VARIAN INC - 10-Q Quarterly Report

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 x No ¨

The number of shares of the registrant’s common stock outstanding as of July 25, 2003 was 34,015,160.

See accompanying Notes to the Unaudited Consolidated Condensed Financial Statements.

These unaudited interim consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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. The September 27, 2002 balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2002 filed with the SEC. In the opinion of the Company’s management, the unaudited interim consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter and nine months ended June 27, 2003 are not necessarily indicative of the results to be expected for a full year or for any other periods.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum products and services, and electronics manufacturing services. These businesses primarily serve life science, industrial, academic, and research customers. Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian Associates, Inc. (“VAI”). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company for each share of VAI (the “Distribution”).

The Company’s fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2003 will comprise the 53-week period ending October 3, 2003, and fiscal year 2002 was comprised of the 52-week period ended September 27, 2002. The fiscal quarters and nine-month periods ended June 27, 2003 and June 28, 2002 each comprised 13 weeks and 39 weeks, respectively.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

The Company enters into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in currencies other than the local functional currencies. These contracts are accounted for under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. (“FAS”) 133, Accounting for Derivative Instruments and Hedging Activities. The Company records these contracts at fair value with the related gains and losses recorded in general and administrative expenses. The gains and losses on these contracts are substantially offset by transaction losses and gains on the underlying balance being hedged.

From time to time, the Company also enters into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under FAS 133. At June 27, 2003, there were no outstanding forward contracts designated as cash flow hedges of forecasted sale transactions. During the nine months ended June 27, 2003, a loss of $0.1 million from hedge ineffectiveness was recognized and included in general and administrative expenses.

The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of June 27, 2003 follows:

Changes in the carrying amount of goodwill for each of the Company’s reporting segments in the first nine months of fiscal year 2003 were as follows:

As required by FAS 142, Goodwill and Other Intangible Assets, the Company completed its annual goodwill impairment assessment during the second quarter of fiscal year 2003 and determined that there was no impairment.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

The following intangible assets are recorded and are being amortized by the Company:

Amortization expense relating to intangible assets was $0.8 million and $0.5 million during the fiscal quarters ended June 27, 2003 and June 28, 2002, respectively, and $1.9 million and $1.1 million during the nine months ended June 27, 2003 and June 28, 2002, respectively.

Roche DAT Business. In January 2003, the Company acquired the non-clinical, drugs of abuse testing business (the “DAT Business”) of Roche Diagnostics Corporation (“Roche”) for approximately $22.2 million in cash. The DAT Business develops, markets, and sells consumable products for detecting drugs of abuse, including several products manufactured by the Company for Roche prior to the acquisition. As a result of this acquisition, the Company added the DAT Business’ sales and distribution capabilities to the Company’s existing consumables business, which is part of the Scientific Instruments segment.

The purchase price paid for this acquisition was allocated to the estimated fair value of assets acquired and liabilities assumed as follows:

The amounts allocated to identified intangible assets have a weighted-average useful life of approximately 6.7 years. These intangible assets are being amortized using the straight-line method over their respective estimated useful lives. An external appraisal was performed which used the income approach, the royalty savings approach, and the cost approach to determine the fair value of the DAT Business’ significant identifiable intangible assets. A risk-adjusted discount rate of 12% was applied to cash flow projections to determine the present value of the different intangible assets.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

Other Acquisitions. During the third quarter of fiscal year 2003, the Company made an acquisition in its Electronics Manufacturing segment. This acquisition did not have a material affect on the Company’s financial condition or results of operations.

The above acquisitions were accounted for using the purchase method of accounting. Accordingly, the Company’s Unaudited Consolidated Condensed Statement of Earnings for the fiscal quarter and nine months ended June 27, 2003 include the results of operations of the acquired companies since the effective dates of their respective purchases. There were no significant differences between the accounting policies of the Company and either of the acquired companies. Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effects of these acquisitions were not material on either an individual or an aggregated basis.

Basic earnings per share are calculated based on net earnings and the weighted-average number of shares outstanding during the reported period. Diluted earnings per share include dilution from potential shares of common stock issuable pursuant to the exercise of outstanding stock options determined using the treasury stock method.

For the fiscal quarters ended June 27, 2003 and June 28, 2002, options to purchase 701,000 and 624,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive. For the nine months ended June 27, 2003 and June 28, 2002, options to purchase 1,111,000 and 660,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.

