UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

ý                                 QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 2, 2004

 

or

 

o                                  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission File Number 1-7598

 

VARIAN MEDICAL SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

	Title of each class		Name of each exchange on which registered
	Common Stock, $1 par value		New York Stock Exchange / Pacific Exchange
	Preferred Stock Purchase Rights		New York Stock Exchange / Pacific Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark 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  ý  No  o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  ý  No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,391,606 shares of Common Stock, par value $1 per share, outstanding as of May 12, 2004.

 

www.varian.com

(NYSE: VAR)

 

 

VARIAN MEDICAL SYSTEMS, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

Part I.	Financial Information	5
Item 1.	Condensed Consolidated Financial Statements	5
	Condensed Consolidated Statements of Earnings	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to the Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
Part II.	Other Information	34
Item 1.	Legal Proceedings	34
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 6.	Exhibits and Reports on Form 8-K	35
Signatures		36
Index to Exhibits		37

 

2

 

FORWARD-LOOKING STATEMENTS

 

In addition to historical information, 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. (“we” 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 due to the factors listed below and elsewhere in this Quarterly Report on Form 10-Q, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Business” in our Annual Report on Form 10-K for the fiscal year ended September 26, 2003, and from time to time in our other filings with the Securities and Exchange Commission. For this purpose, statements concerning industry or market segment outlook; market acceptance of or transition to new products or technology such as Intensity Modulated Radiation Therapy, or IMRT, Image Guided Radiotherapy, or IGRT, brachytherapy, software, treatment techniques and advanced X-ray products; growth drivers; orders, sales, backlog or earnings growth; future financial results and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “will,” “would,” “could,” “estimate,” “appear,” “may,” “pending,” “intended,” “assuming” 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. Such risks and uncertainties include:

 

•                  our ability to anticipate and keep pace with changes in the marketplace and technological innovation;

 

•                  our ability to successfully develop and commercialize new products and new product enhancements;

 

•                  our ability to gain healthcare market acceptance and demand for our new products and treatments procedures, which may be affected by among other things, the budgeting cycles of hospitals and clinics for equipment purchases which frequently fix budgets one or more years in advance and our ability to provide significant education and training to physicians and healthcare payors on new treatment procedures, benefits of such treatment procedures and the skilled use of our products;

 

•                  our ability to meet U.S. Food and Drug Administration and other domestic or foreign regulatory requirements or obtain product clearances, which might limit the products we can sell, subject us to fines or other regulatory actions, and/or increase costs;

 

•                  the impact of managed care initiatives or other healthcare reforms and/or limitations on third party reimbursements, including resulting pressure on pricing and demand for our products;

 

•                  the possibility that material product liability claims could harm our future sales or require us to pay uninsured claims, and the availability and adequacy of our insurance to cover any such liabilities;

 

•                  the highly competitive nature of the markets in which we compete, and the impact of competition on our pricing, sales, margins and market share, and our ability to maintain or increase operating margins;

 

•                  our ability to protect our intellectual property and the competitive position of our products;

 

•                  the possibility of intellectual property infringement claims against us;

 

•                  our reliance on a sole source or a limited number of suppliers for some key components;

 

•                  the effect of environmental claims and clean-up expenses, including, product recycling and related regulatory requirements in European and other countries, on our costs and margins;

 

•                  our ability to attract and retain qualified employees;

 

•                  economic, political and other risks associated with our significant international operations, including the enforceability of obligations, the extent of taxes and trade restrictions and licensing and other requirements, and protection of intellectual property;

 

3

 

•                  the effect of foreign currency exchange rates and changes to those rates;

 

•                  our ability to match manufacturing capacity with demand for our products;

 

•                  our reliance on a limited number of original equipment manufacturer customers for our X-ray computed tomography tubes, and the potential for continued consolidation in the X-ray tubes market;

 

•                  our ability to successfully acquire complementary businesses, to successfully integrate acquired businesses into our existing operations and to realize anticipated benefits;

 

•                  our use of distributors for a portion of our sales;

 

•                  our ability to make our products interoperate with one another or compatible with widely used third party products;

 

•                  the effect fluctuations in our operating results, including the result of changes in accounting policies, may have on the price of our common stock;

 

•                  the effect of terrorism concerns or the occurrence of disease outbreaks such as Severe Acute Respiratory Syndrome on travel, related business operations and business activity;

 

•                  the risk of loss or interruption to our operations or increased costs due to natural disasters which may not be adequately covered by insurance, the availability and cost of power and energy supplies, strikes and other events beyond our control; and

 

•                  the possibility that provisions of our Certificate of Incorporation and stockholder rights plan might discourage a takeover and therefore limit the price of our common stock.

 

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.

