Varian, Inc. Reports Record Sales And EPS From Continuing Operations

PALO ALTO, Calif., Nov. 2 /PRNewswire-FirstCall/ -- Varian, Inc. today reported fourth quarter 2005 non-GAAP (pro forma) net earnings of $16.1 million, or $0.50 pro forma diluted earnings per share, compared to $14.5 million, or $0.41 pro forma diluted earnings per share, in the fourth quarter of fiscal year 2004. On a GAAP basis, net earnings in the fourth quarter of fiscal year 2005 were $14.6 million, or $0.46 diluted earnings per share, compared to $12.5 million, or $0.35 diluted earnings per share, in the fourth quarter of fiscal year 2004. Throughout this release, all revenues, operating profit, operating profit margin, net earnings, earnings per share, and cash flow are presented on a continuing operations basis unless otherwise noted.

Revenues were $198.1 million in the fourth quarter of fiscal year 2005, an increase of 6.1% compared to $186.7 million in the fourth quarter of fiscal year 2004. Sales grew in all major geographic regions, with growth from products for both life science and industrial applications. Pro forma operating profit margin was 11.7% in the fourth quarter of fiscal year 2005 compared to 11.6% in the prior-year quarter. On a GAAP basis, operating profit margin was 10.6% in the fourth quarter of fiscal year 2005 compared to 9.9% in the same quarter a year ago. Unallocated corporate costs in the current-year quarter included approximately $1.5 million related to implementing Sarbanes-Oxley Act Section 404, which negatively impacted operating profit margins by 0.7% of sales.

Free cash flow (defined as operating cash flow less net fixed asset purchases) was a record $27.0 million for the fourth quarter. For the full year, free cash flow was $56.1 million, which represents 120% of net earnings.

During the fourth quarter of fiscal year 2005, the company also repurchased 1,048,443 shares of its common stock, bringing the total repurchased for the fiscal year to 4,771,094 shares.

"This was another good year for Varian," said Garry W. Rogerson, President and Chief Executive Officer. "We achieved record revenues and EPS from continuing operations and generated excellent free cash flow. Particularly pleasing was the revenue growth, even stronger order growth, and margin expansion seen in Scientific Instruments. More importantly, we made good progress toward our long-term strategy and internal goals."

Fiscal year 2005 sales totaled $772.8 million, an increase of 6.7% compared to the $724.4 million reported in fiscal year 2004. Pro forma net earnings in fiscal year 2005 increased 12.1% to $55.3 million, compared to $49.3 million in the prior year. Pro forma diluted earnings per share increased 16.7% to $1.61 in fiscal year 2005, compared to $1.38 in fiscal year 2004. On a GAAP basis, net earnings were $46.7 million, or $1.36 diluted earnings per share, in fiscal year 2005 compared to $45.3 million, or $1.27 diluted earnings per share, in fiscal year 2004.

For a complete reconciliation of non-GAAP (pro forma) financial information used in this press release to the most directly comparable GAAP financial information, please refer to the attached Reconciliations of GAAP to Pro Forma Results -- Actual, Unaudited Condensed Consolidated Statements of Earnings, Unaudited Results of Operations, and of Operating Cash Flows, Investing Cash Flows, and Free Cash Flow -- Reconciliation of As Reported to Continuing Operations Basis.

In the second quarter of fiscal year 2005, the company's former Electronics Manufacturing business was sold to Jabil Circuit, Inc. Throughout this release, the historical results of the company from continuing operations exclude the historical results of the Electronics Manufacturing business prior to its disposition. Those results have been separately reported as discontinued operations in the company's Unaudited Condensed Consolidated Statement of Earnings.

