90
|
6
For the three and six month periods ended March 28, 2008, 1.3 million and 0.8 million potentially dilutive
shares, respectively, were excluded from the computation of diluted earnings per share. For the three and six month periods ended March 30, 2007, 0.9 million and 0.9 million potentially dilutive shares, respectively, were excluded
from the computation of diluted earnings per share.
Note 4. Accounts Receivable
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 28,
2008
|
|
|
September 28,
2007
|
|
|
|
(Amounts in thousands)
|
|
Billed receivables
|
|
$
|
243,313
|
|
|
$
|
190,133
|
|
Allowance for doubtful accounts
|
|
|
(659
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
242,654
|
|
|
$
|
189,573
|
|
|
|
|
|
|
|
|
|
|
Note 5. Inventories
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
March 28,
2008
|
|
September 28,
2007
|
|
|
(Amounts in thousands)
|
Raw materials and parts
|
|
$
|
94,441
|
|
$
|
81,330
|
Work in process
|
|
|
34,021
|
|
|
41,539
|
Finished goods
|
|
|
36,271
|
|
|
47,424
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
164,733
|
|
$
|
170,293
|
|
|
|
|
|
|
|
Note 6. Accrued Expenses
The components of accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
March 28,
2008
|
|
September 28,
2007
|
|
|
(Amounts in thousands)
|
Accrued incentives
|
|
$
|
11,190
|
|
$
|
18,103
|
Accrued employee benefits
|
|
|
12,020
|
|
|
11,842
|
Accrued payroll
|
|
|
4,880
|
|
|
5,356
|
Accrued retirement benefits
|
|
|
1,574
|
|
|
5,121
|
Other
|
|
|
9,627
|
|
|
10,056
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
39,291
|
|
$
|
50,478
|
|
|
|
|
|
|
|
Note 7. Long-Term Accrued Expenses and Other Long-Term Liabilities
There was $62.8 million in long-term accrued expenses and other long-term liabilities at March 28, 2008. Included in this amount was $37.0 million 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.
There was $53.9 million in long-term accrued expenses and other long-term liabilities at September 28, 2007, including $28.5
million 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 8. Product Warranties
Varian Semiconductor warrants that its products will be free from defects in materials and workmanship and will conform to its standard published specifications in effect at the time of delivery for a period of three
to twenty-four months from the date the
7
customer accepts the products. Additionally, Varian Semiconductor warrants 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. Varian Semiconductor provides for the estimated cost of product warranties, the amount of which is based primarily upon historical
information, at the time product revenue is recognized. Varian Semiconductors 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 Varian Semiconductor. Should these factors or other factors affecting warranty costs differ from Varian Semiconductors estimates, revisions to the estimated warranty
liability would be required.
Product warranty activity for the first three and six months of fiscal years 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Beginning product warranty balance
|
|
$
|
12,667
|
|
|
$
|
10,552
|
|
|
$
|
12,979
|
|
|
$
|
9,813
|
|
Accruals for warranties issued during the period
|
|
|
3,466
|
|
|
|
3,167
|
|
|
|
6,784
|
|
|
|
7,088
|
|
Adjustments to pre-existing warranties
|
|
|
(310
|
)
|
|
|
(110
|
)
|
|
|
189
|
|
|
|
(469
|
)
|
Fulfillments during the period
|
|
|
(3,624
|
)
|
|
|
(2,579
|
)
|
|
|
(7,753
|
)
|
|
|
(5,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending product warranty balance
|
|
$
|
12,199
|
|
|
$
|
11,030
|
|
|
$
|
12,199
|
|
|
$
|
11,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of product warranty
|
|
$
|
11,505
|
|
|
$
|
10,114
|
|
|
|
|
|
|
|
|
|
Long-term portion of product warranty
|
|
|
694
|
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product warranty liability
|
|
$
|
12,199
|
|
|
$
|
11,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Deferred Revenue
The components of deferred revenue are as follows:
|
|
|
|
|
|
|
|
|
March 28,
2008
|
|
September 28,
2007
|
|
|
(Amounts in thousands)
|
Fully deferred systems, installation and acceptance revenue
|
|
$
|
34,941
|
|
$
|
40,415
|
Extended warranties
|
|
|
15,330
|
|
|
15,007
|
Maintenance and service contracts
|
|
|
7,707
|
|
|
7,341
|
Other deferred revenue
|
|
|
400
|
|
|
635
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
58,378
|
|
$
|
63,398
|
|
|
|
|
|
|
|
Current portion of deferred revenue
|
|
$
|
51,059
|
|
$
|
54,742
|
Long-term portion of deferred revenue
|
|
|
7,319
|
|
|
8,656
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
58,378
|
|
$
|
63,398
|
|
|
|
|
|
|
|
Note 10. Commitments, Contingencies and Guarantees
As permitted under Delaware law, Varian Semiconductor has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer
or director is, or was, serving in such capacity at the request of Varian Semiconductor. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments Varian
Semiconductor could be required to make under these indemnification agreements is unlimited; however, Varian Semiconductor has a Director and Officer insurance policy that limits its exposure and enables Varian Semiconductor to recover a portion of
any future amounts paid. As a result of Varian Semiconductors insurance policy coverage, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any
liabilities for these agreements as of March 28, 2008.
Varian Semiconductor enters into indemnification agreements in the normal course of business.
Pursuant to these agreements, Varian Semiconductor indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or
8
incurred by the indemnified party, generally Varian Semiconductor customers, in connection with any patent, or any copyright or other intellectual property
infringement claim by any third party with respect to Varian Semiconductor products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments
Varian Semiconductor could be required to make under these indemnification agreements may be unlimited. Management believes the estimated fair value of these agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities
for these agreements as of March 28, 2008.
Varian Semiconductor also indemnifies 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 relating to the use of Varian Semiconductors products and services or resulting from the acts or omissions of Varian
Semiconductor, its employees, officers, authorized agents or subcontractors. Varian Semiconductor has general and umbrella insurance policies that limit its exposure under these indemnification obligations and guarantees. As a result of Varian
Semiconductors insurance policy coverage, Varian Semiconductor believes the estimated fair value of these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities for these agreements as of
March 28, 2008.
Prior to the spinoff of Varian Semiconductor from Varian Associates, Inc. (VAI), Varian Semiconductors
business was operated as the Semiconductor Equipment Business (SEB) of VAI. On April 2, 1999, VAI contributed its SEB to Varian Semiconductor, its Instruments Business to Varian, Inc. (VI), and changed its name to Varian
Medical Systems, Inc. (VMS). In connection with 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. Varian Semiconductor believes the estimated fair value of the indemnification agreements is minimal, except as already recorded on
the financial statements.
Varian Semiconductors 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.
Varian Semiconductor also enters into purchase order commitments in the normal course of business. As of March 28, 2008, Varian
Semiconductor had approximately $69.5 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. Varian Semiconductor has accrued $1.2
million in estimated environmental investigation and remediation costs for these sites and facilities as of March 28, 2008. 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, Varian Semiconductor has accrued $4.0 million as of March 28, 2008, which represents future costs discounted at 7%, net of inflation, to cover Varian Semiconductors portion of these
costs. This reserve is in addition to the $1.2 million as of March 28, 2008 previously described.
As of March 28, 2008, Varian
Semiconductors 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 $5.2 million, of which $0.6 million is classified as
current.
9
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. Varian Semiconductor believes that its
reserves are adequate, but as the scope of the obligations becomes 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 Varian Semiconductors financial statements, the likelihood of such occurrence is considered remote. Based on information currently available to management and its best assessment of the ultimate amount and timing of
environmental-related events, Varian Semiconductors management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of Varian
Semiconductor.
Varian Semiconductor evaluates its liability for environmental-related investigation and remediation in light of the liability and
financial wherewithal of potentially responsible parties and insurance companies where Varian Semiconductor believes that it has rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and
remediation costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. In 1992, VAI filed a lawsuit against 36 insurance companies with respect to most of the
above-referenced sites and facilities. VAI received certain cash settlements with respect to these lawsuits in prior years. VMS has also reached an agreement with an insurance company under which the insurance company agreed to pay a portion of
Varian Semiconductors past and future environmental-related expenditures. Although VMS intends to aggressively pursue additional insurance recoveries, Varian Semiconductor has not reduced any liability in anticipation of recovery with respect
to claims made against third parties.
Legal Proceedings
From time to time, in the ordinary course of business, Varian Semiconductor is a party to legal disputes related to employment and contract matters and could incur an uninsured liability in one or more of them. While it is not possible to
predict or determine the outcomes of the disputes, Varian Semiconductor believes the outcomes of such disputes will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Note 11. Derivative Financial Instruments
Varian Semiconductor
uses derivative instruments to protect its interests from fluctuations in earnings and cash flows caused by volatility in currency exchange rates. Varian Semiconductor has a policy of hedging its balance sheet and certain foreign currency sales
exposures with hedging instruments having terms of up to twelve months.
Varian Semiconductors international sales are primarily denominated in U.S.
dollars. For foreign currency denominated sales, however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward sales contracts for
which critical terms are designed to match those of the underlying exposure. These hedges are evaluated for effectiveness at least quarterly by comparing the change in value of the forward contracts to the change in value of the underlying
transaction, with the effective portion of the hedge accumulated in other comprehensive income (OCI). Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of income. There was an
immaterial amount of ineffectiveness recognized during the three and six month periods ended March 28, 2008. OCI associated with hedges of sales denominated in foreign currencies is reclassified to revenue upon recognition in income of the
underlying hedged exposure. The unrealized loss included in OCI associated with hedges of foreign currency denominated sales during the three month period ended March 28, 2008 was $0.3 million and during the three month period ended
December 28, 2007 was $0.1 million.