A reconciliation of weighted-average basic shares outstanding to weighted-average diluted shares outstanding follows:

The Company’s comprehensive income is comprised of net earnings, foreign currency translation adjustments, and changes in the fair value of highly effective cash flow hedge transactions. Comprehensive income was $25.9 million and $25.3 million for the fiscal quarters ended June 27, 2003 and June 28, 2002, respectively, and $63.9 million and $46.9 million for the nine months ended June 27, 2003 and June 28, 2002, respectively. Accumulated other comprehensive income (loss) is included as a component of stockholders’ equity.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

As of June 27, 2003, the Company and its subsidiaries had $55.7 million in uncommitted, unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of June 27, 2003. All of these credit facilities contain certain conditions and events of default customary for such facilities, with which the Company was in compliance. Of the $55.7 million in uncommitted, unsecured credit facilities, a total of $36.6 million was limited for use by, or in favor of, certain subsidiaries. As of June 27, 2003, a total of $25.9 million of the $36.6 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to the Company’s subsidiaries by customers for which separate liabilities were recorded in the Unaudited Consolidated Condensed Financial Statements at June 27, 2003. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.

In February 2003, the Company established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.5 million at June 27, 2003). The credit facility is available to the Company’s wholly-owned Japanese subsidiary for working capital purposes. As of June 27, 2003, an aggregate of $2.5 million was outstanding under this credit facility at an annual interest rate of 0.8%, and no amounts were available for future borrowing. This credit facility contains certain covenants that limit future borrowings of the Company from this facility, with which the Company was in compliance.

The Company’s products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the related sale is recognized. The amount of liability to be recorded is based on management’s best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. Changes in the Company’s estimated liability for product warranty during the nine months ended June 27, 2003 were as follows:

During fiscal year 2002, the Company’s Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock before October 1, 2004. During the fiscal quarter and nine months ended June 27, 2003, the Company repurchased and retired 79,000 and 353,000 shares, respectively, under this authorization at an aggregate cost of $2.3 million and $10.4 million, respectively. As of June 27, 2003, the Company had remaining authorization for future repurchases of 597,000 shares.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

As of June 27, 2003, the Company had two stock-based employee compensation plans, the Varian, Inc. Omnibus Stock Plan (the “Plan”) and the Varian, Inc. Employee Stock Purchase Plan (the “ESPP”). In accounting for its employee stock compensation plans, the Company applies the intrinsic value method as prescribed by Accounting Principles Board Opinion No. (“APB”) 25, Accounting for Stock Issued to Employees, and related Interpretations, and has adopted the pro forma disclosure provisions of FAS 123, Accounting for Stock-Based Compensation. If the Company had elected to recognize compensation cost based on the fair value of options granted under the Plan and shares issued under the ESPP as prescribed by FAS 123, net earnings and net earnings per share would have been reduced to the pro forma amounts shown below:

Environmental matters. The Company’s operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company’s operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect on the Company’s capital expenditures, earnings, or competitive position.

Under the terms of the Distribution, the Company and Varian Semiconductor Equipment Associates, Inc. (“VSEA”) each agreed to indemnify Varian Medical Systems, Inc. (“VMS”) for one-third of certain environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

federal, state, and/or local agencies at certain current VMS or former VAI facilities. Under the terms of the Distribution, the Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs).

For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of June 27, 2003, it was nonetheless estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.8 million to $4.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 27, 2003. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore had an accrual of $1.8 million as of June 27, 2003.

As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental-related activities. As of June 27, 2003, it was estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $6.1 million to $13.3 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of June 27, 2003. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.4 million at June 27, 2003. The Company therefore had an accrual of $5.0 million as of June 27, 2003, which represents the best estimate of its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.8 million described in the preceding paragraph.

The foregoing amounts are only estimates of anticipated future environmental-related costs, and the amounts actually spent in the years indicated may be greater or less than such estimates. The aggregate range of cost estimates reflects various uncertainties inherent in many environmental investigation, monitoring, and remediation activities and the large number of sites where such investigation, monitoring, and remediation activities are being undertaken.

An insurance company agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which the Company has an indemnity obligation, and the Company therefore has a $1.3 million receivable in other assets as of June 27, 2003 for the Company’s share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.

Management believes that the Company’s reserves for the foregoing and other environmental-related matters are adequate, but as the scope of its obligation becomes more clearly defined, these reserves may be modified, and related charges against or credits to earnings may be made. Although any ultimate liability arising from environmental-related matters 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 and its best assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of environmental-related matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.