Results by Segment

Scientific Instruments revenues for the fourth quarter of fiscal year 2005 were $163.7 million, representing an 8.0% increase from revenues of $151.6 million in the fourth quarter of the prior year. Sales increased in all major regions of the world with growth into both life science and industrial applications. Increased customer demand for our information rich detection products, including those obtained through the acquisitions of Magnex Scientific Limited in November 2004 and of product lines from Digilab LLC in September 2004, contributed to this increase. Pro forma operating profit margin was 11.5% in the fourth quarter of fiscal year 2005, compared to 11.1% in the prior-year quarter. The improvement in the segment's pro forma operating margin was primarily the result of sales volume leverage and the positive effect of efficiency improvements. On a GAAP basis, operating profit margin was 10.3% in the fourth quarter of fiscal year 2005 compared to 9.1% in the same quarter a year ago.

For the full year, revenues for Scientific Instruments grew 8.2% from $584.9 million to $632.9 million. Pro forma operating profit margin was 10.9% in fiscal year 2005 compared to 10.5% in fiscal year 2004. On a GAAP basis, operating profit margin was 8.0% in fiscal year 2005 and 9.2% in the prior year.

Vacuum Technologies revenues were $34.4 million in the fourth quarter of fiscal year 2005 and $35.1 million in the fourth quarter of fiscal year 2004. Growth of sales into life science applications in the current-year quarter was more than offset by a decrease in sales into industrial applications. Vacuum Technologies operating profit margin in the fourth quarter of fiscal year 2005 was 22.1% on both a pro forma and GAAP basis compared to 19.0% (pro forma) and 18.9% (GAAP) in the prior-year quarter. The margin improvement was primarily the result of a favorable product mix shift and manufacturing and quality improvements.

On an annual basis, revenues for Vacuum Technologies were $139.9 million in fiscal year 2005 compared to $139.5 million in fiscal year 2004. Operating profit margin was 18.2% in fiscal year 2005 and 16.9% in fiscal year 2004 on both a pro forma basis and a GAAP basis.

For the combined segments, pro forma operating profit margin before unallocated corporate costs was 13.3% in the fourth quarter of fiscal year 2005 compared to 12.6% in the prior-year quarter. On a GAAP basis, operating profit margin before unallocated corporate costs was 12.3% and 10.9% in the fourth quarter of fiscal years 2005 and 2004, respectively.

For the full year, pro forma operating profit margin before unallocated corporate costs was 12.2% compared to 11.7% in fiscal year 2004. On a GAAP basis, operating profit margin before unallocated corporate costs was 9.8% in fiscal year 2005 and 10.7% in fiscal year 2004.

Outlook

For the first time, Varian, Inc. provided fiscal year 2006 earnings per share guidance. "We believe the actions we have taken toward our longer-term internal goals, such as the LC/MS and magnetic resonance products we recently released and several other new products in the late stages of development, position us to accelerate pro forma earnings per share growth in fiscal year 2006," said Rogerson. "We expect pro forma diluted earnings per share for fiscal year 2006 to be approximately $1.94 plus or minus $0.06. For the first quarter, we expect pro forma diluted earnings per share to be approximately $0.42 plus or minus $0.03."

The company's GAAP results for the first quarter of fiscal year 2006 and the full fiscal year are expected to include the following items:

-- Acquisition-related intangible amortization of approximately $1.7 million for the first quarter and approximately $6.7 million for the full year, -- Amortization of approximately $0.5 million for the full year related to inventory written up in connection with the acquisition of Magnex, and -- Stock-based compensation expense, the amount of which cannot currently be estimated, but which is expected to be significant.

In the first quarter of fiscal year 2006, the company is required to adopt the provisions of FAS 123(R), which requires that share-based payments (including employee stock options) be valued and expensed. The company is still assessing the impact of this new accounting standard. Due to the fact that this expense cannot yet be estimated, GAAP earnings guidance cannot be given for fiscal year 2006.

Varian, Inc. will be holding a conference call later today, November 2, 2005, at 2:00 p.m. Pacific time. The call may be heard via the Internet by going to www.varianinc.com, clicking on the Investors link at the right side of the screen, and then clicking on the Webcasts link at the left side of the screen.

