Add
VAR to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| VAR > SEC Filings for VAR > Form 10-Q on 5-Feb-2013 | All Recent SEC Filings |
5-Feb-2013
Quarterly Report
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of Varian Medical Systems, Inc. ("VMS") and its subsidiaries (collectively "we," "our" or the "Company"). The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements or management's current expectations due to the factors cited in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), the Risk Factors listed under Part II, Item 1A of this Quarterly Report on Form 10-Q, and other factors described from time to time in our other filings with the Securities and Exchange Commission ("SEC"), or other reasons. For this purpose, statements concerning: industry or market segment outlook; market acceptance of or transition to new products or technology such as fixed field intensity-modulated radiation therapy ("IMRT"), image-guided radiation therapy ("IGRT"), stereotactic radiosurgery, volumetric modulated arc therapy, brachytherapy, software, treatment techniques, proton therapy and advanced x-ray products; growth drivers; future orders, revenues, backlog, earnings or other financial results; and any statements using the terms "believe," "expect," "anticipate," "can," "should," "would," "could," "estimate," "may," "intended," "potential," and "possible" or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management's current expectations. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.
Overview
Revenues increased 8% and operating earnings increased 7% in the first quarter of fiscal year 2013, compared to the first quarter of fiscal year 2012. First quarter fiscal year 2013 operating earnings included a restructuring charge of $4.1 million related to an enhanced retirement program. Gross margin decreased 0.1 percentage points in the first quarter of fiscal year 2013 from the year-ago quarter. However, net earnings per diluted share increased 9% and the number of weighted average shares outstanding on a diluted basis decreased from the year-ago quarter primarily due to repurchases of shares of VMS common stock.
Net orders for Oncology Systems decreased in the first quarter of fiscal year 2013 from the year-ago quarter, while X-ray Products net orders increased. Including $142 million in Varian Particle Therapy ("VPT") backlog, our backlog at December 28, 2012 was 11% higher than at the end of the first quarter of fiscal year 2012. Our cash and cash equivalents were $755 million at the end of the first quarter of fiscal year 2013 and our short-term borrowings and long-term debt totaled $206 million.
Oncology Systems. Our largest business segment is Oncology Systems, which designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy (including IMRT, IGRT and volumetric modulated arc therapy), stereotactic body radiotherapy, stereotactic radiotherapy, stereotactic radiosurgery and brachytherapy.
Our primary goal in the Oncology Systems business is to promote the adoption of more advanced and effective cancer treatments. In our view, the fundamental market forces that drive long-term growth in our Oncology Systems business are the rise in cancer cases; technology advances and product developments that are leading to improvements in patient care; customer demand for the more advanced and effective cancer treatments that we offer; competitive conditions among hospitals and clinics to offer such advanced treatments; continued improvement in safety and cost efficiency in delivering radiation therapy; and underserved medical needs outside of the United States. We have recently seen a greater percentage of Oncology Systems net orders and revenues coming from emerging markets within our international region, which typically demand lower-priced products compared to developed markets. We expect that this shift in geographic mix of net orders and revenues will generally continue and may negatively impact Oncology Systems' gross margin. We do not know what impact the Affordable Health Care for America Act (the "Affordable Care Act") will have on long-term growth or demand for our products and services. In accordance with the Affordable Care Act, in the second quarter of fiscal year 2013, we will begin to account for the 2.3% medical excise tax on sales of most medical devices (including our Oncology Systems' products), which
may have a negative impact on our gross margin and may lead our customers to reduce their orders for our products. In addition, the U.S. Centers for Medicare and Medicaid Services ("CMS") reduced reimbursement rates for radiation therapy in free-standing clinics in the United States for calendar year 2013. In the past, we have seen our customers' decision-making process complicated by the uncertainties surrounding healthcare reform and reimbursement rates for radiotherapy and radiosurgery in the United States, and we expect this will continue. During the first quarter of fiscal year 2013, we announced the EDGETM radiosurgery suite, a combination of products for performing advanced radiosurgery using new real-time tumor tracking technology and motion management capabilities. Towards the end of the quarter, we received Food and Drug Administration ("FDA") 510(k) clearance for components of Edge, including the Edge radiosurgery accelerator and the Calypso® System with Dynamic Edge™ Gating.