 

4

 

PART I

 

FINANCIAL INFORMATION

 

Item 1.  Condensed Consolidated Financial Statements

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

 

		Three Months Ended						Six Months Ended
(Amounts in thousands, except per share amounts)		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Sales:
Product		$	279,268		$	234,440		$	507,076		$	410,419
Service contracts and other		41,397			31,716			80,554			62,440
Total sales		320,665			266,156			587,630			472,859
Cost of sales:
Product		159,249			137,887			294,183			243,435
Service contracts and other		29,082			22,268			54,592			43,346
Total cost of sales		188,331			160,155			348,775			286,781
Gross profit		132,334			106,001			238,855			186,078
Operating expenses:
Research and development		18,471			14,201			36,075			26,572
Selling, general and administrative		46,989			39,619			91,461			75,309
Total operating expenses		65,460			53,820			127,536			101,881
Operating earnings		66,874			52,181			111,319			84,197
Interest income		1,490			1,792			3,138			3,495
Interest expense		(1,148		)	(1,017		)	(2,363		)	(2,145		)
Earnings from operations before taxes		67,216			52,956			112,094			85,547
Taxes on earnings		23,520			18,800			39,230			30,370
Net earnings		$	43,696		$	34,156		$	72,864		$	55,177
Net earnings per share:
Basic		$	0.64		$	0.50		$	1.07		$	0.81
Diluted		$	0.61		$	0.48		$	1.02		$	0.78
Shares used in the calculation of net earnings per share:
Weighted average shares outstanding – Basic		68,285			68,064			68,163			67,980
Weighted average shares outstanding – Diluted		71,651			71,069			71,377			70,993

 

See accompanying notes to the condensed consolidated financial statements.

 

5

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

 

(Dollars in thousands, except par values)		April 2, 2004			September 26, 2003
Assets
Current assets:
Cash and cash equivalents		$	226,079		$	210,448
Short-term marketable securities		113,305			112,128
Accounts receivable, net		269,209			252,265
Inventories		123,828			116,815
Other current assets		120,994			113,868
Total current assets		853,415			805,524
Property, plant and equipment		243,570			236,077
Accumulated depreciation and amortization		(162,225		)	(154,905		)
Property, plant and equipment, net		81,345			81,172
Long-term marketable securities		56,258			84,820
Goodwill		111,496			59,979
Other non-current assets		47,330			21,992
Total assets		$	1,149,844		$	1,053,487
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	49,382		$	47,169
Accrued expenses		234,434			240,406
Product warranty		38,496			36,040
Advance payments from customers		108,805			85,801
Total current liabilities		431,117			409,416
Long-term accrued expenses and other		36,397			21,895
Long-term debt		58,500			58,500
Total liabilities		526,014			489,811
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock
Authorized 1,000,000 shares, par value $1 per share, issued and outstanding none		—			—
Common stock
Authorized 99,000,000 shares, par value $1 per share, issued and outstanding 68,460,000 shares at April 2, 2004 and 67,971,000 shares at September 26, 2003		68,460			67,971
Capital in excess of par value		203,988			159,539
Deferred stock compensation		(1,755		)	(2,281		)
Accumulated other comprehensive loss		(3,416		)	(3,416		)
Retained earnings		356,553			341,863
Total stockholders’ equity		623,830			563,676
Total liabilities and stockholders’ equity		$	1,149,844		$	1,053,487

 

See accompanying notes to the condensed consolidated financial statements.

 

6

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

		Six Months Ended
(Dollars in thousands)		April 2, 2004			March 28, 2003
Cash flow from operating activities:
Net earnings		$	72,864		$	55,177
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		10,373			9,594
Allowance for doubtful accounts		776			1,811
Loss from sale of assets		120			24
Amortization of intangibles		1,687			424
Amortization of premiums, net		820			567
Amortization of deferred stock-based compensation		526			649
Deferred taxes		2,805			836
Net change in fair value of derivatives and underlying commitments		(2,410		)	(3,623		)
Other		—			(79		)
Changes in assets and liabilities:
Accounts receivable		(3,707		)	4,660
Inventories		(4,832		)	(2,803		)
Other current assets		(1,051		)	4,523
Accounts payable		(228		)	(2,366		)
Accrued expenses		(20,144		)	3,753
Product warranty		1,968			1,949
Advance payments from customers		21,355			7,430
Long-term accrued expenses		(2,603		)	(1,344		)
Tax benefits from employee stock option plans		23,224			13,490
Net cash provided by operating activities		101,543			94,672
Cash flows from investing activities:
Purchase of marketable securities		(20,000		)	(49,044		)
Maturity of marketable securities		46,565			10,000
Purchase of property, plant and equipment		(9,482		)	(7,323		)
Proceeds from sale of property, plant and equipment		133			33
Purchase of businesses, net of cash received		(71,744		)	—
Increase in cash surrender value of life insurance		(5,346		)	(3,988		)
Other, net		(366		)	53
Net cash used in investing activities		(60,240		)	(50,269		)
Cash flows from financing activities:
Net repayments on short-term obligations		—			(58		)
Proceeds from sale of mandatorily redeemable financial instrument		13,457			—
Proceeds from common stock issued to employees		34,090			19,598
Repurchase of common stock		(70,551		)	(42,450		)
Net cash used in financing activities		(23,004		)	(22,910		)
Effects of exchange rate changes on cash		(2,668		)	(3,595		)
Net increase in cash and cash equivalents		15,631			17,898
Cash and cash equivalents at beginning of period		210,448			160,285
Cash and cash equivalents at end of period		$	226,079		$	178,183

 

See accompanying notes to the condensed consolidated financial statements.

