Varian Medical Systems, Inc. Reports Second-Quarter Results | Varian

Varian Medical Systems, Inc. Reports Second-Quarter Results

Palo Alto, Calif. -- May 17, 1999 -- Varian Medical Systems, Inc. today reported second quarter financial results showing strong growth in orders and sales, but a net loss after a decline in operating earnings and accounting for spin-off and restructuring costs. The second-quarter financial report for Varian Medical Systems, formerly known as Varian Associates, Inc., reflects the just-completed spin-off of the instruments and semiconductor equipment businesses into new companies that are reporting their second quarter results separately.

Varian Medical Systems reported second-quarter net orders of $155 million, up 33 percent from the year-ago period. Sales for the quarter were $149 million, up 14 percent from the year-ago period. For the first half, Varian Medical Systems' net orders were up 21 percent and sales were up 10 percent. Reported backlog for the medical systems business hit an all time high of $384 million.

Second-quarter operating earnings for Varian Medical Systems, excluding costs for restructuring and spinning off the instruments and semiconductor equipment businesses, were $4.2 million versus $7.4 million in the year-ago period. On the same basis, operating earnings for the first half were $4 million versus $1.9 million for the first half of last year.

Reported earnings

Varian Medical Systems reported a loss from continuing operations for the quarter of $10.2 million or ($0.34) per diluted share versus income of $4.5 million or $0.15 per diluted share in the second quarter of fiscal 1998.

The loss for the quarter reflects costs related to spinning off the semiconductor equipment and instruments businesses. Earnings also were affected by non-recurring spin-off costs within normal medical business operations as well as a small restructuring charge to close an X-ray tube manufacturing facility in Arlington Heights, Ill. in order to consolidate production at the company's existing facility in Salt Lake City, Utah. The former instruments and semiconductor equipment businesses are accounted for separately in the results as discontinued operations.

"We successfully completed the spin-off during the quarter and we are now focusing exclusively on growing the medical business," said Richard M. Levy, CEO and president of Varian Medical Systems. "Strong second-quarter growth in net orders and sales for Oncology Systems was driven by customers who are upgrading and deploying new therapy systems that are capable of delivering more effective cancer treatments. Technical advances and the development of integrated systems have measurably improved the precision and cost efficiency of radiotherapy, and our customers are moving to take advantage of it for their patients."

Oncology Systems:

Second-quarter net orders for Clinac® accelerators, Ximatron® simulators and ancillary products and services totaled $123 million, up 48 percent from the prior year, with higher bookings across all product lines. Second- quarter gains were strongest for ancillary products that comprised 53 percent of total Oncology Systems net orders for the period.

Sales of Oncology Systems for the second quarter totaled $116 million, up 20 percent from the year-ago period, driven largely by double-digit increases in North America and Asia.

For the first half, Oncology Systems' net orders were up 28 percent and sales were up 18 percent versus the corresponding period of last year.

X-ray Products

Net orders for X-ray products including tubes and digital imagers, totaled $32 million for the second quarter, down 4 percent from the prior-year period. Sales for the quarter were $33 million, down 3 percent from $34 million in the year-ago period. Orders and sales for X-ray tube products were slightly lower partially as a consequence of delays in new product introductions at some customers who are facing tougher competition, a sales mix-shift toward lower-priced products, and longer-life tubes that have slowed replacement rates.

For the first half, X-ray Products' net orders and sales were each down 9 percent versus the corresponding period of last year.

Subsequent to the second quarter, Varian Medical Systems received a record order from a major customer for tubes, including Varian's new large X-ray tube for high-throughput CT scanning.

Spin, restructuring charges

Net costs for restructuring, spin-off transactions and non-recurring operating costs for the quarter totaled $27 million. Costs included $4 million in restructuring charges for consolidating X-ray tube production and $50 million in transaction costs to effectuate Varian's spin-off, partially offset by gains on asset sales of
$27 million.

Varian Medical Systems results for the second quarter also reflect an abnormally high 58 percent effective tax rate as a consequence of having to absorb significant spin-off transaction costs that are not tax deductible.

Outlook

"Varian Medical Systems is well positioned with leading technologies, products, sales support and services to meet the growing demand for improved cancer treatment systems," said Levy. "Given the strong second-quarter orders and sales, we remain comfortable with our target for high-single digit revenue gains for this fiscal year and we continue to aim for double-digit growth in the year ahead with somewhat faster, leveraged growth in earnings."