Note 12. Comprehensive Income
The following table reconciles net income to comprehensive income for the second quarter and first six months of fiscal years 2008 and 2007:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Net income
|
|
$
|
34,054
|
|
|
$
|
38,423
|
|
|
$
|
77,721
|
|
|
$
|
75,415
|
|
Other comprehensive income (loss), net of (benefit) taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedging instruments
|
|
|
285
|
|
|
|
(45
|
)
|
|
|
200
|
|
|
|
380
|
|
Reclassification adjustment for realized gains on cash flow hedging instruments included in net income
|
|
|
(381
|
)
|
|
|
|
|
|
|
(381
|
)
|
|
|
(693
|
)
|
Unrealized gain on investments
|
|
|
69
|
|
|
|
521
|
|
|
|
201
|
|
|
|
678
|
|
Reclassification adjustment for realized (gains) losses on investments included in net income
|
|
|
(63
|
)
|
|
|
23
|
|
|
|
(99
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(90
|
)
|
|
$
|
499
|
|
|
$
|
(79
|
)
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
33,964
|
|
|
$
|
38,922
|
|
|
$
|
77,642
|
|
|
$
|
75,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13. Share Repurchase Program
The Board of Directors voted to increase the amount of funds that may be expended in repurchasing Varian Semiconductors common stock to a total of $700 million as of November 13, 2007. On April 21,
2008, Varian Semiconductors Board of Directors amended the repurchase program to increase the amount that may be expended in repurchasing its common stock from $700 million to $800 million. The program does not have a fixed expiration date.
Share repurchases under this program during the second quarter and first six months of fiscal years 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
Fiscal Six Months Ended
|
|
|
March 28,
2008
|
|
March 30,
2007
|
|
March 28,
2008
|
|
March 30,
2007
|
|
|
Amounts in thousands, except per share
amounts
|
|
Amounts in thousands, except per share
amounts
|
Number of shares of common stock repurchased
|
|
|
1,215,408
|
|
|
3,177,519
|
|
|
2,677,683
|
|
|
4,791,921
|
Total cost of repurchase
|
|
$
|
39,320
|
|
$
|
100,509
|
|
$
|
104,362
|
|
$
|
143,801
|
Average price paid per share.
|
|
$
|
32.32
|
|
$
|
31.61
|
|
$
|
38.94
|
|
$
|
29.99
|
Varian Semiconductor has repurchased an aggregate of 19,642,033 shares of its common stock through March 28,
2008 pursuant to this repurchase program since its inception in October 2004. As of March 28, 2008, there was a total of $60.7 million remaining under this repurchase program.
Note 14. Operating Segments and Geographic Information
Varian Semiconductor has determined that it operates in one
business segment: the manufacturing, marketing and servicing of semiconductor processing equipment for ion implantation systems. Since Varian Semiconductor operates in one segment, all financial segment information required by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, can be found in the consolidated financial statements.
Varian
Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future. In the second quarter of fiscal year 2008, revenue from four customers accounted
for 21%, 15%, 12% and 10%, respectively, of Varian Semiconductors total revenue. In the second quarter of fiscal year 2007, revenue from three customers accounted for 21%, 11% and 11%, respectively, of Varian Semiconductors total
revenue. During the first six months of fiscal year 2008, revenue from four customers accounted for 19%, 13%, 10% and 10%, respectively, of Varian Semiconductors total revenue. During the first six months of fiscal year 2007, revenue from one
customer accounted for 17% of Varian Semiconductors total revenue.
11
As of March 28, 2008, three customers represented 17%, 13% and 10%, respectively, of the total accounts receivable
balance. As of September 28, 2007, one customer accounted for 15% of the total accounts receivable balance.
The following table summarizes revenue
based on final geographic destination and long-lived assets by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Europe
|
|
Japan
|
|
Taiwan
|
|
Korea
|
|
Other
|
|
Consolidated
|
|
|
(Amounts in thousands)
|
Revenue Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2008
|
|
$
|
63,383
|
|
$
|
12,507
|
|
$
|
10,841
|
|
$
|
98,075
|
|
$
|
40,331
|
|
$
|
30,201
|
|
$
|
255,338
|
March 30, 2007
|
|
|
72,730
|
|
|
10,412
|
|
|
5,203
|
|
|
56,445
|
|
|
74,500
|
|
|
22,514
|
|
|
241,804
|
|
|
|
|
|
|
|
|
Revenue Six months ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2008
|
|
$
|
114,220
|
|
$
|
21,396
|
|
$
|
31,806
|
|
$
|
202,676
|
|
$
|
86,592
|
|
$
|
52,704
|
|
$
|
509,394
|
March 30, 2007
|
|
|
121,309
|
|
|
31,473
|
|
|
35,209
|
|
|
102,390
|
|
|
118,902
|
|
|
58,144
|
|
|
467,427
|
|
|
|
|
|
|
|
|
Long-lived assets, net, as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2008
|
|
$
|
65,820
|
|
$
|
480
|
|
$
|
323
|
|
$
|
584
|
|
$
|
7,424
|
|
$
|
415
|
|
$
|
75,046
|
September 28, 2007
|
|
|
68,193
|
|
|
403
|
|
|
402
|
|
|
430
|
|
|
8,989
|
|
|
437
|
|
|
78,854
|
Note 15. Income Taxes
Varian Semiconductors effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax jurisdictions throughout the world.
In fiscal 2007 Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated group. The objective of this realignment was to make
its legal structure more consistent with the geographic mix of its customers and suppliers. In effecting this realignment, Varian Semiconductor has established operations in Switzerland that will provide operational and financial services to all of
its international locations.
Varian Semiconductors effective income tax rate was a provision of 38.2% for the first six months of fiscal year 2008
and a provision of 31.8% for the same period in fiscal year 2007. The 2008 provision included a discrete net benefit of $1.2 million related to a Swiss net operating loss and other discrete items. The discrete income tax benefit received in the
first six months of fiscal year 2008 reduced the effective tax rate by approximately 1 percentage point. For the same period of fiscal year 2007, Varian Semiconductors income tax expense included a discrete net benefit of $2.1 million related
to the reinstatement of the research and development tax credit retroactive to January 1, 2006. The discrete income tax benefit recorded in the first six months of fiscal year 2007 reduced the effective tax rate by approximately 2 percentage
points. The realignment of Varian Semiconductors entities has caused the tax rate to become more sensitive to the geographic distribution of profits. The increase in the effective rate in the first six months of fiscal 2008, exclusive of the
benefits received, is primarily due to changes in the geographic distribution of forecasted income, lower forecasted profitability and the expiration of the research and development tax credit effective December 31, 2007. The rate is higher
than the U.S. federal statutory rate principally due to tax charges to implement the new structure, which are expected to decrease over time, and an increase in reserves for unrecognized tax benefits. Future tax rates may vary from the historic
rates depending on the worldwide composition of earnings and the continuing availability of income tax credits as well as the potential resolution of reserves for unrecognized tax benefits.
In the second quarter of fiscal year 2008, Varian Semiconductors forecast of international earnings declined significantly. Consequently, the current proportion of
earnings in the U.S. became substantially higher than expected during the first quarter of fiscal year 2008. As a result, Varian Semiconductors current projected effective rate required an adjustment to the rate during the second quarter of
fiscal year 2008. This adjustment to the rate, from 31.4% recorded in the first quarter of fiscal year 2008 to 38.2% in the second quarter of fiscal year 2008, resulted in an actual provision of 45.1% during the second quarter of 2008.
Varian Semiconductor adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109 (FIN 48) on September 29, 2007. FIN 48
12
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. This interpretation prescribes the 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. Upon adoption of FIN 48, Varian Semiconductor increased the liability for net unrecognized
tax benefits by $1.7 million, and accounted for the increase as a cumulative effect of change in accounting principle that resulted in a reduction in retained earnings of $1.7 million at September 29, 2007. Varian Semiconductor also
reclassified $4.0 million of current income taxes payable to long-term income taxes payable and $1.3 million of long-term income taxes payable to non-current deferred tax assets.
As of September 29, 2007, the total gross unrecognized tax benefits related to various federal, state and foreign income tax matters was $40.8 million. Of this amount, the amount that would impact the effective
tax rate, if recognized, was $38.5 million. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred tax assets of $2.3 million, of
which $0.9 million relates to state tax credits which are fully offset by a valuation allowance.
The increase in the reserve for unrecognized tax benefits
during the first and second quarters of fiscal 2008, was $2.1 and $3.8 million, respectively, for positions taken in the current year. The total amount of unrecognized tax benefits was $42.9 as of December 28, 2007 and $46.7 million as of
March 28, 2008. Of these amounts, the amounts that would impact the effective tax rate, if recognized, was $40.6 and $42.8 million respectively. 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, of which $0.9 as of December 28, 2007 and $2.5 million as of March 28, 2008 relate to state tax credits which are fully offset by a valuation allowance.
Varian Semiconductor anticipates a ratable increase in unrecognized tax benefits during the remainder of the fiscal year ending October 3, 2008. Varian Semiconductor will reexamine the tax provision and the effect of estimated unrecognized tax
benefits on its financial position at the end of each reporting period.
In the normal course of business, Varian Semiconductor and its subsidiaries are
examined by various federal, state and foreign tax authorities, including the Internal Revenue Service. Varian Semiconductor is subject to audit by the Internal Revenue Service and various state and foreign authorities for the fiscal years 2003
through 2007. The Internal Revenue Service is currently examining certain refund claims, primarily related to the extraterritorial income exclusion, filed by Varian Semiconductor for fiscal years 2000 through 2004. The favorable resolution of these
claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. It is reasonably possible that agreement on these claims may be reached within the next twelve months. Final agreement could reduce the amount of unrecognized
tax benefits by approximately $5.8 million.