 

7

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 1 — BASIS OF PRESENTATION

 

The condensed consolidated financial statements have been prepared by Varian Medical Systems, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 26, 2003. In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position as of April 2, 2004 and September 26, 2003, the results of operations for the three and six months ended April 2, 2004 and March 28, 2003, and cash flows for the six months ended April 2, 2004 and March 28, 2003. The results of operations for the three and six months ended April 2, 2004 are not necessarily indicative of the results to be expected for a full year or for any other period.

 

NOTE 2 — MARKETABLE SECURITIES

 

The carrying amounts of marketable securities are as follows:

 

(Dollars in thousands)		April 2, 2004			September 26, 2003
Municipal bonds		$	144,660		$	171,824
Corporate debt securities		24,903			25,124
		169,563			196,948
Less:  Short-term marketable securities		113,305			112,128
Long-term marketable securities		$	56,258		$	84,820

 

Scheduled maturities of held-to-maturity investments are as follows:

 

(Dollars in thousands)		April 2, 2004
Due within one year		$	113,305
Due after one year through three years		56,258
		$	169,563

 

NOTE 3 — INVENTORIES

 

Inventories are valued at the lower of cost or market (realizable value) using last-in, first-out (“LIFO”) cost for Oncology Systems’ U.S. inventories. All other inventories are valued principally at average cost. If the first-in, first-out (“FIFO”) method had been used for those operations valuing inventories on a LIFO basis, inventories would have been higher than reported by $16.3 million at April 2, 2004 and $16.0 million at September 26, 2003. The components of inventories are as follows:

 

(Dollars in thousands)		April 2, 2004			September 26, 2003
Raw materials and parts		$	78,872		$	81,593
Work-in-process		5,609			5,923
Finished goods		39,347			29,299
Total inventories		$	123,828		$	116,815

 

8

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

 

The following table reflects the gross carrying amount and accumulated amortization of the Company’s intangible assets included in other non-current assets on the condensed consolidated balance sheets:

 

(Dollars in thousands)		April 2, 2004			September 26, 2003
Intangible assets:
Amortized intangible assets:
Technology		$	11,490		$	890
Customer and supplier relationships		9,320			—
Patents, licenses and trademarks		8,330			7,030
Other intangible assets		5,156			5,599
Accumulated amortization		(10,041		)	(9,087		)
Net carrying amount		$	24,255		$	4,432

 

Amortization expense for those intangible assets still required to be amortized under Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, was $1 million and $212,000 for the three months ended April 2, 2004 and March 28, 2003, respectively, and $1.7 million and $424,000 for the six months ended April 2, 2004 and March 28, 2003, respectively. The Company estimates amortization expense on a straight-line basis to be $2.7 million for the remaining six months of fiscal year 2004 and $5.1 million, $5.0 million, $3.8 million, $2.5 million and $5.2 million for fiscal years 2005 through 2008 and thereafter, respectively.

 

The following table reflects goodwill allocated to the Company’s reportable segments:

 

(Dollars in thousands)		April 2, 2004			September 26, 2003
Oncology Systems		$	98,805		$	47,288
X-ray Products		477			477
Other		12,214			12,214
Total		$	111,496		$	59,979

 

Increases during the first six months of fiscal year 2004 to the goodwill and intangible assets balances were the result of the Company’s acquisition of Zmed, Inc., OpTx Corporation and Mitsubishi Electric Corporation’s radiotherapy equipment service business in Japan. (See Note 14)

 

NOTE 5 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

The Company has significant international transactions in foreign currencies and addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments.  The Company sells products throughout the world, often in the currency of the customer’s country, and adheres to a policy of hedging firmly committed sales orders. These firmly committed foreign currency sales orders, excluding the amounts relating to the products made outside of the United States, are hedged with forward exchange contracts. The Company enters into foreign currency forward exchange contracts primarily to reduce the effects of fluctuating foreign currency exchange rates. The forward exchange contracts generally range from one to twelve months in original maturity. At April 2, 2004, the Company did not have any forward exchange contract with an original maturity greater than twelve months.  As international deliveries may extend beyond twelve months, the Company may hedge beyond twelve months in the future.  The Company does not hold derivative instruments for speculative or trading purposes.

 

The Company accounts for its hedges of foreign currency denominated sales orders (firm commitments) as fair value hedges. For the three months ended April 2, 2004, there were no material

 

9

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

gains or losses due to hedge ineffectiveness. At April 2, 2004, the Company had foreign exchange forward contracts to sell and purchase $207.2 million and $1.1 million, respectively, in various foreign currencies. At April 2, 2004, all open forward exchange contracts were deemed effective.

 

The Company also hedges balance sheet exposures from its various foreign subsidiaries and business units. These hedges of foreign-currency-denominated assets and liabilities do not qualify for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  Accordingly, changes in their fair values are recognized in “selling, general and administrative expenses” in the then-current period.  Changes in the values of these hedging instruments are offset by changes in the values of foreign currency denominated assets and liabilities.  Variations from the forecasted foreign currency assets or liabilities, coupled with a significant currency movement, may result in a material gain or loss as a result of the hedges not effectively offsetting the change in value of the foreign currency asset or liability.  At April 2, 2004, the Company had foreign exchange forward contracts maturing in the third quarter of fiscal year 2004 to sell and purchase $79.5 million and $14.6 million, respectively, to hedge the risks associated with foreign currency denominated assets and liabilities.