Non-GAAP (Pro Forma) Financial Measures

This press release includes non-GAAP (pro forma) financial measures for operating profit, operating profit margins, income tax expense, net earnings, diluted earnings per share, and free cash flow. With the exception of free cash flow, these non-GAAP financial measures exclude acquisition-related intangible and inventory write-up amortization and in-process research and development charges, restructuring and other related costs, defined benefit pension plan curtailment gains and settlement losses, and discrete income tax events. Free cash flow is defined as operating cash flow less net purchases of property, plant, and equipment. Reconciliations of each of these non-GAAP financial measures to the most directly comparable financial measures are detailed in the Reconciliations of GAAP to Pro Forma Results attached to this press release. We believe that presentation of these non-GAAP financial measures provides useful information to investors regarding our results of operations and cash flows.

We believe that excluding acquisition-related intangible and inventory write-up amortization and in-process research and development charges provides supplemental information and an alternative presentation useful to investors' understanding of the company's core operating results and trends. In addition, investors have indicated to us that they analyze the benefits of acquisitions based on the cash return on the investment made, and thus consider financial measures excluding acquisition-related intangible and inventory write-up amortization and in-process research and development charges as important, useful information.

We similarly believe that excluding restructuring and other related costs (principally related to facility closures and employee terminations to improve operational efficiency), defined benefit pension plan curtailment gains and settlement losses, and discrete income tax events provides supplemental information and an alternative presentation useful to investors' understanding of the company's core operating results and trends, especially when comparing those results on a consistent basis to results for previous periods and anticipated results for future periods. Investors have indicated that they consider financial measures of our results of operations excluding restructuring and other related costs, defined benefit pension plan curtailment gains and settlement losses, and discrete income tax events as important supplemental information useful to their understanding of our historical results and estimating of our future results.

We also believe that, in excluding acquisition-related intangible and inventory write-up amortization and in-process research and development charges, restructuring and other related costs, defined benefit pension plan curtailment gains and settlement losses, and discrete income tax events, our non-GAAP financial measures provide investors with transparency into what is used by management to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods, to compare our results of operations on a more consistent basis against that of other companies, in making financial and operating decisions and to establish certain management compensation.

In the case of defined benefit pension plan curtailment gains and settlement losses and certain discrete income tax events such as tax law changes, we also consider these to be unusual events.

We believe that the presentation of free cash flow provides investors with useful information on what is used by management to measure cash management performance, in making financial and operating decisions and to establish certain management compensation.

Although we believe, for the foregoing reasons, that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations and cash flows, our non-GAAP financial measures should only be considered in addition to, and not as a substitute for or superior to, our financial measures prepared in accordance with GAAP.

Caution Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, including those relating to anticipated diluted earnings per share for fiscal year 2006. These forward-looking statements are based on management's current expectations, are not guarantees of future performance, and involve certain risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations and the forward-looking statements made in this press release. Those risks and uncertainties include, but are not limited to, the following: whether we will succeed in new product development, release, commercialization, performance, and acceptance; whether we can achieve continued growth in sales in life science applications; risks arising from the timing of shipments, installations, and the recognition of revenues on leading-edge NMR and MR imaging systems and superconducting magnets; whether we can increase margins on newer leading-edge NMR and MR imaging systems and superconducting magnets; the impact of shifting product mix on profit margins; competitive products and pricing; economic conditions in the company's product and geographic markets; whether we will see continued and timely delivery of key raw materials and components by suppliers; foreign currency fluctuations that could adversely impact revenue growth and earnings; whether we will see sustained or improved market investment in capital equipment; whether we will see reduced demand from customers that operate in cyclical industries; the impact of any delay or reduction in government funding for research; our ability to successfully integrate acquisitions; the actual cost of anticipated restructuring activities and their timing and impact on future costs; our ability to improve efficiency; the timing and amount of discrete income tax events; the timing and amount of stock-based compensation expense; whether the actual cost of complying with the requirements of Section 404 of the Sarbanes- Oxley Act will exceed our current estimates; and other risks detailed from time to time in the company's filings with the Securities and Exchange Commission. We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise.