As of September 29, 2007, Varian Semiconductor had accrued $1.7 million of interest and penalties related
to unrecognized tax benefits. As of December 28, 2007 and March 28, 2008, the total amount of accrued interest and penalties was $1.9 and $2.5 million respectively. Varian Semiconductor includes interest and penalties related to
unrecognized tax benefits within its provision for income taxes.
Note 16. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair
value in accordance with GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will change current
practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this statement on its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement
No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to measure items at fair value can
be made on an instrument-by-instrument basis, but once the decision is made, it is permanent. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this
statement on its financial statements.
In February 2008, the FASB adopted FASB Staff Position SFAS No. 157-2, Effective Date of FASB Statement
No. 157 delaying the effective date of SFAS No. 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). Varian Semiconductor is currently evaluating the impact of the implementation of SFAS No. 157 on its financial statements.
13
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities. This statement requires enhanced disclosure requirements for derivative instruments and hedging activities including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are
accounted for under Statement 133, and how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This statement will be effective for Varian Semiconductors fiscal
year 2010. Varian Semiconductor is in the process of evaluating the impact of this statement on its 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. (Varian Semiconductor)s 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 Varian Semiconductors financial results to differ are described under the heading Risk Factors in this
report and in the annual report on Form 10-K for the fiscal year ended September 28, 2007, filed with the Securities and Exchange Commission (SEC) on November 21, 2007.
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 Varian Semiconductors annual report on Form 10-K for the fiscal year ended September 28, 2007, filed with the SEC on November 21, 2007.
Overview
Varian Semiconductor is the leading supplier of ion implantation equipment used in the fabrication of
semiconductor chips. Varian Semiconductor designs, manufactures, markets and services 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. Varian Semiconductor has shipped more than 3,900 systems worldwide.
Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and productivity, reduce operating costs, and extend capital productivity of
investments through multiple product generations. In fiscal year 2007, Varian Semiconductor was 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 ten of the past eleven years.
Varian Semiconductors business is cyclical. The business depends upon semiconductor manufacturers
expectations and resulting capacity investments for future integrated circuit demand. Varian Semiconductors business is also tied closely to its market share. Varian Semiconductor has increased its market share substantially in recent years.
Most recently, overall market share grew from 43.1% in calendar year 2006 to 64.5% in calendar year 2007. Varian Semiconductor believes the semiconductor capital equipment business will continue to be volatile, largely due to fluctuations in the
level of investment by memory manufacturers. As such, worldwide implanter sales are expected to decline in calendar year 2008. Thus, despite Varian Semiconductors recent gains in market share, its fiscal year 2008 revenue could be lower than
its fiscal year 2007 revenue.
Most advanced devices below 90nm are produced on 300mm wafers. Memory manufacturers typically produce integrated circuits
used for 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. Significant purchasing fluctuations by memory, logic and foundry manufacturers could lead to significant fluctuations in Varian Semiconductors revenues, even if the total ion implant market remains flat.
14
Market Share and Total Available Market.
The table below shows Varian Semiconductors calendar year 2007 and
2006 market share, as reported by Gartner Dataquest in April 2008 and April 2007, 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 2007 and 2006, also reported by Gartner Dataquest in April 2008 and April 2007, respectively. The total available market represents an estimated
worldwide total revenue for ion implanters sold by all companies which sell ion implanters during each of the calendar years.
|
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|
|
|
|
|
|
|
|
|
|
|
Market Share
Calendar Year Ended
|
|
|
Total Available Market
Calendar Year Ended
|
|
|
December 31,
2007
|
|
|
December 31,
2006
|
|
|
December 31,
2007
|
|
December 31,
2006
|
By market
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium current
|
|
56.6
|
%
|
|
52.8
|
%
|
|
$
|
454
|
|
$
|
414
|
High current
|
|
77.8
|
%
|
|
45.8
|
%
|
|
|
672
|
|
|
720
|
High energy
|
|
12.8
|
%
|
|
17.4
|
%
|
|
|
147
|
|
|
230
|
Ultra high dose
|
|
100.0
|
%
|
|
na
|
|
|
|
64
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
|
|
64.5
|
%
|
|
43.1
|
%
|
|
$
|
1,337
|
|
$
|
1,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market share and total available market research data is also published by VLSI Research Inc. In April 2008, VLSI
Research Inc. reported that Varian Semiconductors overall market share was 64% and that the total available market was $1.3 billion for calendar year 2007.
Varian Semiconductors twenty-two point increase in market share in calendar year 2007 led to increased revenues during 2007 compared to 2006. Varian Semiconductors increase in high current market share is a result of the
industry shift to single wafer implanters at advanced technology nodes (65nm and below). Varian Semiconductor began developing single wafer high current tools in 1994 and is currently the industry leader. The increase in medium current market share
is primarily related to Varian Semiconductors market share growth in Taiwan. The decrease in high energy market share is primarily related to customer mix in the total available market for high energy tools. Varian Semiconductors
position in the newly designated ultra high-dose market has resulted from the success of its new plasma doping tool known as the VIIsta PLAD, which is currently used primarily by memory manufacturers.
Critical Accounting Policies and Significant Accounting Estimates
Varian Semiconductors discussion and analysis of its financial condition and results of operations are based upon Varian Semiconductors 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 Varian Semiconductor 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, Varian Semiconductor evaluates its 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. Varian Semiconductors critical accounting policies and estimates are described in Item 7 in the
annual report on Form 10-K for the fiscal year ended September 28, 2007, filed with the SEC on November 21, 2007. Varian Semiconductor operates 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. Varian Semiconductor bases its 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 the section titled Risk Factors in Part II, Item 1A.
With the exception of the
paragraphs below which discuss the impact of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48), there were no significant changes in
15
Varian Semiconductors critical accounting policies and estimates during the six months ended March 28, 2008. Please refer to Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of the Annual Report on Form 10-K for the fiscal year ended September 28, 2007 for a more complete discussion of the critical accounting
policies and estimates.
Income Tax Provision
. On a quarterly basis, Varian Semiconductor provides for income taxes based upon an estimated annual
effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of Varian Semiconductors tax
planning strategies. Varian Semiconductor carefully monitors the changes in many factors and adjusts its effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on Varian
Semiconductors financial condition and results of operations.
In addition, the calculation of Varian Semiconductors tax liabilities involves
dealing with uncertainties in the application of complex tax regulations. As a result of the implementation of FIN 48, Varian Semiconductor recognizes liabilities for uncertain tax positions based on the two-step process prescribed within this
interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
Varian Semiconductor adopted FIN 48 on September 29, 2007. See Note 15, Income Taxes to the Consolidated Financial Statements for a detailed description.
Results of Operations
Revenue
The following table sets forth revenue by category for the three and six month periods ended March 28, 2008 and March 30, 2007:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
March 30,
2007
|
|
Change
|
|
|
Percent
Change
|
|
|
March 28,
2008
|
|
March 30,
2007
|
|
Change
|
|
|
Percent
Change
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
234,962
|
|
$
|
219,863
|
|
$
|
15,099
|
|
|
6.9
|
%
|
|
$
|
470,472
|
|
$
|
422,213
|
|
$
|
48,259
|
|
|
11.4
|
%
|
Service
|
|
|
20,347
|
|
|
19,695
|
|
|
652
|
|
|
3.3
|
%
|
|
|
38,876
|
|
|
41,172
|
|
|
(2,296
|
)
|
|
-5.6
|
%
|
Royalty and license
|
|
|
29
|
|
|
2,246
|
|
|
(2,217
|
)
|
|
-98.7
|
%
|
|
|
46
|
|
|
4,042
|
|
|
(3,996
|
)
|
|
-98.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
255,338
|
|
$
|
241,804
|
|
$
|
13,534
|
|
|
5.6
|
%
|
|
$
|
509,394
|
|
$
|
467,427
|
|
$
|
41,967
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by territory:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
179,448
|
|
$
|
158,662
|
|
$
|
20,786
|
|
|
13.1
|
%
|
|
$
|
373,778
|
|
$
|
314,645
|
|
$
|
59,133
|
|
|
18.8
|
%
|
North America
|
|
|
63,383
|
|
|
72,730
|
|
|
(9,347
|
)
|
|
-12.9
|
%
|
|
|
114,220
|
|
|
121,309
|
|
|
(7,089
|
)
|
|
-5.8
|
%
|
Europe
|
|
|
12,507
|
|
|
10,412
|
|
|
2,095
|
|
|
20.1
|
%
|
|
|
21,396
|
|
|
31,473
|
|
|
(10,077
|
)
|
|
-32.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
255,338
|
|
$
|
241,804
|
|
$
|
13,534
|
|
|
5.6
|
%
|
|
$
|
509,394
|
|
$
|
467,427
|
|
$
|
41,967
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
During the second quarter and first six months of fiscal year 2008, product revenue was $235.0 million and $470.5 million, respectively, compared to $219.9 million and $422.2 million, respectively, for the same periods a year ago. The
increase in product revenue in the second quarter of fiscal year 2008 as compared to the second quarter of fiscal year 2007 was primarily due to product and customer mix as the number of tools recognized in revenue was constant in both periods.
Additionally, parts sales during the second quarter of fiscal year 2008 increased 20% compared to the same period a year ago due to a higher installed base along with higher fab utilization. The increase in product revenue in the first six months of
fiscal year 2008 as compared to the first six months of fiscal year 2007 was primarily due to increased tool sales. On a unit basis, the number of tools recorded in revenue increased 4% for the first six months of fiscal year 2008 compared to the
first six months of fiscal year 2007. This increase was primarily attributable to an increase in VIIsta PLAD sales. In addition, revenue from parts during the first six months of fiscal year 2008 increased 22% compared to the same period a year ago
due to a higher installed base along with higher fab utilization. Upgrade sales were slightly lower in both the second quarter and first six months of fiscal year 2008 compared to the same periods a year ago mainly due to lower customer demand in
the U.S.