 

NOTE 6 — EARNINGS PER SHARE

 

Basic net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net earnings by the sum of the weighted average number of common shares outstanding and dilutive common equivalent shares. Dilutive common equivalent shares consist of stock options, restricted performance shares and restricted common stock. A reconciliation of the numerator and denominator used in the earnings per share calculations is presented as follows:

 

		Three Months Ended						Six Months Ended
(In thousands, except per share amounts)		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Numerator – Basic and Diluted:
Net earnings		$	43,696		$	34,156		$	72,864		$	55,177
Denominator – Basic:
Average shares outstanding		68,285			68,064			68,163			67,980
Net earnings per share – Basic		$	0.64		$	0.50		$	1.07		$	0.81
Denominator – Diluted:
Average shares outstanding		68,285			68,064			68,163			67,980
Dilutive common equivalent shares		3,205			2,878			3,058			2,891
Dilutive restricted performance shares and restricted common stock		161			127			156			122
Average shares outstanding		71,651			71,069			71,377			70,993
Net earnings per share – Diluted		$	0.61		$	0.48		$	1.02		$	0.78

 

Options to purchase 68,962 shares at an average exercise price of $83.12 per share were outstanding on a weighted average basis during the three and six months ended April 2, 2004, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the shares during the period.

 

Options to purchase 105,395 shares at an average exercise price of $50.06 per share were outstanding on a weighted average basis during the six months ended March 28, 2003, but were not included in the

 

10

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the shares during the period.

 

NOTE 7 — COMPREHENSIVE EARNINGS

 

Comprehensive earnings for the three and six months ended April 2, 2004 and March 28, 2003 equaled the reported net earnings.  Accumulated other comprehensive loss for all periods presented resulted from a minimum pension liability adjustment, net of taxes.

 

NOTE 8 — INDUSTRY SEGMENTS

 

The Company’s operations are grouped into two reportable industry segments: Oncology Systems and X-ray Products. These industry segments were determined based on how management views and evaluates the Company’s operations. The Company’s Ginzton Technology Center (“GTC”), and BrachyTherapy operations are reflected in an “other” category. The Company evaluates its financial performance and allocates its resources primarily based on operating earnings.

 

		Sales						Operating Earnings
		Three Months Ended						Three Months Ended
(Dollars in millions)		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Oncology Systems		$	270		$	215		$	65		$	50
X-ray Products		42			44			8			9
Other		9			7			—			—
Total industry segments		321			266			73			59
Corporate		—			—			(6		)	(7		)
Total Company		$	321		$	266		$	67		$	52

 

		Sales						Operating Earnings
		Six Months Ended						Six Months Ended
(Dollars in millions)		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Oncology Systems		$	491		$	381		$	110		$	83
X-ray Products		79			78			15			15
Other		18			14			—			(1		)
Total industry segments		588			473			125			97
Corporate		—			—			(14		)	(13		)
Total Company		$	588		$	473		$	111		$	84

 

NOTE 9 — STOCK REPURCHASE PROGRAM

 

On February 14, 2003, the Company’s Board of Directors authorized a repurchase of up to 2,000,000 shares of the Company’s common stock through the end of February 2004. On November 12, 2003, the Company’s Board of Directors authorized an additional repurchase of up to 3,000,000 shares of its common stock through the end of August 2005. During the three months ended April 2, 2004, the Company paid $35.6 million to repurchase 424,300 shares of its common stock. During the six months ended April 2, 2004, the Company paid $70.6 million to repurchase 942,300 shares of its common stock. All shares that have been repurchased have been retired. As of April 2, 2004, the Company could still purchase up to 2,575,700 shares.

 

11

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

NOTE 10 — EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS

 

Option activity under the Omnibus Stock Plan and the 2000 Stock Option Plan (together, the “Employee Stock Option Plans”) is presented below:

 

		Options		Weighted Average Exercise Price
		(in thousands)
Options outstanding at September 28, 2001		8,854		$	17.07
Granted		1,686		$	35.95
Terminated or expired		(115	)	$	17.52
Exercised		(1,624	)	$	11.71
Options outstanding at September 27, 2002		8,801		$	21.67
Granted		1,530		$	48.81
Terminated or expired		(66	)	$	23.39
Exercised		(2,018	)	$	15.26
Options outstanding at September 26, 2003		8,247		$	28.26
Granted		1,565		$	65.03
Terminated or expired		(16	)	$	40.18
Exercised		(1,361	)	$	22.55
Options outstanding at April 2, 2004		8,435		$	35.98

 

At April 2, 2004, September 26, 2003 and September 27, 2002, options for 5,801,000, 6,112,000 and 6,241,000 shares of common stock, respectively, were exercisable and 2,855,000, 4,407,000 and 5,913,000 shares, respectively, were available for future grants under the Employee Stock Option Plans.