Legal proceedings. The Company is currently the defendant in a patent infringement lawsuit brought by Unaxis Balzers Aktiengesellschaft Liechtenstein, which is seeking infringement damages (royalties and/or lost

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

profits) for the period beginning when the Company’s alleged infringing product (a Vacuum Technologies leak detection system) was introduced in 1997 until the patent expired in 2001. During that period, the Company’s revenues on that product were $17.6 million. The Company believes that it has strong defenses and intends to vigorously defend against this lawsuit.

In addition to this matter, the Company is also involved in other pending legal proceedings that are ordinary, routine, and incidental to its business. While the ultimate outcome of these legal matters is not determinable, the Company believes that these matters are not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations.

The Company’s operations are grouped into three business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The Scientific Instruments segment designs, develops, manufactures, sells, and services equipment and consumable laboratory supplies for a broad range of life science and chemical analysis applications requiring identification, quantification, and analysis of the composition or structure of liquids, solids, or gases. The Vacuum Technologies segment designs, develops, manufactures, sells, and services high-vacuum pumps, leak detection equipment, and related products and services used to create, contain, control, and measure vacuum environments in a broad range of life science, industrial, and scientific applications requiring ultra-clean or high-vacuum environments. The Electronics Manufacturing segment provides electronics manufacturing services, including design, support, manufacturing, and post-manufacturing services, of electronic assemblies and subsystems for a wide range of customers, in particular small- and medium-sized companies with low- to medium-volume, high-mix requirements.

These segments were determined based on how management views and evaluates the Company’s operations.

Corporate includes shared costs of legal, tax, accounting, human resources, real estate, information technology, treasury, insurance, and other management costs. A portion of the indirect and common costs has been allocated to the segments through the use of estimates. Also, transactions between segments are accounted for at cost and are not included in sales. Accordingly, the following information is provided for purposes of achieving an understanding of operations, but might not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies might not be meaningful.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

In August 2001, the FASB issued FAS 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

In October 2001, the FASB issued FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes FAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and portions of Accounting Principles Board Opinion No. (“APB”) 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. While FAS 144 carries forward many of the provisions of FAS 121 and APB 30, some of the key differences in the new standard are that goodwill is excluded from its scope, assets to be abandoned will be viewed as held for use and amortized over their remaining service period, and the standard broadens the presentation of discontinued operations. The adoption of FAS 144 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

In July 2002, the FASB issued FAS 146, Accounting for Exit or Disposal Activities. FAS 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance set forth in Emerging Issues Task Force Issue No. (“EITF”) 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The scope of FAS 146 includes costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and certain termination benefits provided to employees who are involuntarily terminated. FAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 in the second quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS—(Continued)

In November 2002, the FASB issued Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees, standby letters of credit, and warranty obligations. It also clarifies that at the time a company issues a guarantee, a company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The provisions of FIN 45 relating to initial recognition and measurement must be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45, which are effective for both interim and annual periods, were adopted by the Company in the first quarter of fiscal year 2003. The adoption of the initial recognition and measurement provisions of FIN 45 in the second quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

In November 2002, the FASB’s Emerging Issues Task Force finalized EITF 00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. However, it does not address when the criteria for revenue recognition are met or provide guidance on the appropriate revenue recognition convention for a given unit of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, and early application is permitted. Upon adoption, entities may elect to either apply EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its financial condition or results of operations.

In December 2002, the FASB issued FAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FAS 123. FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of FAS 123, Accounting for Stock-Based Compensation. Since the Company has decided to continue to apply the intrinsic value method of accounting for stock-based compensation, the adoption of FAS 148 in the second quarter of fiscal year 2003 did not have an effect on its financial condition or results of operations. However, the Company began making the additional disclosures required by FAS 148 at that time.

Until April 2, 1999, the business of Varian, Inc. (the “Company”) was operated as the Instruments business (“IB”) of Varian Associates, Inc. (“VAI”). IB included the business units that designed, developed, manufactured, sold, and serviced scientific instruments and vacuum technologies, and a business unit that provided electronics manufacturing services. VAI contributed IB to the Company; then on April 2, 1999, VAI distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of the Company for each share of VAI common stock outstanding on April 2, 1999 (the “Distribution”). At the same time, VAI contributed its Semiconductor Equipment business to Varian Semiconductor Equipment Associates, Inc. (“VSEA”) and distributed to the holders of record of VAI common stock on March 24, 1999 one share of common stock of VSEA for each share of VAI common stock outstanding on April 2, 1999. VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (“VMS”) effective as of April 3, 1999. These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the “Distribution Agreement”). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS, and VSEA after the Distribution, the Company, VMS, and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, and a Tax Sharing Agreement.