16
Service
Service
revenue during the second quarter and first six months of fiscal year 2008 was $20.3 million and $38.9 million, respectively, compared to $19.7 million and $41.2 million, respectively, for the same periods a year ago. The slight increase in service
revenue in the second quarter of fiscal year 2008 as compared to the same period in fiscal year 2007 is related to higher paid service and installation revenue. The decrease in service revenue in the first six months of fiscal year 2008 as compared
to the same period in fiscal year 2007 is primarily related to a decrease in the number of service contracts. Service contracts decreased due to a lower number of second year warranties and engineer-on-site contracts in Asia.
Royalty and License
Royalty revenue for both the second quarter and
first six months of fiscal year 2008 was less than $0.1 million compared to $2.2 million and $4.0 million, respectively, for the same periods in fiscal year 2007 as most agreements have now expired.
Revenue by Territory
The Asia Pacific region accounts for a
significant percentage of Varian Semiconductors revenues. Increases in revenue from this region for the second quarter and first six months of fiscal year 2008 as compared to the same periods in fiscal year 2007, are a result of the continued
migration of worldwide semiconductor manufacturing to Asia.
Customers
During the second quarter of fiscal year 2008, revenue from four customers accounted for 21%, 15%, 12% and 10%, respectively, of Varian Semiconductors total revenue. In the second quarter of fiscal year 2007,
revenue from three customers accounted for 21%, 11% and 11%, respectively, of Varian Semiconductors total revenue. During the first six months of fiscal year 2008, revenue from four customers accounted for 19%, 13%, 10% and 10%, respectively,
of Varian Semiconductors total revenue. During the first six months of fiscal year 2007, revenue from one customer accounted for 17% of Varian Semiconductors total revenue. Varian Semiconductor expects that sales of its products to
relatively few customers will continue to account for a high percentage of its 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 Risk
Factors in Part II Item 1A).
Shipment Mix
Varian Semiconductors tools are used by logic, memory and foundry manufacturers for integrated circuits. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory
manufacturers make chips that store information and they, too, 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. Over the last several
years the demand for memory chips has outstripped the demand for logic chips. As the demand for memory intensive applications such as cameras, phones, and MP3 players grows, it is expected that memory will continue to represent the bulk of chips
made worldwide. The following table sets forth tool shipments by market, as a percent of total tool shipments, for the second quarter and first six months of fiscal years 2008 and 2007. Percentages are based on the number of tools shipped during the
respective period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Three Months Ended
|
|
|
Fiscal Six Months Ended
|
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
March 28,
2008
|
|
|
March 30,
2007
|
|
|
|
|
|
|
By market
|
|
|
|
|
|
|
|
|
|
|
|
|
Memory
|
|
65
|
%
|
|
73
|
%
|
|
74
|
%
|
|
78
|
%
|
Logic
|
|
35
|
%
|
|
27
|
%
|
|
26
|
%
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipments
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Product Revenue
Cost of product revenue was $121.5 million and gross margin was 48% for the second quarter of fiscal year 2008, compared to cost of product revenue of $118.0 million and gross margin of 46% for the second quarter of
fiscal year 2007. For the first six months of fiscal year 2008, the cost of product revenue was $241.0 million and gross margin was 49%, compared to cost of product revenue of $229.5 million and gross margin of 46% for the first six months of fiscal
year 2007.
17
More favorable product mix significantly contributed to higher gross margins in both the second quarter and first six months of fiscal year 2008 as compared
to the same periods a year ago. In general, Varian Semiconductors newer products carry higher gross margins than its older ones and Varian Semiconductor has continued to successfully sell a greater proportion of these newer, higher value
products. In both the second quarter and first six months of fiscal year 2008, the higher margins were partially offset by inventory charges related to product transitions and the reduction in the demand for legacy parts and less efficient factory
operations due to lower anticipated production levels.
Cost of Service Revenue
Cost of service revenue was $12.6 million and gross margin was 38% for the second quarter of fiscal year 2008, compared to cost of service revenue of $13.0 million and gross margin of 34% for the second quarter of
fiscal year 2007. Cost of service revenue was $24.9 million and gross margin was 36% for the first six months of fiscal year 2008, compared to a cost of service revenue of $26.6 million and gross margin of 35% for the first six months of fiscal year
2007. The primary reasons for the increase in gross margin in the second quarter and first six months of fiscal year 2008 versus the same periods a year ago are improved margins in service contract revenue and paid service.
Research and Development
Research and development expense for the
second quarter and first six months of fiscal year 2008 was $28.5 million and $57.3 million, respectively, compared to $25.6 million and $49.8 million, respectively, for the same periods in fiscal year 2007. The increase in research and development
spending is attributable to Varian Semiconductors rapid product development cycle, which aims to introduce new products every nine to twelve months and continuing efforts to improve productivity and technical development of its products.
Additionally, Varian Semiconductor is actively investing in an effort to find new applications for its products. Varian Semiconductor focuses on maintaining its leadership position in the markets for medium current, high current and ultra high dose
implanters, improving its position in the high energy business and continuing to invest in other new and next generation products.
Marketing, General
and Administrative
Marketing, general and administrative expense for the second quarter and first six months of fiscal year 2008 was $32.8 million and
$65.4 million, respectively, compared to $32.6 million and $63.0 million, respectively, for the same periods in fiscal year 2007. The increase in the second quarter of fiscal 2008 as compared to the same period in the prior year is primarily due to
additional expenses associated with Varian Semiconductors realignment of its legal entities. The increase in the first six months of fiscal year 2008 as compared to the same period a year ago is also primarily due to the additional expenses
associated with realignment of its legal entities along with increases in incentive compensation and additional infrastructure in Japan associated with increased business activity.
Interest Income and Interest Expense
During the second quarter and first six months of fiscal year 2008, Varian
Semiconductor earned $2.2 million and $4.9 million in net interest income, respectively, compared to $5.8 million and $11.4 million, respectively for the same periods in fiscal year 2007. The decrease in net interest income for the first quarter and
first six months of fiscal year 2008 was due to a decrease in average cash and investment balances, primarily attributable to the share repurchase program (See Notes 12 and 13 in the notes to the unaudited interim consolidated financial statements
contained in Item 1 of this Quarterly Report on Form 10-Q for further information regarding comprehensive income and the share repurchase program).
Other Income (Expense), Net
Other income (expense), net, was less than $0.1 million in income for both the second quarter and first six
months of fiscal year 2008, compared to less than $0.1 million in expense and $0.7 million in income, respectively, for the same periods of fiscal year 2007. Other income for the first quarter of fiscal year 2007 included $0.8 million for the
reversal of a liability related to the expiration of the statute of limitations on a pre-spin liability.
Provision for Income Taxes
Varian Semiconductors effective tax rate is based on its current profitability outlook and its expectations of earnings from operations in the U.S. and other tax
jurisdictions throughout the world.
In fiscal 2007 Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated
group. The objective of this realignment was to make its legal structure more consistent with the geographic mix of its customers and suppliers. In effecting this realignment, Varian Semiconductor has established operations in Switzerland that will
provide operational and financial services to all of its international locations.
Varian Semiconductors effective income tax rate was a provision of
38.2% for the first six months of fiscal year 2008 and a provision of 31.8% for the same period in fiscal year 2007. The 2008 provision included a discrete net benefit of $1.2 million
18
related to a Swiss net operating loss and other discrete items. The discrete income tax benefit received in the first six months of fiscal year 2008 reduced
the effective tax rate by approximately 1 percentage point. For the same period of fiscal year 2007, Varian Semiconductors income tax expense included a discrete net benefit of $2.1 million related to the reinstatement of the research and
development tax credit retroactive to January 1, 2006. The discrete income tax benefit recorded in the first six months of fiscal year 2007 reduced the effective tax rate by approximately 2 percentage points. The realignment of Varian
Semiconductors entities has caused the tax rate to become more sensitive to the geographic distribution of profits. The increase in the effective rate in the first six months of fiscal 2008, exclusive of the benefits received, is primarily due
to changes in the geographic distribution of forecasted income, lower forecasted profitability and the expiration of the research and development tax credit effective December 31, 2007. The rate is higher than the U.S. federal statutory rate
principally due to tax charges to implement the new structure, which are expected to decrease over time, and an increase in reserves for unrecognized tax benefits. Future tax rates may vary from the historic rates depending on the worldwide
composition of earnings and the continuing availability of income tax credits as well as the potential resolution of reserves for unrecognized tax benefits.
In the second quarter of fiscal year 2008, Varian Semiconductors forecast of international earnings declined significantly. Consequently, the current proportion of earnings in the U.S. became substantially higher than expected during
the first quarter of fiscal year 2008. As a result, Varian Semiconductors current projected effective rate required an adjustment to the rate during the second quarter of fiscal year 2008. This adjustment to the rate, from 31.4% recorded in
the first quarter of fiscal year 2008 to 38.2% in the second quarter of fiscal year 2008, resulted in an actual provision of 45.1% during the second quarter of 2008.
In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various federal, state and foreign tax authorities, including the Internal Revenue Service. Varian Semiconductor is subject
to audit by the Internal Revenue Service and various state and foreign authorities for the fiscal years ended 2003 through 2007. The Internal Revenue Service is currently examining certain refund claims, primarily related to the extraterritorial
income exclusion, filed by Varian Semiconductor for fiscal years ended 2000 through 2004. The favorable resolution of these claims could result in a benefit to the tax provision in the range of $0 to $5.8 million. It is reasonably possible that
agreement on these claims may be reached within the next twelve months. Final agreement could reduce the amount of unrecognized tax benefits by approximately $5.8 million.