About Varian, Inc.

Varian, Inc. is a leading worldwide supplier of scientific instruments and vacuum technologies for life science and industrial applications. The company provides complete solutions, including instruments, vacuum components, laboratory consumable supplies, software, training, and support through its global distribution system. Varian, Inc. employs approximately 3,500 people and operates manufacturing facilities in 12 locations in North America, Europe, and the Pacific Rim. Varian, Inc. had fiscal year 2005 sales of $773 million (excluding the divested Electronics Manufacturing business), and its common stock is traded on Nasdaq under the symbol, "VARI." Further information is available on the company's Web site: www.varianinc.com.

VARIAN, INC. AND SUBSIDIARY COMPANIES RECONCILIATION OF GAAP TO PRO FORMA RESULTS - ACTUAL UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (In thousands, except per share amounts) Fourth Quarter FY 2005 and Fourth Quarter FY 2004 Fiscal Quarter Ended Fiscal Quarter Ended September 30, 2005 October 1, 2004 GAAP Pro Forma GAAP Pro Forma Sales $198,090 $198,090 $186,661 $186,661 Cost of sales 108,543 108,179 (1) 102,910 102,910 Gross profit 89,547 89,911 83,751 83,751 Operating expenses Sales and marketing 42,182 42,182 39,816 39,816 Research and development 12,848 12,848 12,405 12,405 General and administrative 13,535 11,754 (2) 12,907 9,887 (3) Purchased in-process research and development -- -- 101 -- (4) Total operating expenses 68,565 66,784 65,229 62,108 Operating earnings 20,982 23,127 18,522 21,643 Interest income (expense) Interest income 1,254 1,254 940 940 Interest expense (533) (533) (576) (576) Total interest income, net 721 721 364 364 Earnings from continuing operations before income taxes 21,703 23,848 18,886 22,007 Income tax expense 7,133 7,778 6,394 7,486 Earnings from continuing operations 14,570 16,070 12,492 14,521 Discontinued operations Earnings from operations of disposed Electronics Manufacturing business, net of taxes 184 184 3,389 3,389 Gain on sale of Electronics Manufacturing business, net of taxes (164) (164) -- -- Earnings from discontinued operations 20 20 3,389 3,389 Net earnings $14,590 $16,090 $15,881 $17,910 Net earnings per diluted share Continuing operations $0.46 $0.50 $0.35 $0.41 Discontinued operations 0.00 0.00 0.09 0.09 Net earnings $0.46 $0.50 $0.44 $0.50 Diluted shares outstanding 32,015 32,015 35,730 35,730 SUMMARY OF RECONCILING ITEMS: (1) Excludes $364 in acquisition-related inventory write-up amortization. (2) Excludes $1,669 in acquisition-related intangible amortization and $112 in restructuring and other related costs. (3) Excludes $777 in acquisition-related intangible amortization, $2,412 in restructuring and other related costs, and a pension curtailment gain of ($169). (4) Excludes $101 related to an acquisition-related in-process research and development charge. VARIAN, INC. AND SUBSIDIARY COMPANIES RECONCILIATION OF GAAP TO PRO FORMA RESULTS - ACTUAL UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (In thousands, except per share amounts) Full Year FY 2005 and Full Year FY 2004 Fiscal Year Ended Fiscal Year Ended September 30, 2005 October 1, 2004 GAAP Pro Forma GAAP Pro Forma Sales $772,795 $772,795 $724,440 $724,440 Cost of sales 432,276 427,944 (1) 403,365 403,365 Gross profit 340,519 344,851 321,075 321,075 Operating expenses Sales and marketing 165,753 165,753 156,738 156,738 Research and development 53,942 53,942 48,731 48,731 General and administrative 59,883 45,029 (2) 47,744 41,692 (5) Purchased in-process research and development 700 -- (3) 101 -- (6) Total operating expenses 280,278 264,724 253,314 247,161 Operating earnings 60,241 80,127 67,761 73,914 Interest income (expense) Interest income 5,416 5,416 3,055 3,055 Interest expense (2,204) (2,204) (2,393) (2,393) Total interest income, net 3,212 3,212 662 662 Earnings from continuing operations before income taxes 63,453 83,339 68,423 74,576 Income tax expense 16,766 28,004 (4) 23,074 25,228 Earnings from continuing operations 46,687 55,335 45,349 49,348 Discontinued operations Earnings from operations of disposed Electronics Manufacturing business, net of taxes 5,385 5,385 14,181 14,181 Gain on sale of Electronics Manufacturing business, net of taxes 73,885 73,885 -- -- Earnings from discontinued operations 79,270 79,270 14,181 14,181 Net earnings $125,957 $134,605 $59,530 $63,529 Net earnings per diluted share Continuing operations $1.36 $1.61 $1.27 $1.38 Discontinued operations 2.31 2.31 0.39 0.40 Net earnings $3.67 $3.92 $1.66 $1.78 Diluted shares outstanding 34,355 34,355 35,773 35,773 SUMMARY OF RECONCILING ITEMS: (1) Excludes $4,332 in acquisition-related inventory write-up amortization. (2) Excludes $6,491 in acquisition-related intangible amortization, $6,886 in restructuring and other related costs, and a pension settlement loss of $1,477. (3) Excludes $700 related to an acquisition-related in-process research and development charge. (4) Excludes ($4,800) related to tax credits due to changes in tax law. (5) Excludes $2,892 in acquisition-related intangible amortization, $4,613 in restructuring and other related costs, and pension curtailment gain of ($1,453). (6) Excludes $101 related to an acquisition-related in-process research and development charge. VARIAN, INC. AND SUBSIDIARY COMPANIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except par value amounts) September 30, October 1, 2005 2004 ASSETS Current assets Cash and cash equivalents $188,494 $159,982 Short-term investments -- 25,000 Accounts receivable, net 154,525 182,843 Inventories 114,427 135,344 Deferred taxes 26,842 30,008 Other current assets 21,744 18,986 Total current assets 506,032 552,163 Property, plant, and equipment, net 102,290 120,239 Goodwill 149,934 131,441 Intangible assets, net 28,245 21,279 Other assets 9,494 5,543 Total assets $795,995 $830,665 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $2,500 $6,673 Accounts payable 61,435 70,667 Deferred profit 11,587 11,306 Accrued liabilities 165,626 160,710 Total current liabilities 241,148 249,356 Long-term debt 27,500 30,000 Deferred taxes 5,888 9,411 Other liabilities 21,937 14,687 Total liabilities 296,473 303,454 Stockholders' equity Preferred stock-par value $0.01, authorized -- 1,000 shares; issued -- none -- -- Common stock-par value $0.01, authorized -- 99,000 shares; issued and outstanding -- 30,016 shares at September 30, 2005 and 34,838 shares at October 1, 2004 106,188 257,083 Retained earnings 379,053 253,096 Accumulated other comprehensive income 14,281 17,032 Total stockholders' equity 499,522 527,211 Total liabilities and stockholders' equity $795,995 $830,665 VARIAN, INC. AND SUBSIDIARY COMPANIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Fiscal Quarter Ended Fiscal Year Ended Sept. 30 Oct. 1, Sept. 30 Oct. 1, 2005 2004 2005 2004 Cash flows from operating activities Net earnings $14,590 $15,881 $125,957 $59,530 Adjustments to reconcile net earnings to net cash provided by operating activities: Loss (gain) on sale of Electronics Manufacturing business 164 -- (73,885) -- Depreciation and amortization 6,053 6,536 26,249 25,481 (Gain) loss on disposition of property, plant, and equipment (105) (185) 12 (163) Purchased in-process research and development -- 101 700 101 Stock-based compensation expense 75 -- 415 -- Tax benefit from stock option exercises 1,186 9,550 9,113 13,266 Deferred taxes 2,126 (11,421) (5,553) (12,573) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Accounts receivable, net (12,181) (6,164) 5,398 (9,271) Inventories 5,984 10,501 6,304 (5,800) Other current assets (1,617) 3,346 (2,212) 643 Other assets (368) (549) 543 (589) Accounts payable 3,749 (4,943) 3,615 6,287 Deferred profit 962 507 (414) (3,130) Accrued liabilities 8,646 6,673 (18,398) 19,066 Other liabilities 2,149 565 1,431 72 Net cash provided by operating activities 31,413 30,398 79,275 92,920 Cash flows from investing activities Proceeds from sale of property, plant, and equipment 270 1,332 765 2,551 Purchase of property, plant, and equipment (4,497) (5,662) (23,080) (22,968) Purchase of businesses, net of cash acquired (420) (11,898) (28,698) (12,968) Proceeds from sale of short-term investments -- -- 35,000 -- Purchase of short-term investments -- (25,000) (10,000) (25,000) Private company equity investments -- -- (4,000) (1,318) Proceeds from sale of Electronics Manufacturing business, net of transaction costs and taxes (21,196) -- 150,791 -- Net cash (used in) provided by investing activities (25,843) (41,228) 120,778 (59,703) Cash flows from financing activities Repayments of debt -- (1,787) (7,106) (4,602) Issuance of debt -- -- -- 2,037 Repurchase of common stock (38,412) (7,773) (178,786) (31,668) Issuance of common stock 2,846 2,734 18,363 22,855 Transfers to Varian Medical Systems, Inc. (124) (216) (882) (1,110) Net cash used in financing activities (35,690) (7,042) (168,411) (12,488) Effects of exchange rate changes on cash and cash equivalents (590) 1,959 (3,130) 3,462 Net (decrease) increase in cash and cash equivalents (30,710) (15,913) 28,512 24,191 Cash and cash equivalents at beginning of period 219,204 200,895 159,982 160,791 Cash and cash equivalents at end of period $188,494 $184,982 $188,494 $184,982 VARIAN, INC. AND SUBSIDIARY COMPANIES