 

The following tables summarize information concerning options outstanding and exercisable under the Employee Stock Option Plans at April 2, 2004:

 

		Options Outstanding
Range of Exercise Prices		Number Outstanding (in thousands)		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price
$  7.76 – $  9.08		110		4.9		$	8.80
$  9.16		1,286		5.0		$	9.16
$  9.25 – $12.70		198		3.9		$	11.05
$13.32 – $16.00		89		3.6		$	13.38
$20.53 – $27.78		76		6.4		$	22.49
$27.91		2,237		6.6		$	27.91
$29.45 – $42.53		1,446		7.5		$	35.82
$42.99 – $58.37		1,432		8.6		$	48.82
$64.19 – $83.15		1,561		9.6		$	65.03
Total		8,435		7.3		$	35.98

 

12

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

		Options Exercisable
Range of Exercise Prices		Number Exercisable (in thousands)		Weighted Average Exercise Price
$   7.76 – $  9.08		110		$	8.80
$   9.16		1,286		$	9.16
$   9.25 – $12.70		198		$	11.05
$ 13.32 – $16.00		89		$	13.38
$ 20.53 – $27.78		76		$	22.49
$ 27.91		2,237		$	27.91
$ 29.45 – $42.53		1,092		$	35.80
$ 42.99 – $58.37		646		$	48.88
$ 64.19 – $83.15		67		$	83.12
Total		5,801		$	26.98

 

During the first quarter of fiscal year 2003, the Company adopted SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FAS 123. The Company accounts for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation:

 

		Three Months Ended						Six Months Ended
(Dollars in thousands, except per share amounts)		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Net earnings, as reported		$	43,696		$	34,156		$	72,864		$	55,177
Add:  Stock-based employee compensation expense included in reported net earnings, net of related tax effects		171			246			342			419
Deduct:  Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects		(6,266		)	(6,809		)	(10,762		)	(10,964		)
Pro forma net earnings		$	37,601		$	27,593		$	62,444		$	44,632
Net earnings per share — Basic:
As reported		$	0.64		$	0.50		$	1.07		$	0.81
Pro forma		$	0.55		$	0.41		$	0.92		$	0.66
Net earnings per share — Diluted:
As reported		$	0.61		$	0.48		$	1.02		$	0.78
Pro forma		$	0.52		$	0.39		$	0.87		$	0.63

 

13

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

 

		Employee Stock Option Plans
		Three Months Ended				Six Months Ended
		April 2, 2004		March 28, 2003		April 2, 2004		March 28, 2003
Expected dividend yield		—		—		—		—
Risk-free interest rate		2.7	%	3.3	%	3.0	%	3.1	%
Expected volatility		33.1	%	36.1	%	34.1	%	36.9	%
Expected life (in years):
Employees		4		4		4		4
Officers		4		7		4		7

 

		Employee Stock Purchase Plan
		Three Months Ended				Six Months Ended
		April 2, 2004		March 28, 2003		April 2, 2004		March 28, 2003
Expected dividend yield		—		—		—		—
Risk-free interest rate		1.0	%	1.2	%	1.0	%	1.2	%
Expected volatility		15.0	%	36.1	%	15.0	%	36.1	%
Expected life (in years):
Employees		.50		.50		.50		.50
Officers		.50		.50		.50		.50

 

The weighted average estimated fair values of employee stock options granted during the three months ended April 2, 2004 and March 28, 2003 were $24.19 and $21.48 per share, respectively. The weighted average estimated fair values of employee stock options granted during the six months ended April 2, 2004 and March 28, 2003 were $20.31 and $18.68 per share, respectively.  The weighted average estimated fair values of the shares issued from the Employee Stock Purchase Plan during the three and six months ended April 2, 2004 and March 28, 2003 were $15.95 and $13.59, respectively.

 

NOTE 11 – RETIREMENT PLANS

 

The Company’s net pension and post-retirement benefit costs were composed of the following:

 

		Defined Benefit Plans
		Three Months Ended						Six Months Ended
		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Service cost		$	711		$	561		$	1,422		$	1,122
Interest cost		609			611			1,217			1,222
Expected return on assets		(529		)	(547		)	(1,058		)	(1,094		)
Net amortization and deferral:
Transition amount		(3		)	(3		)	(6		)	(6		)
Prior service cost		31			30			62			60
Recognized actuarial loss		192			163			383			327
Net pension benefit cost		$	1,011		$	815		$	2,020		$	1,631

 

14

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

		Post-Retirement Benefit Plans
		Three Months Ended						Six Months Ended
		April 2, 2004			March 28, 2003			April 2, 2004			March 28, 2003
Service cost		$	—		$	—		$	—		$	—
Interest cost		121			114			243			229
Expected return on assets		—			—			—			—
Net amortization and deferral:
Transition amount		123			123			247			247
Prior service cost		—			—			—			—
Recognized actuarial (gain)/loss		57			(1		)	115			(2		)
Net pension benefit cost		$	301		$	236		$	605		$	474

 

The Company made contributions to the defined benefit plans of $2.5 million during the six month period ended April 2, 2003, and expects total contributions for fiscal year 2004 to be $3.9 million.