Net Income
As a result of the foregoing factors, in the second quarter and first six months of fiscal year 2008,
Varian Semiconductor recorded net income of $34.1 million and $77.7 million, respectively, compared to net income of $38.4 million and $75.4 million for the same periods of fiscal year 2007. In the second quarter and first six months of fiscal year
2008, net income per diluted share was $0.45 and $1.02, respectively, compared to net income per diluted share of $0.46 and $0.90, respectively for the same periods of fiscal year 2007.
Liquidity and Capital Resources
Varian Semiconductor generated $58.3 million of cash from operations during the
first six months of fiscal year 2008, compared to $28.6 million of cash generated from operations during the first six months of fiscal year 2007. Cash provided by operations in the first six months of fiscal year 2008 was primarily a result of net
income of $77.7 million, plus non-cash expenses such as stock-based compensation of $10.8 million and depreciation and amortization of $8.4 million. Partially offsetting the increases to cash was an increase in accounts receivable of $47.9 million
related to the timing of shipments and extended payment terms granted to key customers. Also contributing to cash from operations was a decrease in other current assets of $11.1 million, primarily related to a $10.8 million decrease in prepaid
income taxes. Prepaid income taxes decreased due to an overpayment of U.S. federal income taxes at the end of the prior fiscal year which was reclassified to income taxes payable in the first three months of fiscal year 2008 to offset the fiscal
year 2008 tax liability.
Cash provided by operations of $28.6 million in the first six months of fiscal year 2007 was primarily a result of net income of
$75.4 million, plus non-cash expenses such as stock-based compensation of $10.4 million and depreciation and amortization of $7.0 million. Also contributing to cash from operations were increases in accounts payable and deferred revenue of $24.6
million and $14.3 million, respectively. These changes were partially offset by a $55.7 million increase in accounts receivable and a $45.1 million increase in inventories. The increase in accounts payable was mainly related to the timing of
inventory receipts and payments throughout the second quarter of fiscal year 2007. The increase in deferred revenue was related to the timing of tool shipments within the quarter. The increase in accounts receivable was related to the volume of
revenue recognized during the latter portion of the second quarter of fiscal year 2007. The increase in inventories was related to an increase in the manufacturing build schedule for the third quarter of fiscal year 2007.
19
Varian Semiconductor generated $45.9 million from investing activities during the first six months of fiscal year 2008
compared to $9.8 million in the first six months of fiscal year 2007. Varian Semiconductor received proceeds from sales and maturities of investments of $107.6 million during the period, partially offset by $57.2 million used for the purchase of
investments during the first six months of fiscal year 2008, and $4.5 million used for the purchase of property, plant and equipment during the same period. Varian Semiconductor is using cash from investing activities to repurchase shares of its
common stock. In the first six months of fiscal year 2007, Varian Semiconductor used $86.7 million of cash and cash equivalents for the purchase of investments and $5.7 million for the purchase of property, plant and equipment. This was offset by
proceeds from sales and maturities of investments of $102.2 million during the first six months of fiscal year 2007.
During the first six months of fiscal
year 2008, Varian Semiconductor used $99.1 million of cash for financing activities, primarily to repurchase shares of its common stock. This was partially offset by $3.8 million of cash received from the issuance of common stock upon the exercise
of stock options. During the first six months of fiscal year 2007, Varian Semiconductor used $109.2 million of cash from financing activities, primarily to repurchase shares of its common stock. This was partially offset by $30.3 million of cash
received from the issuance of common stock upon the exercise of stock options.
Varian Semiconductors Board of Directors amended the share repurchase
program by increasing the amount of funds that may be expended in repurchasing common stock from $700 to $800 million as of April 21, 2008. The program does not have a fixed expiration date. In the first six months of fiscal year 2008, Varian
Semiconductor repurchased 2.7 million shares at a weighted-average price per share of $38.94. In the first six months of fiscal year 2007, Varian Semiconductor repurchased 4.8 million shares at a weighted-average price per share of $29.99.
As of April 25, 2008, Varian Semiconductor had $147.2 million remaining in its repurchase authorization.
Varian Semiconductors 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. Varian Semiconductor believes that cash, cash equivalents and investments of $246.7 million
at March 28, 2008 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.
Off-Balance Sheet Arrangements
Varian Semiconductor
does 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, Varian Semiconductor is not exposed to any financing, liquidity, market or credit risk that could arise if Varian Semiconductor had engaged in such
relationships.
Contractual Obligations
Under GAAP,
certain obligations and commitments are not required to be included in the consolidated balance sheets and statements of income. These obligations and commitments, while entered into in the normal course of business, may have a material impact on
liquidity. The following commitments as of March 28, 2008 have not been included in the consolidated balance sheets and statements of income included under Item 1. Consolidated Financial Statements; however, they have been disclosed in the
following table in order to provide a more complete picture of Varian Semiconductors financial position and liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
Total
|
|
Less than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More than
5 Years
|
|
|
(Amounts in thousands)
|
|
|
|
|
Operating leases
|
|
$
|
4,024
|
|
$
|
2,369
|
|
$
|
1,023
|
|
$
|
529
|
|
$
|
103
|
Purchase order commitments
|
|
|
69,476
|
|
|
69,405
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
73,500
|
|
$
|
71,774
|
|
$
|
1,094
|
|
$
|
529
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Varian Semiconductor adopted Financial Accounting Standards Board FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109, (FIN 48) on September 29, 2007. As of March 28, 2008, the non-current tax payable under FIN 48 was $38.4 million.
Varian Semiconductor is unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.
20
Transactions with Affiliates and Related Parties
Operations prior to April 2, 1999 had been part of the former Varian Associates, Inc. (VAI), now known as Varian Medical Systems, Inc. (VMS) (See Note 10. Commitments, Contingencies and
Guarantees in the accompanying notes to the unaudited interim consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q). During the first six months of fiscal year 2008, Varian Semiconductor was charged by VMS $0.5
million in settlement of these obligations. During the first six months of fiscal year 2007, Varian Semiconductor was charged by VMS $0.4 million in settlement of these obligations.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This statement defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that
require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change current practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this
statement on its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
value. The decision to measure items at fair value can be made on an instrument-by-instrument basis, but once the decision is made, it is permanent. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian
Semiconductor is in the process of evaluating the impact of this statement on its financial statements.
In February 2008, the FASB adopted FASB Staff
Position SFAS No. 157-2, Effective Date of FASB Statement No. 157 delaying the effective date of SFAS No. 157 for one year for all non financial assets and non financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually). Varian Semiconductor is currently evaluating the impact of the implementation of SFAS No. 157 on its financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. This statement requires enhanced
disclosure requirements for derivative instruments and hedging activities including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133, and how derivative
instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This statement will be effective for Varian Semiconductors fiscal year 2010. Varian Semiconductor is in the process of
evaluating the impact of this statement on its financial statements.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Foreign Currency Exchange Risk
As a multinational company, Varian Semiconductor faces exposure to adverse movements in foreign currency
exchange rates. This exposure may change over time as Varian Semiconductors business practices evolve and could impact Varian Semiconductors financial results. However, based on the results of an annual test, a 10% change in the exchange
rate of the U.S. dollar against other major currencies would not have a material effect on Varian Semiconductors results of operations. Historically, Varian Semiconductors primary exposures have resulted from non-U.S. dollar-denominated
sales and purchases in Asia Pacific and Europe. Varian Semiconductor does not enter into forward exchange contracts for trading purposes. Varian Semiconductors forward exchange contracts generally range from one to twelve months in original
maturity. Typically, no forward exchange contract exceeds one year in original maturity.
Varian Semiconductor hedges currency exposures that are
associated with certain of its assets and liabilities denominated in various non-U.S. dollar currencies. The aggregate exchange loss for the second quarter and first six months of fiscal year 2008 was $113 thousand and $167 thousand, respectively,
compared to $8 thousand and $143 thousand, respectively, for the same periods a year ago.
21
Forward exchange contracts outstanding are summarized as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2008
|
|
September 28, 2007
|
|
|
Notional
Value
|
|
Contract
Rate
|
|
Fair
Value
|
|
Notional
Value
|
|
Contract
Rate
|
|
Fair
Value
|
Foreign currency purchase contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Singapore Dollar
|
|
$
|
3,383
|
|
1.39
|
|
$
|
3,413
|
|
$
|
4,609
|
|
1.52
|
|
$
|
4,678
|
New Taiwan Dollar
|
|
|
682
|
|
30.49
|
|
|
690
|
|
|
2,093
|
|
32.93
|
|
|
2,100
|
Japanese Yen
|
|
|
|
|
|
|
|
|
|
|
557
|
|
115.21
|
|
|
556
|
Korean Won
|
|
|
1,164
|
|
989.50
|
|
|
1,166
|
|
|
218
|
|
913.35
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency purchase contracts
|
|
$
|
5,229
|
|
|
|
$
|
5,269
|
|
$
|
7,477
|
|
|
|
$
|
7,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sell contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japanese Yen
|
|
$
|
23,295
|
|
104.73
|
|
$
|
24,559
|
|
$
|
24,186
|
|
114.91
|
|
$
|
24,052
|
Korean Won
|
|
|
9,277
|
|
942.95
|
|
|
8,856
|
|
|
5,072
|
|
939.70
|
|
|
5,177
|
New Taiwan Dollar
|
|
|
338
|
|
30.80
|
|
|
345
|
|
|
|
|
|
|
|
|
Singapore Dollar
|
|
|
716
|
|
1.38
|
|
|
715
|
|
|
169
|
|
1.49
|
|
|
168
|
Israeli Shekel
|
|
|
704
|
|
3.60
|
|
|
724
|
|
|
311
|
|
4.13
|
|
|
319
|
Euro
|
|
|
|
|
|
|
|
|
|
|
1,077
|
|
0.73
|
|
|
1,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign currency sell contracts
|
|
$
|
34,330
|
|
|
|
$
|
35,199
|
|
$
|
30,815
|
|
|
|
$
|
30,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contracts
|
|
$
|
39,559
|
|
|
|
$
|
40,468
|
|
$
|
38,292
|
|
|
|
$
|
38,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Varian Semiconductor uses derivative instruments to protect its foreign operations from fluctuations in earnings
and cash flows caused by volatility in currency exchange rates. Varian Semiconductor hedges its current exposures and a portion of its anticipated foreign currency exposures with hedging instruments having terms of up to twelve months.
