True Customer
Solutions
We have built a business that is helping patients around the world
to beat cancer. During fiscal year 2003, the number of radiation
oncology centers treating patients with Varian’s SmartBeam™ IMRT
(intensity modulated radiation therapy) grew by more than two and
a half times to 472. As a rising number of clinical papers and
media reports showed, this advanced treatment is resulting in better
outcomes and fewer complications in prostate, head and neck, breast,
and many other types of cancer.
We concentrated during the year on expanding the use of computer automation and
better software integration as well as incorporating new X-ray imaging technology
to create a versatile radiation oncology system capable of treating more patients
in less time with greater precision.
The company introduced new VARiS/Vision™ software that coordinates all
members of the medical staff and all parts of the treatment process through a
shared database and retooled user interface. New IMRT quality assurance software
was developed to cut the time for plan verification from several hours to 15
minutes.
Combining technologies from our Ginzton Technology Center, our X-Ray Products
business, and our Oncology Systems business, we developed important new products
for Dynamic Targeting™ IGRT (image-guided radiation therapy), a more precise
treatment technique that can adjust for daily changes and movements in tumors.
IGRT makes it possible to treat tumors with higher, more effective doses of radiation
while sparing more of the surrounding healthy tissue.
Shortly after the year ended, we acquired Zmed, Inc., which adds three-dimensional
ultrasound imaging and products for precise targeting of tumors to our radiotherapy
treatment systems. Separately, we announced an agreement in which we will initially
form a joint venture with Mitsubishi Electric Corp, the leader in the Japanese
radio-therapy business, and eventually acquire its linear accelerator service
business in Japan and other countries in Asia.
Market Leadership
Since the 1950s, Varian has been a pioneer and leader in radiation therapy,
a treatment which is used for as many as 60 percent of all patients in modern
cancer care. Today, Varian supplies a significant percentage of all the radiation
oncology equipment in the world.
Strong execution and a commitment to continuous improvement in all operations
contributed to our success in fiscal 2003. The company increased inventory
turns for the year to 3.82, up from 3.23 last year. Our year-ending accounts
receivable days sales outstanding was reduced to 73, an improvement from 80
days in fiscal 2002.
We reduced warranty costs as a percentage of sales, particularly in our
X-Ray Products business, which enhanced products through “Six Sigma” programs.
Several X-ray tubes were developed in record time by cross-functional teams.
The Oncology Systems business initiated remote servicing via telephone and
the Internet to improve response time and system reliability. These and other
factors enhanced our market leadership in fiscal 2003. Our technology in X-ray
tubes, imaging subsystems, and in radiation oncology systems broadened the
gap between Varian and other companies in the business.
Profitable Growth
Varian Medical Systems earned $1.84 per diluted share in fiscal year 2003,
up an outstanding 38 percent over fiscal year 2002.
We reported sales of $1.0 billion for the fiscal year, up 19 percent from the
previous fiscal year, including an 18 percent sales gain in our Oncology Systems
segment, a 25 percent rise in X-Ray Products, and a 28 percent boost in the
Ginzton Technology Center/Brachytherapy business.
The company’s gross margin for the fiscal year was a record 40.5 percent
of sales, approximately 160 basis points higher than the fiscal year 2002 level,
due in part to higher volumes in our X-Ray Products segment and to favorable
product mix and higher volumes in the Oncology Systems business.
We increased operating earnings to 19.0 percent of sales in fiscal year 2003,
up from 16.6 percent of sales in fiscal year 2002 while increasing our investment
in research and development and reducing selling, general, and administrative
expenses as a percentage of sales. Research and development spending rose by
nearly $11 million to $59 million or 5.7 percent of sales in fiscal year 2003,
up from 5.5 percent of sales in fiscal year 2002.
Our net orders positioned the company for further growth, totaling $1.2 billion
for fiscal year 2003, an 18 percent increase from fiscal year 2002. Our backlog
reached $808 million at the end of fiscal year 2003, up 16 percent from the
end of fiscal 2002.
The company had record operating cash flows in fiscal 2003, averaging more
than $50 million per quarter and contributing to our fiscal year-ending total
of $407 million in cash and marketable securities. Return on net assets reached
33.5 percent.
‘03 Varian
In ’03 Varian, our focus is on true customer solutions, including Dynamic
Targeting IGRT, the evolution of IMRT; superb engineering in X-ray Products;
and our emerging technologies in flat panel imaging, security and inspection,
and brachytherapy that together grew combined sales by more than 50 percent
during the year. We hope to show you how Varian Medical Systems’ accomplishments
in fiscal year 2003 are leading to better cancer care and new possibilities
in the security industry.
The Future
Our major goals for the future are clear:
 Increase the availability
of IMRT to cancer patients by continually improving software, training, and
process automation;
Develop and deliver practical clinical IGRT products and processes
for improved targeting of primary tumors and metastases;
Combine IMRT and IGRT to significantly improve cancer control
and launch a new era in which the most advanced modern radiation oncology is
routinely available to all patients around the world.
Our fiscal year 2003 achievements were made possible by talented and dedicated
employees who share an intense drive to achieve our goals, a commitment to
continuous improvement, the intuition to make the right decisions for the right
reasons, and the ability to inspire others to do the same. With their efforts,
we are achieving our mission and we are looking forward to even greater success
in fiscal year 2004.
Sincerely yours,
Richard M. Levy
Chairman and CEO
Varian Medical Systems, Inc.
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