Throughout this Report, and particularly in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” there are forward-looking statements that are based upon our current expectations, estimates, and projections, and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms.

We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, and assumptions that are difficult to predict. Our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed below under the heading “Risk Factors.” We encourage you to read that section carefully. Other risks and uncertainties include, but are not limited to, the following: whether we will succeed in new product development, commercialization, performance, and acceptance, particularly in life science applications; 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 nuclear magnetic resonance (“NMR”) systems; whether we will see renewed demand for vacuum products and continued demand for electronics manufacturing services; 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 be able to successfully integrate acquired businesses; whether we will see reduced demand from customers that operate in cyclical industries; whether government funding for research might decline; the actual cost of anticipated restructuring activities and their impact on future costs; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”). You should carefully consider those risks, in addition to the other information in this Report and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We disclaim any intent or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise.

Third Quarter of Fiscal Year 2003 Compared to Third Quarter of Fiscal Year 2002

Sales. Sales were $208.7 million in the third quarter of fiscal year 2003, an increase of 5.6% from sales of $197.6 million in the third quarter of fiscal year 2002. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 9.8%, 2.2%, and (3.4%), respectively, compared to the prior-year period.

Geographically, sales in North America of $118.8 million, Europe of $56.7 million, and the rest of the world of $33.2 million in the third quarter of fiscal year 2003 represented increases (decreases) of (4.2%), 23.0%, and 20.9%, respectively, as compared to the third quarter of fiscal year 2002. All three segments experienced a decrease in sales in North America, primarily because of continued economic weakness in the United States. The increase in Europe was driven by stronger Scientific Instruments sales due in part to the stronger Euro in the third quarter of fiscal year 2003. The increase in the rest of the world was primarily driven by continued growth in Scientific Instruments sales into the Pacific Rim.

Gross Profit. Gross profit was $77.9 million (representing 37.3% of sales) in the third quarter of fiscal year 2003, compared to $75.3 million (representing 38.1% of sales) in the third quarter of fiscal year 2002. The decrease in gross profit percentage was driven primarily by the rapid weakening of the U.S. dollar (which increased costs for most non-U.S. operations and increased the cost of foreign-sourced components), increased sales of newer leading-edge Scientific Instruments products (which had lower margins due to higher installation and warranty costs), and approximately $0.5 million in pretax acquisition-related transition costs.

Sales and Marketing. Sales and marketing expenses were $36.1 million (representing 17.3% of sales) in the third quarter of fiscal year 2003, compared to $33.4 million (representing 16.9% of sales) in the third quarter of fiscal year 2002. The increase in sales and marketing expenses resulted primarily from the acquisition of the non-clinical, drugs of abuse testing business (the “DAT Business”) of Roche Diagnostics Corporation in January 2003, the weaker U.S. dollar, which increased costs for most non-U.S. operations, and costs associated with higher revenues.

Research and Development. Research and development expenses were $12.0 million (5.8% of sales) in the third quarter of fiscal year 2003, compared to $10.6 million (representing 5.4% of sales) in the third quarter of fiscal year 2002. Research and development expenses increased primarily because the Company continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications. The weaker U.S. dollar also contributed to the increase, as the costs of certain non-U.S. based research and development resources were higher. We expect that, as a percentage of sales, research and development expenses will continue at or near this higher level for the remainder of fiscal year 2003.

General and Administrative. General and administrative expenses were $13.1 million (representing 6.2% of sales) in the third quarter of fiscal year 2003, compared to $10.3 million (representing 5.2% of sales) in the third quarter of fiscal year 2002. The increase in general and administrative expenses resulted primarily from higher expenses related to acquired businesses (including intangible asset amortization), higher insurance costs, foreign exchange losses of $0.9 million on balance sheet currency exposures due to the rapid weakening of the U.S. dollar during the third quarter of fiscal year 2003, and $1.1 million in pretax restructuring costs. The restructuring costs consisted mainly of employee severance-related costs to improve efficiency and more closely align employee skill sets to the Company’s evolving product mix. We expect that, as a percentage of sales, general and administrative expenses will be higher in the fourth quarter of fiscal year 2003 due to anticipated restructuring costs of $3.0 million to $3.5 million, approximately 90% of which is expected to relate to the Scientific Instruments segment.

Net Interest Expense. Net interest expense was $0.2 million (representing 0.1% of sales) in the third quarter of fiscal year 2003, compared to $0.6 million (representing 0.3% of sales) in the third quarter of fiscal year 2002.