RECONCILIATION OF GAAP TO PRO FORMA RESULTS -- ACTUAL OPERATING CASH FLOWS,

INVESTING CASH FLOWS, AND FREE CASH FLOW -- RECONCILIATION OF AS REPORTED TO

CONTINUING OPERATIONS BASIS (In thousands) Fiscal Quarter Ended Fiscal Year Ended September 30, 2005 September 30, 2005 As Continuing As Continuing Reported Operations Reported Operations (1) (1) Cash flows from operating activities Net earnings $14,590 (2) $14,569 $125,957 (2) $46,686 Adjustments to reconcile net earnings to net cash provided by operating activities: Loss (gain) on sale of Electronics Manufacturing business 164 -- (73,885) -- Depreciation and amortization 6,053 6,053 26,249 23,709 (Gain) loss on disposition of property, plant, and equipment (105) (105) 12 105 Purchased in-process research and development -- -- 700 700 Stock-based compensation expense 75 75 415 415 Tax benefit from stock option exercises 1,186 1,186 9,113 9,113 Deferred taxes 2,126 2,126 (5,553) (5,553) Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Accounts receivable, net (12,181) (12,181) 5,398 2,698 Inventories 5,984 5,984 6,304 11,597 Other current assets (1,617) (1,617) (2,212) (2,584) Other assets (368) (368) 543 543 Accounts payable 3,749 3,749 3,615 6,346 Deferred profit 962 962 (414) (444) Accrued liabilities 8,646 8,646 (18,398) (17,573) Other liabilities 2,149 2,149 1,431 1,431 Net cash provided by operating activities $31,413 $31,228 $79,275 $77,189