Oncology Systems net orders decreased 2% or 1% on a constant currency basis, in the first quarter of fiscal year 2013 from the first quarter of fiscal year 2012. An 11% decrease in Oncology Systems net orders in Europe was partially offset by a 2% increase in North American net orders and a 32% increase in net orders in Asia and the rest of the world. We believe that timing of order placements between quarters, particularly in light of strong net orders performance in the fourth quarter of last fiscal year, as well as uncertainty in the United States associated with healthcare reform and reimbursement rates, contributed to the decline in Oncology Systems net orders.
In the first quarter of 2013, Oncology Systems total revenues rose 8% over the first quarter of 2012 with a 2% increase in North American revenues in the first quarter of fiscal year 2013 over the first quarter of fiscal year 2012 and a 13% increase in international revenues. Oncology Systems gross margin in the first quarter of fiscal year 2013 decreased 1.1 percentage points from the first quarter of fiscal year 2012.
X-ray Products. Our X-ray Products business segment, designs, manufactures, sells and services x-ray imaging components for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, specific procedures, computed tomography and industrial applications. We continue to view the long-term fundamental growth driver for this business to be the ongoing success of key x-ray imaging original equipment manufacturers ("OEMs") that incorporate our X-ray tube products and flat panel detectors into their medical diagnostic, dental, veterinary and industrial imaging systems.
X-ray Products net orders increased 21% and revenues increased 18% in the first quarter of fiscal year 2013 compared to the first quarter of fiscal year 2012 with both the flat panel detector and X-ray tubes product lines contributing to the net orders and revenue growth. X-ray Products gross margin for the first quarter of fiscal year 2013 increased 1.3 percentage points over the first quarter of fiscal year 2012.
Our success in our X-ray Products business depends upon our ability to anticipate changes in our markets, the direction of technological innovation and the demands of our customers. We are currently in the process of introducing multiple new products which we believe will help sustain the growth of our X-ray Products business. In addition, changes in access to diagnostic radiology or the reimbursement rates associated with diagnostic radiology as a result of the Affordable Care Act and similar state proposals, or otherwise, could affect demand for our products in our X-ray Products business.
Other. The "Other" category is comprised of Security and Inspection Products ("SIP"), VPT, and the operations of the Ginzton Technology Center ("GTC"). (Please refer to Note 17, "Segment Information" to the Condensed Consolidated Financial Statements within this Quarterly Report on Form 10-Q) .
SIP designs, manufactures, sells and services Linatron ® x-ray accelerators, imaging processing software and image detection products (including IntellXTM) for cargo screening at ports and borders and non-destructive examination in a variety of applications. Orders and revenues for our SIP products have been and may continue to be unpredictable as governmental agencies may place large orders with us or our OEM customers in a short time period, and then may not place any orders for a long time period thereafter.
VPT develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams, for the treatment of cancer. Although proton therapy has been in clinical use for more than four decades, it has not been widely deployed due to high capital cost. Our current focus is commercializing our ProbeamTM proton therapy system and bringing our expertise in traditional radiation therapy to proton therapy to improve its clinical utility and to reduce its cost of treatment per patient. CMS has reduced reimbursement rates for proton therapy in hospitals in the United States for calendar year 2013. We do not know what impact the reductions will have on the growth or demand for our VPT products and services.
GTC, our scientific research facility, develops technologies that enhance our current businesses or may lead to new business areas, including technology to improve radiation therapy and x-ray imaging, as well as other technology for a variety of applications, including security and cargo screening. GTC is also actively engaged in searching for chemical or biological agents that work synergistically with radiation to improve treatment outcomes.
In the first quarter of fiscal year 2013, net orders in the "Other" category decreased by $2.4 million from the year-ago quarter primarily due to a decrease in SIP net orders, and revenues decreased $3.5 million due to a decrease in VPT revenues, partially offset by an increase in SIP revenues.
This discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the Condensed Consolidated Financial Statements and the notes included elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 28, 2012 (the "2012 Annual Report"), as well as the Risk Factors contained in Part II, Item 1A of this Quarterly Report on Form 10-Q, and other information provided from time to time in our other filings with the SEC.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate. In addition to the accounting policies that are more fully described in the Notes to the Consolidated Financial Statements included in our 2012 Annual Report, we consider the critical accounting policies described below to be affected by critical accounting estimates. Our critical accounting policies that are affected by accounting estimates include revenue recognition, share-based compensation expense, valuation of allowance for doubtful accounts, valuation of inventories, assessment of recoverability of goodwill and intangible assets, valuation of warranty obligations, assessment of loss contingencies, valuation of defined benefit pension and post-retirement benefit plans, valuation of derivative instruments and taxes on earnings. Such accounting policies require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates. For a discussion of how these estimates and other factors may affect our business, see Part II, Item 1A, "Risk Factors."