Varian Semiconductors international sales, except for those in Japan, are primarily denominated in the U.S. dollar. For foreign currency-denominated sales,
however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward sales contracts whose critical terms are designed to match those of
the underlying exposure. These hedges are evaluated for effectiveness at least quarterly using the change in value of the forward contracts to the change in value of the underlying transaction, with the effective portion of the hedge accumulated in
other comprehensive income. Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of operations. There was an immaterial amount of ineffectiveness recognized during the three and six month
periods ended March 28, 2008. There were seven forward foreign exchange sell contracts designated as hedges of product sales in Japanese Yen outstanding at March 28, 2008 totaling an equivalent of $22.5 million. In addition, there were
four forward exchange purchase contracts totaling an equivalent of $14.5 million offsetting four of the seven forward sell contracts. At September 28, 2007, there were four forward foreign exchange sell contracts designated as hedges of
anticipated product sales in Japanese Yen totaling an equivalent of $12.6 million. In addition, there were two forward foreign exchange purchase contracts totaling an equivalent of $6.5 million offsetting two of the four forward sell contracts.
There was an unrealized loss of $0.3 million on the seven forward Yen sell contracts as of March 28, 2008. There were approximately $0.1 million in
net unrealized losses on forward Yen revenue contracts as of September 28, 2007. The fair value of forward exchange contracts generally reflects the estimated amounts that Varian Semiconductor would receive or pay to terminate the contracts at
the reporting date. The notional amounts of forward exchange contracts are not a measure of Varian Semiconductors exposure.
Interest Rate Risk
Although payments under certain of Varian Semiconductors overseas borrowing facilities are tied to market indices, Varian Semiconductor is not
exposed to material interest rate risk from these borrowing facilities, as none were in use at March 28, 2008. Varian Semiconductor has no material cash flow exposure due to rate changes for cash equivalents and investments. Varian
Semiconductor maintains cash investments primarily in money market funds consisting of U.S. Treasury, government agency and investment-grade corporate and municipal securities, as well as short-term time deposits with investment grade
22
financial institutions. Cash equivalents at March 28, 2008 and September 28, 2007 were $59.5 million and $84.5 million, respectively. At
March 28, 2008 and September 28, 2007, Varian Semiconductors short-term investments were $57.0 million and $88.4 million, respectively, and consisted primarily of government agency and corporate bonds with ratings of AA or better. At
March 28, 2008 and September 28, 2007, Varian Semiconductors long-term investments were $77.7 million and $96.2 million, respectively, and consisted primarily of government agency and corporate bonds with ratings of AA or better.
Commodity Price Risk
Varian Semiconductor is 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 March 28, 2008. 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 SECs 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 March 28, 2008, 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 March 28, 2008 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
23
PART II. OTHER INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS
|
Information required by this Item is provided in
Note 10. Commitments, Contingencies and Guarantees to the unaudited interim consolidated financial statements under Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
You should carefully consider the following risk
factors, in addition to other information included in this quarterly report on Form 10-Q, in evaluating Varian Semiconductor and its business. If any of the following risks occur, Varian Semiconductors business, financial condition and
operating results could be materially adversely affected. There have been no material changes from the risk factors previously disclosed in Item 1A. of Varian Semiconductors 2007 Annual Report on Form 10-K for the year ended
September 28, 2007.
The semiconductor industry is cyclical, and a slowdown in demand for Varian Semiconductors semiconductor manufacturing
equipment may negatively affect financial results.
The semiconductor industry historically has been cyclical in nature and has experienced periodic
downturns. The industry may experience volatility in product pricing and in product demand. Volatility may result in significant reductions and delays in the purchase of semiconductor manufacturing equipment and the construction of new fab
facilities. If such significant reductions and delays in purchasing occur and Varian Semiconductor has procured materials prior to the receipt of the customer purchase order, significant inventory charges could be incurred, thereby negatively
impacting Varian Semiconductors financial results. In addition, even though Varian Semiconductors revenues may fluctuate significantly from period to period, in order to remain competitive, Varian Semiconductor continues to invest in
research and development and to maintain its worldwide customer service and support capabilities. These investments in the business may adversely affect Varian Semiconductors financial results.
Varian Semiconductor faces intense competition in the semiconductor equipment industry.
Significant competitive factors in semiconductor equipment manufacturing include the strength of customer relationships, pricing, technological performance and timing, distribution capabilities and financial
viability. Varian Semiconductor believes that in order to remain competitive in this industry, it will need to devote significant financial resources to research and development, to offer and market a broad range of products, and maintain and
enhance customer service and support centers worldwide. The semiconductor equipment industry is increasingly dominated by large manufacturers who have resources to support customers worldwide, and some of Varian Semiconductors competitors have
substantially greater financial resources and more extensive engineering, manufacturing, marketing, service and support than does Varian Semiconductor. With fewer resources, Varian Semiconductor may not be able to match the product offerings or
customer service and technical support offered by its competitors. In addition, there are several smaller companies that provide innovative technology that may have performance advantages over Varian Semiconductors systems. If these
manufacturers continue to improve their product performance and pricing, enter into strategic relationships, expand their current targeted geographic territory or consolidate with large equipment manufacturers, sales of Varian Semiconductors
products may be adversely affected.
Varian Semiconductor derives a substantial portion of its revenues from a small number of customers, and its
business may be harmed by the loss of any one significant customer.
From time to time within the same accounting period, Varian Semiconductor has sold
significant percentages of its systems to its major customers, some of which include Elpida, Hynix, Hynix-ST, IM Flash, Inotera, Intel, Micron, Nan Ya, Promos, Qimonda, Rexchip, Samsung, SMIC, TSMC, and UMC. During some quarters, some of these
customers have individually accounted for more than 10% of Varian Semiconductors total revenue. Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue
in the foreseeable future. Furthermore, Varian Semiconductor may have difficulty attracting additional large customers because its sales depend, in large part, upon the decision of a prospective customer to increase manufacturing capacity in an
existing fabrication facility or to transfer a manufacturing process to a new fabrication facility, both of which typically involve a significant capital commitment. Once a semiconductor manufacturer has selected a particular suppliers capital
equipment, the manufacturer generally relies upon that equipment for the specific production line application. Consequently, Varian Semiconductor may experience difficulty in selling to a prospective customer if that customer initially selects a
competitors capital equipment.
24
Varian Semiconductors quarterly results of operations are likely to fluctuate, and as a result, Varian
Semiconductor may fail to meet the expectations of its investors and securities analysts, which may cause the price of its common stock to decline.
Varian Semiconductor has experienced and expects to continue to experience significant fluctuations in its quarterly financial results. From time to time, customers may accelerate, postpone or cancel shipments, or production difficulties
may delay shipments. A cancellation, delay in shipment or delay in customer acceptance of the product upon installation in any quarter may cause revenue in such quarter to fall significantly below expectations, which could cause the market price of
Varian Semiconductors common stock to decline. Varian Semiconductors financial results also fluctuate based on gross profit realized on sales. Gross profit as a percentage of revenue may vary based on a variety of factors, including the
mix and average selling prices of products sold, costs to manufacture and customize systems and inventory management. In addition, a number of other factors may impact Varian Semiconductors quarterly financial results, including, but not
limited to the following:
|
|
|
changing global economic conditions and worldwide political instability;
|
|
|
|
general conditions in the semiconductor equipment industry;
|
|
|
|
the extent that customers use Varian Semiconductors products and services in their business;
|
|
|
|
unexpected procurement or manufacturing difficulties;
|
|
|
|
pricing of key components;
|
|
|
|
fluctuations in foreign exchange rates;
|
|
|
|
a technical change that Varian Semiconductor is unable to address with its products;
|
|
|
|
a failure to achieve continued market acceptance of Varian Semiconductors key products;
|
|
|
|
ability to develop, introduce and market new, enhanced and competitive products in a timely manner;
|
|
|
|
introduction of new products by Varian Semiconductors competitors;
|
|
|
|
strategic technology investment decisions;
|
|
|
|
legal or technical challenges to Varian Semiconductors products and technology;
|
|
|
|
adverse weather conditions at its manufacturing facilities or customers facilities;
|
|
|
|
changes in the effective tax rate; and
|
|
|
|
new or modified accounting regulations.
|
Varian
Semiconductors operating expenses also fluctuate on a quarterly basis. A high percentage of Varian Semiconductors expenses are relatively fixed, thus, even a minimal number of cancelled, postponed or delayed shipments could have a
significant adverse impact on financial results. In addition, Varian Semiconductor may continue to heavily invest in such areas such as research and development, despite lower revenue levels. As such, financial results could be adversely impacted.
It is difficult for Varian Semiconductor to predict the quarter in which it will be recognizing revenue from large product orders.
Varian Semiconductor customarily sells a relatively small number of systems within any period. Consequently, Varian Semiconductors revenue and financial results
could be negatively impacted for a particular quarter if anticipated orders from even a few customers are not received in time to permit shipment and/or there are delays in customer acceptance of the product upon installation or future obligations
included in the contract do not permit revenue to be recognized on current tool sales under generally accepted accounting principles (GAAP). Generally, Varian Semiconductor recognizes all or a portion of the revenue from a product upon
shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and
25
regular credit evaluations, and there are no uncertainties regarding customer acceptance. Please refer to the full revenue recognition policy in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Significant Judgments and Accounting Estimates section of Varian Semiconductors most recent Annual Report on
Form 10-K. As a result, it is often difficult to determine the timing of product revenue recognition. In addition, Varian Semiconductors product order backlog at the beginning of each quarter may not include all systems needed to achieve
expected revenues for that quarter. Because Varian Semiconductor may build systems according to forecast, the absence of a significant backlog for an extended period of time could adversely affect financial results.