Forward Looking Statements:

Except for historical information, this news release contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: product demand and market acceptance risks; the effect of general economic conditions and foreign currency fluctuations; the impact of competitive products and pricing; new product development and commercialization; the reliance on sole source suppliers; the Company's ability to increase operating margins on higher sales; the impact of managed care initiatives in the U.S. on capital expenditures and resulting pricing pressure on medical equipment; successful implementation by the Company and certain third parties of corrective action to address the impact of the year 2000; successful consolidation of the Company's X-ray tube manufacturing operation; the Company's ability to operate as a smaller and less diversified business entity; the ability to sell surplus assets in connection with the recently completed reorganization; the ability of the Company to realize anticipated cost savings from the reorganization; the Company's potential responsibility for liabilities arising out of the reorganization which were not expressly assumed by the Company; the possibility that indemnification for certain liabilities arising out of or relating to the reorganization will not be available to the Company due to the indemnifying party's insolvency or legal prohibition; increased debt leverage resulting from the reorganization impacting the Company's ability to obtain future financing for working capital, capital expenditures, product development, acquisitions and general corporate purposes; the effect of increased debt leverage on cash flow, vulnerability to economic downturns and flexibility in responding to changing business and economic conditions; possible exposure to fraudulent conveyance allegations arising out of the reorganization; possible exposure to additional tax obligations in connection with the reorganization; and other risks detailed from time to time in theCompany's filings with the Securities and Exchange Commission.

A summary of income and other financial information follows.

Varian Medical Systems, Inc.
Consolidated Statement of Earnings
(Dollars and shares in millions except per share amounts)

Fiscal Year 1999 Fiscal Year 1998
----------------------------------
----------------------------------
Q2 YTD Q2 YTD
FY 99 FY 99 FY 98 FY 98
----------------------------------
----------------------------------
Net Orders $ 155.2 285.4 116.6 236.7
Order Backlog $ 383.5 383.5 353.7 353.7

Sales $ 149.3 254.3 131.5 230.5
Gross Margin 48.3 81.3 42.0 75.2
As a percent of Sales 32.4% 32.0% 31.9% 32.6%
Operating Expenses

Marketing 15.8 30.8 14.5 26.5
Research and development 11.1 20.5 11.4 21.5
General and administrative 17.2 26.0 8.7 25.3

Operating Earnings Before
Restructuring and
Reorganization Expenses 4.2 4.0 7.4 1.9
As a percent of Sales 2.8% 1.6% 5.6% 0.8%

Restructuring Expenses 3.7 3.7 0.0 0.0
Operating Earnings Before Reorg.
Expenses 0.5 0.3 7.4 1.9

Reorganization Expenses 23.7 27.3 0.0 0.0
Operating Earnings (23.2) (27.0) 7.4 1.9

Interest Expense 1.3 2.4 1.3 1.6

Earnings From Continuing
Operations

Before Taxes (24.5) (29.4) 6.1 0.3

Taxes on earnings (14.3) (17.2) 1.6 0.1

Earnings from Continuing
Operations (10.2) (12.2) 4.5 0.2

Earnings from Discontinued
Operations - Net of Taxes (30.8) (31.2) 18.5 42.5

Net Earnings $ (41.0) (43.4) 23.0 42.7

Average Shares Outstanding
- Basic 30.1 30.0 30.0 30.0
Average Shares Outstanding
- Diluted 30.1 30.0 30.6 30.8

----------------------------------------------------------------------
----------------------------------------------------------------------
Net Earnings Per Share - Basic

Continuing Operations $ (0.34) (0.41) 0.15 0.01
Discontinued Operations (1.02) (1.04) 0.62 1.41
----------------- ----------------
================= ================
Net Earnings Per Share (1.36) (1.45) 0.77 1.42
================= ================
================= ================

Net Earnings Per Share - Diluted

Continuing Operations (0.34) (0.41) 0.15 0.01
Discontinued Operations (1.02) (1.04) 0.60 1.38
----------------- ----------------
----------------- ----------------
Net Earnings Per Share $ (1.36) (1.45) 0.75 1.39
----------------------------------------------------------------------
----------------------------------------------------------------------

Varian Medical Systems, Inc.
Consolidated Statement of Earnings
(Dollars and shares in millions except per share amounts)

Fiscal Year 1999 (Pro Forma)
----------------------------------------
----------------------------------------
YTD FY99 FY98 YTD
QTR2 QTR2 Q2-Q2 FY99 FY98
DIFF. DIFF.
----------------------------------------
----------------------------------------
Net Orders $ 155.2 285.4 38.6 48.7
Order Backlog $ 383.5 383.5 29.8 29.8

Sales $ 149.3 254.3 17.8 23.8
Gross Margin 48.6 81.6 6.6 6.4
As a percent of Sales 32.6% 32.1%
Operating Expenses
Marketing 14.8 29.1 2.7 5.9
Research and development 11.1 20.5 (0.3) (1.0)
General and administrative 12.9 18.5 5.1 (1.8)

Operating Earnings Before
Restructuring and
Reorganization Expenses 9.8 13.5 (0.9) 3.3
As a percent of Sales 6.6% 5.3%

Note: Consistent with previous filings with the SEC, the Proforma
table presents summary financial data prepared to give effect to the
distribution, and does not purport to represent what the operations
actually would have been, or to project VMS's operating results for
the future.