Taxes on Earnings. The effective income tax rate was 35.0% for the third quarter of fiscal year 2003 compared to 36.0% for the third quarter of fiscal year 2002. The fiscal year 2003 rate was lower than the fiscal year 2002 rate primarily due to a reduction in tax rates and higher tax credits in certain foreign jurisdictions.

Net Earnings. Net earnings for the third quarter of fiscal year 2003 were $10.7 million ($0.31 net earnings per diluted share), compared to $13.0 million ($0.37 net earnings per diluted share) in the third quarter of fiscal year 2002. The net earnings for the third quarter of fiscal year 2003 include the impact of $1.1 million in pretax restructuring costs and approximately $0.5 million in pretax acquisition-related transition costs. Excluding these costs, the decrease in net earnings was primarily attributable to decreased profitability in the Scientific Instruments and Vacuum Technologies segments and higher corporate costs, partially offset by increased Electronics Manufacturing profitability.

Segments. Scientific Instruments sales of $135.3 million in the third quarter of fiscal year 2003 increased 9.8% over the third quarter of fiscal year 2002 sales of $123.3 million. The growth in sales was primarily driven by strong sales in certain regions outside of North America, particularly with respect to sales of chromatography, spectroscopy, and high-end NMR systems into life science applications. The strong international sales were offset by continued weakness in some areas of North America. Earnings from operations in the third quarter of fiscal year 2003 of $11.5 million (8.5% of sales) decreased from $12.9 million (10.5% of sales) in the third quarter of fiscal year 2002. The operating earnings for the third quarter of fiscal year 2003 include $0.6 million in pretax restructuring costs. Excluding the impact of these costs, the decrease in operating earnings as a percentage of sales resulted primarily from lower gross profit margins, primarily due to higher installation and warranty costs associated with newer leading-edge Scientific Instruments products, and higher operating costs due primarily to the weaker U.S. dollar and increased research and development spending.

Vacuum Technologies sales of $28.5 million in the third quarter of fiscal year 2003 increased 2.2% from $27.9 million in the third quarter of fiscal year 2002. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the third quarter of fiscal year 2003 of $2.8 million (9.8% of sales) were down from $4.1 million (14.7% of sales) in the third quarter of fiscal year 2002. The operating earnings for the third quarter of fiscal year 2003 include $0.5 million in pretax restructuring costs. Excluding the impact of these costs, the lower operating earnings, as a percentage of sales, were primarily attributable to lower gross profit margins and higher operating costs due in part to the weaker U.S. dollar and increased research and development spending.

Electronics Manufacturing sales in the third quarter of fiscal year 2003 of $44.9 million decreased 3.4% from $46.4 million in the third quarter of fiscal year 2002. The decrease in sales was primarily due to general economic weakness in North America. Sequentially, however, sales grew 9.7% over the second quarter of fiscal year 2003 with improved demand from some established industrial customers and some initial revenues from an acquisition completed during the quarter. Earnings from operations in the third quarter of fiscal year 2003 of $5.5 million (12.1% of sales) increased from $5.3 million (11.4% of sales) in the third quarter of fiscal year 2002. These results include approximately $0.5 million in pretax transition costs associated with an acquisition completed during the third quarter of fiscal year 2003. Excluding the impact of these costs, operating earnings increased primarily as a result of operational efficiencies.

First Nine Months of Fiscal Year 2003 Compared to First Nine Months of Fiscal Year 2002

Sales. Sales were $609.1 million in the first nine months of fiscal year 2003, an increase of 6.4% from sales of $572.2 million in the first nine months of fiscal year 2002. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 10.0%, 5.5%, and (2.7%), respectively, compared to the prior-year period.

Geographically, sales in North America of $333.5 million, Europe of $173.4 million, and the rest of the world of $102.2 million in the first nine months of fiscal year 2003 represented increases (decreases) of (3.6%), 18.1%, and 28.4%, respectively, as compared to the first nine months of fiscal year 2002. The decrease in North America primarily resulted from a shift in NMR systems sales from North America to Europe and the Pacific Rim and lower Electronics Manufacturing sales. This decrease was partially offset by increased sales of Vacuum Technologies and higher sales into North America by the rest of the Scientific Instruments segment. The increase in Europe was driven by stronger sales of Scientific Instruments and Vacuum Technologies due, in part, to the stronger Euro. The increase in the rest of the world primarily resulted from growth in Scientific Instruments sales, particularly sales into the Pacific Rim, partially offset by lower sales into Latin America.