 

The Company made contributions to the post-retirement benefit plans of $324,000 during the six month period ended April 2, 2003 and expects total contributions for fiscal year 2004 to be $672,000.

 

NOTE 12 — PRODUCT WARRANTY

 

The Company warrants its products for a specific period of time, generally twelve months, against material defects.  The Company provides for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized.  The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company expects to incur to repair or replace product parts that fail while still under warranty.  The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends. The following table reflects the change in the Company’s warranty accrual during the six months ended April 2, 2004:

 

(Dollars in thousands)
Warranty accrual, September 26, 2003		$	36,040
Charged to cost of sales		19,460
Actual warranty expenditures		(17,004		)
Warranty accrual, April 2, 2004		$	38,496

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

Commitments

 

On December 19, 2003, the Company signed an agreement to form a three-year joint venture in Japan with Mitsubishi Electric Corp. (“Mitsubishi”). Under that agreement, the joint venture will sell the Company’s full line of radiotherapy products and, for the first two years of the joint venture, Mitsubishi’s medical linear accelerators.  This joint venture will also service and support all of these products.  The Company is accounting for this transaction as an acquisition. On February 2, 2004, the Company’s Japanese subsidiary, which contains the Company’s radiotherapy equipment and service business in Japan, purchased Mitsubishi’s radiotherapy equipment service business in Japan for $2.0 billion Japanese yen, or US$19.1 million, plus a contingent payment to be made to the end of the three-year joint venture period based upon operating results.

 

Mitsubishi, in turn, purchased 35% of the Company’s Japanese subsidiary for 1.4 billion Japanese yen, or US$13.5 million, to form the joint venture. The Company is required to repurchase Mitsubishi’s 35% interest in the Japanese subsidiary at the end of the three-year joint venture period at the original

 

15

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

purchase price.  The Company has accounted for Mitsubishi’s 35% interest as a mandatorily redeemable financial instrument and is included in Long-term accrued expenses and other.

 

Contingencies

 

The Company has been named by the U.S. Environmental Protection Agency or third parties as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, at nine sites where the Company, as Varian Associates, Inc., is alleged to have shipped manufacturing waste for recycling or disposal. In addition, the Company is overseeing environmental cleanup projects and, as applicable, reimbursing third parties for cleanup activities under the direction of, or in consultation with, federal, state and/or local agencies at certain currently owned and previously owned facilities (including facilities disposed of in connection with the Company’s sale of its electron devices business during 1995 and the sale of its thin film systems business during 1997). Varian, Inc. (“VI”) and Varian Semiconductor Equipment Associates, Inc. (“VSEA”), which were spun-off by the Company in 1999, are each obligated to indemnify the Company for one-third of these environmental cleanup costs (after adjusting for any insurance proceeds realized or tax benefits recognized by the Company). The Company spent $0.3 million and $0.4 million (net of amounts borne by VI and VSEA) for the three months ended April 2, 2004 and March 28, 2003, respectively, on environmental investigation, cleanup and third party claim costs. The Company spent $1.1 million and $1.0 million (net of amounts borne by VI and VSEA) for the six months ended April 2, 2004 and March 28, 2003, respectively, on environmental investigation, cleanup and third party claim costs.

 

For a number of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further cleanup activities or to estimate the future costs of such activities (including clean up costs, reimbursements to third parties, project management costs and legal costs) if undertaken. As of April 2, 2004, the Company nonetheless estimated that the Company’s future exposure (net of VI’s and VSEA’s indemnification obligations) to complete the cleanup projects for these sites ranged in the aggregate from $4.8 million to $13.6 million. The time frame over which the Company expects to complete the cleanup projects varies with each site, ranging up to approximately 30 years as of April 2, 2004. Management believes that no amount in the foregoing range of estimated future costs is more probable of being incurred than any other amount in such range and therefore accrued $4.8 million as of April 2, 2004. The amount accrued has not been discounted to present value due to uncertainties that make it difficult to develop a best estimate of future costs.

 

As to other sites and facilities, the Company has gained sufficient knowledge, based upon formal cleanup plans for these sites that have either been approved by or completed in accordance with the requirements of the state or federal environmental agency with jurisdiction over the site, to better estimate the scope and costs of future cleanup activities. As of April 2, 2004, the Company estimated that the Company’s future exposure (net of VI’s and VSEA’s indemnification obligations) to complete the cleanup projects, including reimbursements to third party’s claims, for these sites and facilities ranged in the aggregate from $15.9 million to $33.7 million. The time frame over which these cleanup projects are expected to be complete varies with each site and facility, ranging up to approximately 30 years as of April 2, 2004. As to each of these sites and facilities, management has determined that a particular amount within the range of estimated costs is a better estimate of the future environmental liability than any other amount within the range, and that the amount and timing of these future costs are reliably determinable. The best estimate within the range was $19.8 million at April 2, 2004. The Company accordingly accrued $12.9 million, which represents its best estimate of the future costs of $19.8 million discounted at 4%, net of inflation. This accrual is in addition to the $4.8 million described in the preceding paragraph.