Varian Semiconductors future business depends, in part, on its ability to successfully introduce and manage the transition to new products, and Varian
Semiconductor may not succeed in accomplishing these goals.
Varian Semiconductor believes that its future success will depend on its ability to
develop, manufacture and successfully introduce new systems and product lines with improved capabilities and to continue enhancing existing products; in particular, products that respond to the trend toward single wafer processing and 300mm wafer
processing at more advanced nodes. Varian Semiconductor derives virtually all of its revenue from sales and servicing of systems and related products and services. Varian Semiconductor must accurately forecast the demand for new products while
managing the transition from older products. In addition, Varian Semiconductor may be unable to complete the development or meet the technical specifications of new systems or enhancements or to manufacture and ship these systems or enhancements in
volume and on time, which may harm its reputation and business. If any of Varian Semiconductors new products have reliability or quality problems, Varian Semiconductor may incur additional warranty and service expenses, experience a decline in
product orders or incur higher manufacturing costs to correct such problems, all of which could adversely affect financial results.
Varian
Semiconductor is subject to the risks of operating internationally and it derives a substantial portion of its revenues from outside the U.S.
International revenues account for a substantial portion of Varian Semiconductors revenue. Because Varian Semiconductor relies on sales to customers in Asia Pacific for a significant portion of its revenue, its business is very likely
to be adversely impacted by economic downturns and instability in that region. Varian Semiconductors business in Asia Pacific is affected by demand in each country. In addition, international sales are subject to risks, including, but not
limited to:
|
|
|
changes in legal and regulatory requirements;
|
|
|
|
political and economic instability and acts of terrorism;
|
|
|
|
difficulties in accounts receivable collection;
|
|
|
|
natural disasters or public health crises;
|
|
|
|
difficulties in staffing for cultural diversity and managing international operations;
|
|
|
|
foreign trade disputes; and
|
|
|
|
fluctuations in foreign exchange rates.
|
If
Varian Semiconductor is unable to protect its proprietary rights adequately, it may lose its ability to compete effectively in the semiconductor equipment industry.
Varian Semiconductor relies on obtaining and maintaining patent, copyright and trade secret protection for significant new technologies, products and processes and obtaining key licenses because of the length of time
and expense associated with bringing new products through the development process to market. Varian Semiconductor intends to continue to file applications as appropriate for patents covering new products and manufacturing processes. However, Varian
Semiconductor cannot provide assurance of the following:
|
|
|
that patents will be issued from any pending or future patent applications owned by, or licensed to, Varian Semiconductor;
|
|
|
|
that the claims allowed under any issued patents will be sufficiently broad to protect Varian Semiconductors technology position against competitors;
|
26
|
|
|
that any issued patents owned by or licensed to Varian Semiconductor will not be challenged, invalidated or circumvented; and
|
|
|
|
that the rights granted under Varian Semiconductors patents will provide it with competitive advantages.
|
Varian Semiconductor also has agreements with third parties for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and
technology cross-licenses.
In addition, Varian Semiconductor maintains and enforces its trademarks to increase customer recognition of its products. If
its trademarks are used by unauthorized third parties, Varian Semiconductors business may be harmed. Varian Semiconductor also relies on contractual restrictions on disclosure, copying and transferring title, including confidentiality
agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties to protect its proprietary rights. If these contractual agreements are breached, Varian Semiconductor may not have adequate remedies for
any such breaches. Varian Semiconductor also cannot provide assurance that its trade secrets will not otherwise become known to or be independently developed by others.
Patent claims may be expensive to pursue, defend or settle and may substantially divert Varian Semiconductors resources and the attention of management.
Varian Semiconductor could incur substantial costs and diversion of management resources in defending patent suits brought against it or in asserting its patent rights
against others. If the outcome of any such litigation is unfavorable to Varian Semiconductor, its business may be harmed. Varian Semiconductor may not be aware of pending or issued patents held by third parties that relate to its products or
technologies. In the event that a claim is asserted against Varian Semiconductor, it may need to acquire a license to or contest the validity of a competitors patent. Varian Semiconductor cannot be certain that it could acquire such a license
on commercially acceptable terms, if at all, or that it would prevail in such a proceeding. From time to time Varian Semiconductor has received notices from and has issued notices to such third parties alleging infringement of patent and other
intellectual property rights relating to its products. If Varian Semiconductor is subject to future claims of patent infringement, it may be required to make substantial settlement or damage payments and may have to devote substantial resources to
reengineering its products.
Varian Semiconductor depends on limited groups of suppliers or single source suppliers, the loss of which could impair its
ability to manufacture products and systems.
Varian Semiconductor obtains some of the components and subassemblies included in its products from a
limited group of suppliers, or in some cases a single source supplier. The loss of any supplier (or the temporary inability of any supplier to meet Varian Semiconductors production requirements, including any single source supplier) would
require obtaining one or more replacement suppliers and may also require devoting significant resources to product development to incorporate new parts from other sources into Varian Semiconductors products. The need to change suppliers or to
alternate between suppliers might cause delays in delivery or significantly increase Varian Semiconductors costs. Although Varian Semiconductor has insurance to protect against loss due to business interruption from some sources as necessary,
Varian Semiconductor cannot provide assurance that such coverage will be adequate or that it will remain available on commercially acceptable terms. Although Varian Semiconductor seeks to reduce its dependence on these limited source suppliers,
disruption or loss of these sources could negatively impact its business and damage customer relationships.
Varian Semiconductors outsource
providers may fail to perform as it expects.
Outsource providers have an increasing role in Varian Semiconductors manufacturing operations,
research and development initiatives and in transactional and administrative functions. Although Varian Semiconductor aims at selecting reputable providers and securing their performance on terms documented in written contracts, it is possible that
one or more of these providers could fail to perform as Varian Semiconductor expects and such failure could have an adverse impact on Varian Semiconductors business. In addition, the expansive role of outsource providers has required and will
continue to require Varian Semiconductor to implement changes to its existing operations and to adopt new procedures to deal with and manage the performance of these outsource providers. Any delay or failure in the implementation of our operational
changes and new procedures could adversely affect Varian Semiconductors customer relationships and/or have a negative effect on Varian Semiconductors operating results.
27
Varian Semiconductors indemnification obligations under the Distribution Related Agreements could be
substantial, and Varian Semiconductor may not be fully indemnified in accordance with the Distribution Related Agreements for the expenses it incurs.
Under the terms of the Distribution Related Agreements, each of Varian Medical Systems, Inc. (VMS) (formerly VAI), Varian, Inc. (VI) and Varian Semiconductor has agreed to indemnify the other parties, and certain
related persons, from and after the spin-off with respect to certain indebtedness, liabilities and obligations, which could be significant. The availability of such indemnities will depend upon the future financial strength of the companies. There
is a risk that one or more of these companies will not be able to satisfy their indemnification obligations. In addition, the Distribution Related Agreements generally provide that if a court prohibits a company from satisfying its indemnification
obligations, then such obligations will be shared equally by the other companies.
Failure to comply with present or future environmental regulations
could subject Varian Semiconductor to penalties and environmental remediation costs.
Varian Semiconductor is subject to a variety of foreign, federal,
state and local laws regulating the discharge of materials into the environment and the protection of the environment. These regulations include discharges into the soil, water and air and the generation, handling, storage, and transportation and
disposal of waste and hazardous substances. These laws increase the costs and potential liabilities associated with the conduct of Varian Semiconductors operations.
VAI has been named by the U.S. Environmental Protection Agency and third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended
(CERCLA), at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VAI is also in various stages of environmental investigation and/or remediation under the direction of, or in consultation with
foreign, federal, state and local agencies at certain current or former VAI facilities. 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. Varian
Semiconductor has accrued estimated environmental investigation and remediation costs for these sites and facilities. 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, Varian Semiconductor has sufficient accruals to cover Varian Semiconductors portion of these costs.
Accrued amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent may be greater than such estimates. Accordingly, Varian Semiconductor may need to make additional accruals and subsequent
payments to cover its indemnification obligations that would exceed current estimates. In addition, Varian Semiconductors present and past facilities have been in operation for many years, and over that time in the course of those operations,
such facilities have used substances which are or might be considered hazardous. Varian Semiconductor also may have generated and disposed of wastes which are or might be considered hazardous. Therefore, it is possible that additional environmental
issues may arise in the future that Varian Semiconductor cannot now predict.
Varian Semiconductors ability to manage potential growth or decline,
integration of potential acquisitions, and potential disposition of product lines and technologies creates risks.
The cyclical nature of the
semiconductor industry may cause Varian Semiconductor to experience rapid growth or decline in demand for products and services. As a result, Varian Semiconductor may face significant challenges in maintaining adequate financial and business
controls, materials management, management processes, information systems and procedures on a timely basis, training, managing and appropriately sizing the work force. There can be no assurance that Varian Semiconductor will be able to perform such
actions successfully.