Revenue Recognition
We frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software and services. Judgments as to the allocation of consideration from an arrangement to the multiple elements of the arrangement, and the appropriate timing of revenue recognition are critical with respect to these arrangements to ensure compliance with GAAP.
The allocation of consideration in a multiple element arrangement is affected by the determination of whether any software deliverables that function together with other hardware components to deliver the hardware products' essential functionality are considered as non-software products for purpose of revenue recognition. The allocation of consideration to each non-software deliverable is based on the assumptions we use to establish its selling price, which are based on vendor-specific objective evidence ("VSOE") of selling price, if it exists, otherwise, third-party evidence of selling price, if it exists, and if not on estimated selling prices. In addition, the allocation of consideration to each software deliverable in a multiple element arrangement is affected by our judgment as to whether VSOE of its fair value exists in these arrangements.
Changes to the elements in an arrangement and the amounts allocated to each element could affect the timing and amount of revenue recognition. Revenue recognition also depends on the timing of shipment, the readiness of customers' facilities for installation or is subject to customer acceptance. If shipments or installations are not made on scheduled timelines or if the products are not accepted by the customer in a timely manner, our reported revenues may differ materially from expectations.
In addition, revenues related to certain highly customized image detection systems, proton therapy systems and proton therapy system commissioning contracts are recognized in accordance with contract accounting. For contracts in which we can estimate contract costs with reasonable dependability, we recognize contract revenues under the percentage-of-completion method. Revenues recognized under the percentage-of-completion method are based on contract costs incurred to date compared with total estimated contract costs. Changes in estimates of total contract revenue, total contract cost or the
extent of progress towards completion are recognized in the period in which the changes in estimates are identified. Estimated losses on contracts are recognized in the period in which the loss is identified. In circumstances in which the final outcome of a contract cannot be precisely estimated but a loss on the contract is not expected, we recognize revenues under the percentage-of-completion method based on a zero profit margin until more precise estimates can be made. If and when we can make more precise estimates, revenues and costs of revenues are adjusted in the same period. Because the percentage-of-completion method involves considerable use of estimates in determining revenues, costs and profits and in assigning the dollar amounts to relevant accounting periods, and because the estimates must be periodically reviewed and appropriately adjusted, if our estimates prove to be inaccurate or circumstances change over time, we may be forced to adjust revenues or even record a contract loss in later periods.
Share-based Compensation Expense
We value our stock options granted and the option component of the shares of VMS common stock purchased under the employee stock purchase plan using the Black-Scholes option-pricing model. We value our performance units using the Monte Carlo simulation model. The determination of fair value of share-based payment awards on the date of grant under both the Black-Scholes option-pricing model and the Monte Carlo simulation model is affected by VMS's stock price, as well as the input of other subjective assumptions, including the expected terms of share-based awards and the expected price volatilities of shares of VMS common stock and peer companies that are used to assess certain performance targets over the expected term of the awards, and the dividend yield of VMS.
The expected term of our stock options is based on the observed and expected
time to post-vesting exercise and post-vesting cancellations of stock options by
our employees. We determined the expected term of stock options based on the
demographic grouping of employees and retirement eligibility. We used a
combination of historical and implied volatility, or blended volatility, in
deriving the expected volatility assumption for our stock options. Blended
volatility represents the weighted average of implied volatility and historical
volatility. Implied volatility is derived based on traded options on VMS common
stock. Implied volatility is weighted in the calculation of blended volatility
based on the ratio of the term of the exchange-traded options to the expected
terms of the employee stock options. Historical volatility represents the
remainder of the weighting. Our decision to incorporate implied volatility was
based on our assessment that implied volatility of publicly traded options on
VMS common stock is reflective of market conditions and is generally reflective
of both historical volatility and expectations of how future volatility will
differ from historical volatility. In determining the extent of use of implied
volatility, we considered: (i) the volume of market activity of traded options;
(ii) the ability to reasonably match the input variables of traded options to
those of stock options granted by us, including the date of grant; (iii) the
similarity of the exercise prices; and (iv) the length of term of traded
options. After considering the above factors, we determined that we could not
rely exclusively on implied volatility based on the fact that the term of VMS
exchange-traded options is less than one year and that it is different from the
expected terms of the stock options we grant. Therefore, we believe a
combination of the historical volatility over the expected terms of the stock
options we grant and the implied volatility of exchange-traded options best
reflects the expected volatility of VMS common stock. In determining the grant
date fair value of our performance units, historical volatilities of shares of
VMS common stock, as well as the shares of common stock of peer companies, were
used to assess certain performance targets. The risk-free interest rate
assumption is based upon observed interest rates appropriate for the term of our
stock awards. The dividend yield assumption is based on our history and
expectation of no dividend payouts. If factors change and we employ different
assumptions in future periods, the compensation expense that we record may
differ significantly from what we have recorded in the current period. In
addition, we are required to estimate the expected forfeiture rate, as well as
the probability that certain performance conditions that affect the vesting of
performance units will be achieved, and recognize expense only for those awards
expected to vest. If the actual forfeiture rate and/or the actual number of
performance units that vest based on achievement of performance conditions are
materially different from our estimates, the share-based compensation expense
could be significantly different from what we have recorded in the current
period.