 

The foregoing amounts are only estimates of anticipated future environmental-related costs to cover the known cleanup projects, and the amounts actually spent may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental cleanup activities, the large number of sites and facilities involved and the amount of third party

 

16

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

claims. The Company believes that most of these cost ranges will narrow as cleanup activities progress. The Company believes that its reserves are adequate, but as the scope of its obligations becomes more clearly defined, these reserves (and the associated indemnification obligations of VI and VSEA) may be modified and related charges/credits against earnings 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 the Company’s 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 (and assuming VI and VSEA satisfy their indemnification obligations), management believes that the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated cash flows of the Company in any single fiscal year.

 

The Company evaluates its liability for environmental-related investigation and cleanup costs in light of the liability and financial wherewithal of potentially responsible parties and insurance companies with respect to which the Company believes that it has rights to contribution, indemnity and/or reimbursement (in addition to the obligations of VI and VSEA). Claims for recovery of environmental investigation and cleanup costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. The Company received certain cash payments in the form of settlements and judgments from defendants, its insurers and other third parties from time to time. The Company has also reached an agreement with another insurance company under which the insurance company has agreed to pay a portion of the Company’s past and future environmental-related expenditures, and the Company therefore has a $3.2 million receivable included in “other non-current assets” at April 2, 2004.  The Company believes that this receivable is recoverable because it is based on a binding, written settlement agreement with a solvent and financially viable insurance company and the insurance company has paid the claims made to date.

 

The Company was a party to three related federal actions involving claims by independent service organizations (“ISOS”) that the Company’s policies and business practices relating to replacement parts violate the antitrust laws. These actions have been dismissed with prejudice in a settlement by the parties with mutual releases and no monetary consideration paid.

 

The Company is also involved in other legal proceedings arising in the ordinary course of its business. While there can be no assurances as to the ultimate outcome of any litigation involving the Company, management does not believe any pending legal proceeding will result in a judgment or settlement that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

NOTE 14 — PURCHASE BUSINESS COMBINATIONS

 

On October 24, 2003, the Company acquired Zmed, Inc., a privately held supplier of radiation oncology software and accessories for ultrasound-based, image-guided radiotherapy (“IGRT”), stereotactic radiation treatment planning and image management, for approximately $35.3 million in cash. The condensed consolidated financial statements include the operating results of Zmed, Inc. from the date of acquisition.  Pro forma results of operations have not been presented, because the effect of the acquisition was not significant.  In connection with this acquisition, $27.3 million was allocated to goodwill, $9.9 million was allocated to identifiable intangible assets and ($1.9) million, net, was allocated to assets and liabilities.

 

On February 2, 2004, the Company’s Japanese subsidiary acquired Mitsubishi’s radiotherapy equipment service business in Japan (see discussion in Note 13).  The condensed consolidated financial statements include the operating results of Mitsubishi’s radiotherapy equipment and service business in Japan from the date of acquisition.  Pro forma results of operations have not been presented, because the effect of the acquisition was not significant.  In connection with this acquisition,

 

17

 

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

 

$11.8 million was allocated to goodwill, $4.6 million was allocated to identifiable intangible assets and $2.7 million, net, was allocated to assets and liabilities.

 

On March 29, 2004, the Company acquired OpTx Corporation, a privately held supplier of software for medical oncology practices in cancer clinics, for approximately $17.9 million in cash.  The condensed consolidated financial statements include the operating results of OpTx Corporation from the date of acquisition.  Pro forma results of operations have not been presented because the effect of the acquisition was not significant.  In connection with this acquisition, $12.5 million was allocated to goodwill, $7.0 million was allocated to identifiable intangible assets and ($1.6) million, net, was allocated to assets and liabilities.

 

NOTE 15 — RECENT ACCOUNTING PRONOUNCEMENTS

 

Financial Accounting Standards Board (“FASB”) Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), was issued in January 2003. FIN 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity should be included in the Consolidated Financial Statements of the entity that is the primary beneficiary. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provisions of FIN 46 were required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 to the end of the first interim or annual period ending after December 15, 2003 for those arrangements entered into prior to February 1, 2003.  The Company adopted FIN 46, as required, with no impact to its consolidated financial position or results of operations.

 

In December 2003, the FASB issued a revision to SFAS 132 (“revision”), Employers’ Disclosures about Pensions and Other Postretirement Benefits.  This revision requires additional disclosures relating to the description of the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows and components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans recognized during interim periods.  These disclosure requirements are effective for the Company’s second quarter and all future quarterly and annual reports.  The Company adopted the interim period disclosure provisions in this report.

 

On January 12, 2004, the FASB issued a FASB Staff Position (“FSP”) regarding SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.  FAS 106-1, Accounting and Disclosure Requirements Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003, discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (“the Act”) enacted on December 8, 2003.  FSP 106-1 considers the effect of the two new features introduced in the Act in determining the Company’s accumulated postretirement benefit obligation (“APBO”) and net periodic postretirement benefit cost, which may serve to reduce a company’s postretirement benefit costs.  Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on their net periodic costs currently.  The Company has chosen to defer accounting for the benefit until the FASB issues final accounting guidance due to various uncertainties related to this legislation and the appropriate accounting.  The Company’s measures of APBO and net periodic postretirement benefit costs as of and for the quarter ended April 2, 2004 do not reflect the effect of the Act.