Gross Profit. Gross profit was $232.6 million (representing 38.2% of sales) in the first nine months of fiscal year 2003, compared to $215.2 million (representing 37.6% of sales) in the first nine months of fiscal year 2002. The increase in gross profit percentage was driven primarily by higher Electronics Manufacturing gross profit margins as a result of improved operational efficiencies, as well as lower Vacuum Technologies gross profit margins in the first nine months of the prior fiscal year due to the negative impact of decreased demand on cost of sales. The increase in gross profit percentage due to these factors was partially offset by increased sales of newer leading-edge Scientific Instruments products, which had higher installation and warranty costs.

Sales and Marketing. Sales and marketing expenses were $104.3 million (representing 17.1% of sales) in the first nine months of fiscal year 2003, compared to $96.3 million (representing 16.8% of sales) in the first nine months of fiscal year 2002. The higher sales and marketing expenses resulted primarily from the acquisition of ANSYS Technologies, Inc. (“ANSYS”) in February 2002 and the DAT Business in January 2003, as well as costs associated with higher revenues. In addition, the weaker U.S. dollar increased these costs for most non-U.S. operations.

Research and Development. Research and development expenses were $34.0 million (representing 5.6% of sales) in the first nine months of fiscal year 2003, compared to $29.2 million (representing 5.1% of sales) in the first nine months of fiscal year 2002. Research and development expenses increased primarily because the Company continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications. In addition, the weaker U.S. dollar increased these costs for some non-U.S. operations.

General and Administrative. General and administrative expenses were $36.1 million (representing 5.9% of sales) in the first nine months of fiscal year 2003, compared to $28.8 million (representing 5.0% of sales) in the first nine months of fiscal year 2002. The increase in general and administrative expenses resulted primarily from $3.2 million in pretax restructuring costs recorded in the first nine months of fiscal year 2003. The restructuring costs consisted mainly of employee severance-related costs in the Scientific Instruments and Vacuum Technologies segments to improve efficiency and more closely align employee skill sets to the Company’s evolving product mix. Higher expenses related to acquired businesses (including intangible asset amortization) and higher insurance costs also contributed to the increase in the first nine months of fiscal year 2003.

Purchased In-Process Research and Development. In connection with the acquisition of ANSYS in February 2002, the Company recorded a one-time charge of $0.9 million for purchased in-process research and development in the first nine months of fiscal year 2002 relating to several ANSYS products, which were in process at the time of the acquisition. No such charges were recorded in the first nine months of fiscal year 2003.

Net Interest Expense. Net interest expense was $0.8 million (representing 0.1% of sales) in the first nine months of fiscal year 2003, compared to $1.4 million (representing 0.3% of sales) in the first nine months of fiscal year 2002.

Taxes on Earnings. The effective income tax rate was 35.0% for the first nine months of fiscal year 2003 compared to 36.6% (of which 0.6% relates to the purchased in-process research and development charge) for the first nine months of fiscal year 2002. The fiscal year 2003 rate was lower than the fiscal year 2002 rate due mainly to a reduction in tax rates and higher tax credits in certain foreign jurisdictions.

Net Earnings. Net earnings for the first nine months of fiscal year 2003 were $37.3 million ($1.07 net earnings per diluted share), compared to $37.2 million ($1.07 net earnings per diluted share) in the first nine months of fiscal year 2002. Net earnings for the first nine months of fiscal year 2003 reflect the impact of $3.2 million in pretax restructuring costs and $0.5 million in pretax acquisition-related transition costs, while net earnings for the first nine months of fiscal year 2002 include the impact of a one-time pretax charge of $0.9 million for purchased in-process research and development relating to the ANSYS acquisition. Excluding the effect of these charges, the increase in net earnings in the first nine months of fiscal year 2003 was primarily the result of increased profitability in the Electronics Manufacturing segment, partially offset by lower Vacuum Technologies profitability and higher corporate costs.

Segments. Scientific Instruments sales of $395.2 million in the first nine months of fiscal year 2003 increased 10.0% over the first nine months of fiscal year 2002 sales of $359.3 million. The growth in sales was primarily driven by increased sales of chromatography, spectroscopy, and high-end NMR systems into life science applications, the stronger Euro in the first nine months of fiscal year 2003, and the acquisitions of ANSYS in February 2002 and the DAT Business in January 2003. Earnings from operations in the first nine months of fiscal year 2003 were $39.1 million (9.9% of sales) compared to $40.0 million (11.1% of sales) in the first nine months of fiscal year 2002. These results include $2.2 million in pretax restructuring costs in the first nine months of fiscal year 2003 and a one-time pretax charge of $0.9 million for purchased in-process research and development relating to the ANSYS acquisition in the first nine months of fiscal year 2002. Excluding the impact of these charges, the decrease in operating earnings as a percentage of sales resulted primarily from lower gross profit margins and increased research and development and general and administrative expenses in the first nine months of fiscal year 2003.