An important element of Varian Semiconductors management strategy is to review acquisition prospects that would complement
existing products, augment market coverage and distribution ability, or enhance technological capabilities. In the future, Varian Semiconductor may make acquisitions of complementary companies, products or technologies, or may reduce or dispose of
certain product lines or technologies that no longer fit Varian Semiconductors long-term strategies. Managing an acquired business, disposing of product technologies or reducing personnel entails numerous operational and financial risks,
including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of managements attention to other business concerns, amortization of acquired intangible assets, the
incurrence of debt and contingent liabilities and potential loss of key employees or customers of acquired or disposed operations, among
28
others. Varian Semiconductors success will depend, to a significant extent, on the ability of its executive officers and other members of its senior
management to identify and respond to these challenges effectively. In addition, any acquisitions could result in dilutive issuances of equity securities. There can be no assurance that Varian Semiconductor will be able to achieve and manage
successfully any such growth, decline, integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel, or that management, personnel or systems will be adequate to support continued operations. Any
such inabilities or inadequacies may have a material adverse effect on Varian Semiconductors business, operating results, financial condition, cash flows and/or the price of Varian Semiconductor common stock.
Varian Semiconductor manufactures its products at one primary manufacturing facility and is thus subject to risk of disruption.
Varian Semiconductor has one primary manufacturing facility, located in Gloucester, Massachusetts, and its operations are subject to disruption for a variety of reasons,
including, but not limited to natural disasters, work stoppages, operational facility constraints and terrorism. Such disruption may cause delays in shipments of products to Varian Semiconductors customers and may result in cancellation of
orders or loss of customers and could seriously harm Varian Semiconductors business.
If Varian Semiconductor loses key employees or is unable to
attract and retain key employees, it may be unable to pursue business opportunities.
Varian Semiconductors future success depends to a
significant extent on the continued service of key managerial, technical and engineering personnel. Competition for such personnel is intense, particularly in the labor markets around Varian Semiconductors facilities in Massachusetts. The
available pool of qualified candidates is limited, and Varian Semiconductor may not be able to retain its key personnel or to attract, train, assimilate or retain other highly qualified engineers and technical and managerial personnel in the future.
The loss of these persons or Varian Semiconductors inability to hire, train or retrain qualified personnel could harm Varian Semiconductors business and results of operations.
Varian Semiconductor has anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of its common stock.
Provisions of Varian Semiconductors certificate of incorporation and by-laws and of Delaware law could delay, defer or prevent an acquisition or change in
control of Varian Semiconductor or otherwise adversely affect the price of its common stock. For example, Varian Semiconductors Board of Directors is classified into three classes, and stockholders do not have the right to call special
meetings of stockholders. Varian Semiconductors certificate of incorporation also permits its Board of Directors to issue shares of preferred stock without stockholder approval. In addition to delaying or preventing an acquisition, the
issuance of a substantial number of preferred shares could adversely affect the price of the common stock. Varian Semiconductor has also adopted a stockholders rights plan which could significantly dilute the equity interests of a person
seeking to acquire control of Varian Semiconductor without the approval of the Board of Directors.
Varian Semiconductor does not anticipate paying
dividends on its common stock in the future.
Varian Semiconductor has not paid and does not anticipate paying dividends on its common stock. Varian
Semiconductors Board of Directors has discretion to make decisions to pay dividends to common stockholders in the future. The decision will depend on a number of factors, including results of operations, financial conditions and contractual
restrictions that the Board, in its opinion, deems relevant.
Varian Semiconductors financial results may be adversely impacted by higher than
expected tax rates or exposure to additional income tax liabilities.
As a global company, Varian Semiconductors effective tax rate is highly
dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. Varian Semiconductor is subject to income taxes in both the U.S. and various foreign jurisdictions, and significant judgment is required to
determine worldwide tax liabilities. Varian Semiconductors effective tax rate could be adversely affected by changes in the distribution of earnings between countries with differing statutory tax rates, in the valuation of deferred tax assets,
in tax laws or by material audit assessments, which could affect profitability. For example, due to the global business realignment, the distribution of worldwide earnings has changed. Under audit, Varian Semiconductor could face significant
challenges regarding the geographic composition of these earnings from one or more jurisdictions. In addition, Varian Semiconductors effective tax rate has benefited from the research and development (R & D) tax credit
which expired on December 31, 2007. The forecasted effective tax rate for fiscal 2008 reflects this expiration. A retroactive extension of the credit may benefit the effective tax rate in future quarters. Further, the carrying value of deferred
tax assets, which are predominantly in the U.S., is dependent on Varian Semiconductors ability to
29
generate future taxable income in the U.S. Varian Semiconductor is also subject to regular examination of its tax returns by the Internal Revenue Service and
other taxing authorities. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with respect to sales of products, services, and the use of intangible assets. Varian Semiconductor could face
significant future challenges on these transfer pricing issues in one or more jurisdictions. Varian Semiconductor regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of
its provision for income taxes. Although Varian Semiconductor believes that its tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in its historical
income tax provisions and accruals.
30
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
The
following table provides information about purchases by Varian Semiconductor during the quarter ended March 28, 2008 of equity securities that are registered by Varian Semiconductor pursuant to Section 12 of the Securities Exchange Act of
1934:
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
(a)
Total Number of
Shares (or Units)
Purchased
|
|
(b)
Average Price
Paid per Share
(or
Unit)
|
|
(c)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (1)
|
|
(d)
Maximum Number (or Approximate
Dollar
Value) of Shares (or Units)
that May Yet Be Purchased Under
the Plans or Programs
(in thousands) (2)
|
December 29, 2007 - January 25, 2008
|
|
342,795
|
|
$
|
33.34
|
|
342,795
|
|
$
|
88,521
|
January 26 - February 22, 2008
|
|
262,193
|
|
$
|
33.40
|
|
262,193
|
|
$
|
79,762
|
February 23 - March 28, 2008
|
|
610,420
|
|
$
|
31.28
|
|
610,420
|
|
$
|
60,667
|
Total: (3)
|
|
1,215,408
|
|
$
|
32.32
|
|
1,215,408
|
|
$
|
60,667
|
(1)
|
Varian Semiconductor repurchased an aggregate of 19,642,033 shares of its common stock through March 28, 2008 pursuant to the repurchase program that was first announced in
October 2004.
|
(2)
|
At the beginning of the quarter ended March 28, 2008, Varian Semiconductor had an existing authorization to expend up to $700 million for the repurchase of common stock under
the program. On April 21, 2008, Varian Semiconductors Board of Directors amended the repurchase program to increase the amount that may be expended in repurchasing its common stock from $700 million to $800 million. The program does not
have a fixed expiration date.
|
(3)
|
In addition to the repurchases made during the quarter ended March 28, 2008, Varian Semiconductor repurchased 442,500 shares at total cost of $13.5 million between
March 29, 2008 and April 25, 2008, the latest practicable date prior to the filing date of this quarterly report on Form 10-Q.
|
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES
|
None.
ITEM 4.
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
The following
items were submitted to a vote of the stockholders at the 2008 Annual Meeting of Stockholders of Varian Semiconductor held on February 4, 2008: (1) the election of one Class III Director for the ensuing three years; and (2) the
ratification of PricewaterhouseCoopers LLP as Varian Semiconductors independent registered public accounting firm for the fiscal year ending October 3, 2008. The number of shares of common stock eligible to vote as of the record date of
December 17, 2007 was 75,644,043 shares. Proposal 2 was not approved by the requisite vote of the stockholders. Set forth below is the number of votes cast for, against, or withheld, and the number of abstentions and broker non-votes.
Proposal 1 To elect one Class III Director for a three-year term.
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Withheld
|
|
Broker
Non-Votes
|
Richard A. Aurelio
|
|
56,622,838
|
|
|
|
12,219,119
|
|
|
31
Each of the following directors who were not up for reelection at the Annual Meeting of Shareholders continues to serve
as a director following the Annual Meeting of Shareholders: Messrs. Dickerson, Dutton, Chen and Schmal.
Proposal 2 To ratify the selection of
PricewaterhouseCoopers LLP as Varian Semiconductors independent registered public accounting firm for the fiscal year ending October 3, 2008.
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Votes
|
33,351,543
|
|
35,330,186
|
|
160,228
|
|
|
The Sarbanes-Oxley Act vests in the Audit Committee of a public company the exclusive right to appoint the
companys independent registered public accounting firm. In November 2007, the Audit Committee selected PricewaterhouseCoopers LLP, which has served as Varian Semiconductors independent registered public accounting firm since April 1999,
to continue as Varian Semiconductors independent registered public accounting firm for the fiscal year ending October 3, 2008. Although not required, Varian Semiconductor sought ratification of this selection at the 2008 annual meeting of
stockholders in order to give stockholders an opportunity to express their views, and ratification was defeated by a vote of 51% against and 49% in favor. Because the stockholders did not ratify the selection of PricewaterhouseCoopers LLP as Varian
Semiconductors independent registered public accounting firm for the fiscal year ending October 3, 2008, the Audit Committee reconsidered the selection. In its reconsideration, the Audit Committee took into account several factors,
including the stockholder vote against ratification of PricewaterhouseCoopers LLP, the determination that PricewaterhouseCoopers LLP has maintained and continues to maintain its independence, the one-time nature of the fees related to the
realignment of Varian Semiconductors legal entity structure paid to PricewaterhouseCoopers LLP during fiscal year 2007, the anticipated benefit to stockholders of the realignment, the credentials of PricewaterhouseCoopers LLP and the benefits
of continuity from retaining an audit firm that is familiar with Varian Semiconductor. Based on these factors, in April 2008, the Audit Committee determined to retain PricewaterhouseCoopers LLP as Varian Semiconductors independent registered
public accounting firm for the fiscal year ending October 3, 2008.
ITEM 5.
|
OTHER INFORMATION
|
None.
|
|
|
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.
|
32
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 SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
|
|
|
Registrant
|
|
|
|
|
|
By:
|
|
/S/ Robert J. Halliday
|
|
|
|
|
Robert J. Halliday
|
|
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
|
|
(Principal Financial Officer and Duly Authorized Officer)
|
Date: May 6, 2008
|
|
|
|
|
33
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