 

18

 

REPORT OF INDEPENDENT AUDITORS

 

To the Board of Directors and

Stockholders of Varian Medical Systems, Inc.:

 

We have reviewed the accompanying condensed consolidated balance sheets of Varian Medical Systems, Inc. and its subsidiaries as of April 2, 2004 and September 26, 2003, and the related condensed consolidated statements of earnings for each of the three- and six-month periods ended April 2, 2004 and March 28, 2003 and the condensed consolidated statements of cash flows for the six-month periods ended April 2, 2004 and March 28, 2003.  These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants.  A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

 

 

/S/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
April 27, 2004

 

19

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

We are a world leader in the design and production of (i) integrated systems of equipment and software for treating cancer with radiation therapy, and (ii) high-quality, cost-effective X-ray tubes for original equipment manufacturers, or OEMs, replacement X-ray tubes and imaging subsystems. During the second quarter of fiscal year 2004, our overall sales increased by 20%, net earnings increased by 28%, earnings per diluted share increased by 27% and overall net orders increased by 19% compared to the second quarter of fiscal year 2003. During the first six months of fiscal year 2004, our overall sales increased by 24%, net earnings increased by 32%, earnings per diluted share increased by 31% and overall net orders increased by 21% compared to the first six months of fiscal year 2003.  Our backlog stood at $877 million at the end of the second quarter, up 14% from the end of the year-ago quarter.

 

Oncology Systems.  Our largest business, Oncology Systems, produces and sells an integrated system of products for treating cancer with radiation, including linear accelerators, treatment simulation and verification products, information management and treatment planning software and other sophisticated ancillary products and services.  Our products enable and allow doctors to offer the advanced treatment processes of intensity modulated radiation therapy, or IMRT, and image guided radiation therapy, or IGRT.  We continue to see growth in the number of clinics that are treating patients with IMRT and, in particular, IMRT using Varian products, driven by fundamental market factors which include rising cancer incidence, underserved medical needs outside of the U.S., technology advances that are leading to improvements in patient care, patient demand for more effective treatments facilitated by the internet, the media and educational efforts by hospitals and radiotherapy centers motivated to have the most modern systems to improve clinical outcomes and attract top medical talent.  Our International sales and net orders have been growing at a higher rate than the North American sales and orders, driven by the underserved nature of that market and partially by the favorable currency exchange rates.  Total Oncology Systems sales for the second quarter and first six months of fiscal year 2004 increased for North America by 21% and 22% from the same periods in fiscal year 2003, respectively, and increased for International by 36% and 43% in the same comparative periods.  On a trailing 12-month basis, Oncology Systems net orders grew 18 percent versus the comparable 12-month period a year ago, with North American net orders growing 14 percent and International growing 25 percent.  See Net Orders and Backlog table on page 26.  The demand for our Oncology Systems’ products may also be affected by additional factors such as healthcare reforms, changes in healthcare policies and significant changes to third party reimbursements for radiation oncology services and changes in currency exchange rates that currently make our pricing more competitive with our non-U.S. competitors.

 

Our efforts to enhance and broaden our technology and product offerings in this business are pursued through internal development, acquisitions and strategic relationships.  During the second quarter of fiscal year 2004, we increased our investment in developing next generation products and accessories for the process of enabling image guided radiation therapy, or IGRT, including receiving United States Food and Drug Administration, or FDA, 510(k) clearance for the on-board imaging system for our Clinac^® and Trilogy™ linear accelerators.  Also during the quarter, we completed our previously announced acquisition of certain assets of OpTx Corporation, a privately held supplier of software for medical oncology practices in cancer clinics.  This acquisition allows us to offer an interfaced single software system for managing and coordinating radiation therapy and chemotherapy routinely used in the treatment of cancer.  We also initiated our announced joint venture radiotherapy services with Mitsubishi Electric Corp., or Mitsubishi.  The joint venture will sell our full line of radiotherapy products and, for the first two years of the joint venture, Mitsubishi’s medical linear accelerators and will also service and support all of these products.  We are the majority owner of the venture, and we will acquire Mitsubishi Electric Corp.’s share of the joint venture at the end of the three-year joint venture period.  We are accounting for this transaction as an acquisition.

 

Our success depends on our ability to anticipate or keep pace with changes in the marketplace and the direction of technological innovation and customer demands, to develop or acquire new generations of products and product enhancements, to gain market acceptance and commercialization of our new products and to effectively integrate acquired businesses and technologies.  Market acceptance and demand for our new products may be constrained by hospital and clinic budgeting cycles, which are usually fixed one or more years in advance, and our ability to provide significant education and training on IGRT and these products to physicians and healthcare payors.

 

X-Ray Products.  Our other significant business is X-ray Products, which manufactures and sells (i) X-ray tubes for use in a range of applications including computed tomography, or CT, scanning, radioscopic/fluoroscopic

 

20