Vacuum Technologies sales of $86.1 million in the first nine months of fiscal year 2003 increased 5.5% from the first nine months of fiscal year 2002 sales of $81.6 million. The sales increase resulted primarily from higher sales of products into life science applications. Earnings from operations in the first nine months of fiscal year 2003 of $10.6 million (12.3% of sales) were down from $12.1 million (14.8% of sales) in the first nine months of fiscal year 2002. The results for the first nine months of fiscal year 2003 include $0.5 million in pretax restructuring costs. Excluding the impact of these costs, the lower operating earnings were primarily attributable to increased spending on research and development and higher general and administrative costs due to the impact of the weaker U.S. dollar on non-U.S. operating costs and higher-than-normal legal expenses.

Electronics Manufacturing sales in the first nine months of fiscal year 2003 of $127.8 million decreased 2.7% from $131.3 million in the first nine months of fiscal year 2002. The decrease in sales was primarily due to general economic weakness in North America. Earnings from operations in the first nine months of fiscal year 2003 of $15.2 million (11.9% of sales) increased from $12.4 million (9.4% of sales) in the first nine months of fiscal year 2002. The results for the first nine months of fiscal 2003 include approximately $0.5 million in pretax acquisition-related transition costs. Excluding the impact of these costs, the increase in operating earnings as a percentage of sales resulted primarily from operational efficiencies.

The Company generated $84.2 million of cash from operating activities in the first nine months of fiscal year 2003, which compares to $53.0 million in the first nine months of fiscal year 2002. The increase in cash from operating activities resulted primarily from higher receipts of customer contract advances and improved overall working capital utilization.

The Company used $38.7 million of cash for investing activities in the first nine months of fiscal year 2003, which compares to $68.2 million in the first nine months of fiscal year 2002. The decrease in cash used for investing activities in the first nine months of fiscal year 2003 was primarily due to lower cash expenditures for acquisitions.

The Company used $5.4 million of cash for financing activities in the first nine months of fiscal year 2003, which compares to $0.9 million used for financing activities in the first nine months of fiscal year 2002. The increase in cash used for financing activities in the first nine months of fiscal year 2003 was primarily due to the repurchase of common stock, partially offset by lower repayment of debt and by short-term borrowings under a bank credit facility in Japan.

During fiscal year 2002, the Company established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of June 27, 2003. Borrowings under this credit facility bear interest at rates of LIBOR plus 1.25% to 2.0% depending on certain financial ratios of the Company at the time of borrowing. This credit facility contains certain customary covenants that limit future borrowings of the Company and require the maintenance by the Company of certain levels of financial performance. The Company was in compliance with all such covenants and requirements as June 27, 2003.

As of June 27, 2003, the Company had $35.0 million in term loans outstanding compared to $37.5 million at September 27, 2002. As of both June 27, 2003 and September 27, 2002, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at June 27, 2003 and 6.9% at September 27, 2002. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in compliance with all restrictive covenants of the term loan agreements during the first nine

months of fiscal year 2003. The Company also had other long-term notes payable of $4.3 million as of June 27, 2003 with a weighted-average interest rate of 0.2% and $3.5 million as of September 27, 2002 with a weighted-average interest rate of 0.9%.

Future principal payments on long-term debt outstanding on June 27, 2003 were $0.3 million, $2.8 million, $4.3 million, $4.4 million, $2.5 million, $6.3 million, and $18.7 million during the three months ending October 3, 2003 and fiscal years 2004, 2005, 2006, 2007, 2008, and thereafter, respectively.

In connection with certain acquisitions, the Company has accrued but not yet paid certain purchase price amounts which have been “held back” to secure the sellers’ indemnification obligations. These “holdback” amounts, which are due to be paid (net of any indemnification claims) at various times through fiscal year 2004, totaled approximately $0.5 million at June 27, 2003. In addition to the “holdback” payments, the Company is also obligated to pay additional cash purchase price amounts in the event that contingent financial or operational milestones are met by the acquired businesses. As of June 27, 2003, up to a maximum of $15.4 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Any contingent payments made will be recorded as additional goodwill at the time they are earned.