The Proforma presentation for Q299 is shown before $0.7 million
of Distribution related costs.

Varian Medical Systems, Inc.
Consolidated Statement of Earnings
(Dollars and shares in millions except per share amounts)

Fiscal Year 1998 (Pro Forma)
--------------------------------------------
--------------------------------------------
YTD YTD
QTR2 QTR2 QTR3 QTR4 FY98

--------------------------------------------
--------------------------------------------
Net Orders $ 116.6 236.7 135.7 174.1 546.5
Order Backlog $ 353.7 353.7 357.7 352.4 352.4

Sales $ 131.5 230.5 131.5 179.5 541.5
Gross Margin 42.0 75.2 45.4 73.3 193.9
As a percent of Sales 31.9% 32.6% 34.5% 40.8% 35.8%
Operating Expenses
Marketing 12.1 23.2 11.3 16.3 50.8
Research and
development 11.4 21.5 8.0 10.0 39.5
General and
administrative 7.8 20.3 6.6 17.6 44.5

Operating Earnings
Before Restructuring
and Reorganization
Expenses 10.7 10.2 19.5 29.4 59.1
As a percent of Sales 8.1% 4.4% 14.8% 16.4% 10.9%

Note: Consistent with previous filings with the SEC, the Proforma
table presents summary financial data prepared to give effect to the
distribution, and does not purport to represent what the operations
actually would have been, or to project VMS's operating results for
the future.

VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS

April 2, October 2,
1999 1998
(Dollars in thousands except par values) (Unaudited)

ASSETS
Current Assets
Cash and cash equivalents $ 5,002 $ 149,667
---------- ---------
---------- ---------
Accounts receivable 193,559 392,596
---------- ---------
Inventories
Raw materials and parts 55,932 132,341
Work in process 17,682 43,189
Finished goods 18,924 28,934
---------- ---------
Total inventories 92,538 204,464
---------- ---------
Other current assets 54,247 93,054
Net assets held for sale 10,538 -
---------- ---------
Total Current Assets 355,884 839,781
---------- ---------

Property, Plant, and Equipment 187,831 509,089
Accumulated depreciation and
amortization (115,603) (294,867)
---------- ---------
Net Property, Plant, and Equipment 72,228 214,222
---------- ---------

Other Assets 70,305 164,292
========== =========
TOTAL ASSETS $ 498,417 $1,218,295
========== =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable $ 34,993 $ 46,842
Accounts payable - trade 34,870 76,166
Accrued expenses 103,889 282,647
Product warranty 15,267 44,153
Advance payments from customers 55,890 55,081
---------- ---------
Total Current Liabilities 244,909 504,889
Long-Term Accrued Expenses 27,936 44,771
Long-Term Debt 58,500 111,090
---------- ---------
Total Liabilities 331,345 660,750
---------- ---------

Stockholders' Equity
Preferred stock
Authorized 1,000,000 shares,
par value $1, issued none - -
Common stock
Authorized 99,000,000 shares,
par value $1, issued and
outstanding 30,423,000 shares
at April 2, 1999 and 29,743,000
shares at October 2, 1998 30,423 29,743
Retained earnings 136,649 527,802
---------- ----------
Total Stockholders' Equity 167,072 557,545
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 498,417 $1,218,295
========== ==========

Varian Medical Systems, Inc. (NYSE:VAR) of Palo Alto, Calif. is the world's leading supplier of integrated systems and services for radiotherapy in the treatment of cancer as well as the world's leading independent supplier of X-ray tubes. It also supplies flat panel digital imaging subsystems for medical, scientific and industrial applications. The company has 2,000 employees worldwide and reported revenues of $540 million in fiscal year 1998. Additional information is available on the Internet at http://www.varian.com/pt-br/vms/

FOR INFORMATION CONTACT:
Elisha Finney, Varian Medical Systems
+1 (650) 424-6803
Elisha.Finney@corp.varian.com

Spencer Sias, Varian Medical Systems
+1 (650) 424-5782
Spencer.Sias@os.varian.com