Allowance for Doubtful Accounts
We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. Except for government tenders, group purchases and orders with letters of credit in Oncology Systems and SIP, and orders in our X-ray Products business, our payment terms usually require payment of a small portion of the total amount due when the customer signs the purchase order, a significant amount upon transfer of risk of loss to the customer and the remaining amount upon completion of the installation. On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts. If our evaluation of our customers' financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed and our operating results could be negatively affected.
Inventories
Our inventories include high technology parts and components that are highly specialized in nature and that are subject to rapid technological obsolescence. We have programs to minimize the required inventories on hand and we regularly review inventory quantities on hand and on order and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand and production. Actual demand may differ from our estimates, in which case we may have understated or overstated the provision required for obsolete and excess inventory, which would have an impact on our operating results.
Goodwill and Intangible Assets
Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The majority of businesses that we have acquired have not had significant identified tangible assets and, as a result, we have typically allocated a significant portion of the purchase price to intangible assets and goodwill. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to these intangibles or to goodwill if indicators of impairment exist. The allocation of the purchase price from business acquisitions to goodwill and intangible assets could have a significant impact on our future operating results. In addition, the allocation of the purchase price of the acquired businesses to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for those cash flows. Should conditions differ from management's estimates at the time of the acquisition, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our operating results.
We evaluate goodwill for impairment at least annually or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We determine the fair value of our reporting units based on the present value of estimated future cash flows of the reporting units. If the carrying amount of the reporting unit is in excess of its fair value, step two requires the comparison of the implied fair value of the reporting unit's goodwill against the carrying amount of the reporting unit's goodwill. Any excess of the carrying value of the reporting unit's goodwill over the implied fair value of the reporting unit's goodwill is recorded as an impairment loss. The impairment test for intangible assets with indefinite useful lives, if any, consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. Based on the most recent annual goodwill impairment testing that we performed in fiscal year 2012 for each of our four reporting units with goodwill (Oncology Systems, X-ray Products, SIP and VPT), the fair value of each such reporting unit was substantially in excess of its carrying value. We will continue to make assessments of impairment on an annual basis or more frequently if indicators of potential impairment arise.
Warranty Obligations
We warrant most of our products for a specific period of time, usually 12 months, against material defects. We provide for the estimated future costs of warranty obligations in cost of revenues when the related revenues are recognized. The accrued warranty costs represent our best estimate at the time of sale of the total costs that we will incur to repair or replace product parts that fail while still under warranty. The amount of accrued estimated warranty costs obligation for established products is primarily based on historical experience as to product failures adjusted for current information on repair costs. For new products, estimates will include historical experience of similar products, as well as reasonable allowance for start-up expenses. Actual warranty costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our warranty obligations and update the historical warranty cost trends, if required. If we were required to accrue additional warranty costs in the future, it would have a negative effect on our operating results.
Loss Contingencies
From time to time, we are a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of our business or otherwise. We accrue amounts, to the extent they can be reasonably estimated, that we believe are adequate to address any liabilities related to legal proceedings and other loss contingencies that we believe will result in a probable loss. However,
such matters are subject to many uncertainties and outcomes are not predictable with assurance. If actual liabilities significantly exceed the estimates made, our consolidated financial position, results of operations or cash flows could be materially adversely affected.
. . .
|
|