The Distribution Agreement provides that the Company is responsible for certain litigation to which VAI was a party, and further provides that the Company will indemnify VMS and VSEA for one-third of the after-tax costs, expenses, and other liabilities relating to certain discontinued, former, and corporate operations of VAI, including certain environmental liabilities (see below under the heading “Risk Factors—Environmental Matters”).

The Company’s liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industry and global economies. Although the Company’s cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the Company’s borrowing capability, will be sufficient to satisfy commitments for capital expenditures and other cash requirements for the next 12 months.

The following table summarizes future principal payments on outstanding debt and minimum rentals due for certain facilities and other leased assets under long-term, non-cancelable operating leases as of June 27, 2003:

In addition to the above, the Company had cancelable commitments to purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $33.5 million, net of deposits paid, as of June 27, 2003. In the event that these commitments are canceled for reasons other than the supplier’s default, the Company would be responsible for reimbursement of actual costs incurred by the supplier.

As of June 27, 2003, the Company did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of some contingent event, except for contingent payments of up to a maximum of $15.4 million related to acquisitions as discussed under “Liquidity and Capital Resources” above, the specific timing and amounts of which are not currently determinable.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“FAS”) 143, Accounting for Asset Retirement Obligations. FAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. FAS 143 applies to all entities. The adoption of FAS 143 in the first quarter of fiscal year 2003 did not have a significant impact on the Company’s financial condition or results of operations.

Upon adoption, entities may elect to either apply the EITF 00-21 prospectively or report the change in accounting as a cumulative-effect adjustment. The Company has not yet determined the effect the adoption of EITF 00-21 will have on its financial condition or results of operations.

Customer Demand. Demand for the Company’s products depends upon, among other factors, the level of capital expenditures by current and prospective customers, the rate of economic growth in the markets in which we compete, and the competitiveness of our products and services. Changes in any of these factors could have an adverse effect on the Company’s financial condition or results of operations.

In the case of our Scientific Instruments and Vacuum Technologies segments, we must continue to assess and predict customer needs, regulatory requirements, and evolving technologies. We must develop new products, including enhancements to existing products, new services, and new applications, successfully commercialize, manufacture, market, and sell these products, and protect our intellectual property in these products. If we are unsuccessful in these areas, our financial condition or results of operations could be adversely affected.

In the case of the Company’s Electronics Manufacturing segment, we must respond quickly to our customers’ changing requirements. Customers may change, delay, or cancel orders for many reasons, including lack of success of their products or business strategies and economic conditions in the markets they serve. In addition, some customers, including start-up companies, have limited product histories and financial resources, which make them riskier customers for us. We must determine, based on our judgment and our customers’ estimates of their future requirements, what levels of business we will accept, what start-up costs to incur for new customers or products, production schedules, component procurement commitments, personnel needs, and other resource requirements. All of these decisions require predictions about the future and judgments that could be wrong. Cancellations, reductions, or delays in orders by a significant customer or group of customers, or their inability to meet financial commitments with respect to orders or shipments, could have an adverse impact on the Company’s financial condition or results of operations.

Variability of Operating Results. The Company experiences some cyclical patterns in sales of its products. Generally, sales and earnings in the first quarter of the Company’s fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in our first fiscal quarter (October to December) and many customers defer December deliveries until the next calendar year, our second fiscal quarter. Our fourth fiscal quarter sales and earnings are often the highest in the fiscal year compared to the other three quarters, primarily because many customers spend budgeted money before their own fiscal years end. This cyclical pattern can be influenced by other factors, including general economic conditions, acquisitions, and new product introductions. Consequently, our results of operations may fluctuate significantly from quarter to quarter.

For most of the Company’s products, we operate on a short backlog, as short as a few days for some products and less than a fiscal quarter for most others. We also experience significant shipments in the last month of each quarter, in part because of how our customers place orders and schedule shipments. This can make it difficult for us to forecast our results of operations.

Certain of our leading-edge NMR systems, probes, and components (together accounting for less than 10% of the Company’s revenues and operating profits) sell for high prices and on long lead-times. These systems and components are complex; require development of new technologies and, therefore, significant research and development resources; are often intended for evolving leading-edge research applications; often have customer-specific features, custom capabilities, and specific acceptance criteria; and, in the case of NMR systems, require superconducting magnets that can be difficult to manufacture. These superconducting magnets are not manufactured by us, so our ability to ship, install and obtain customer acceptance of our leading-edge NMR systems is dependent upon the superconducting magnet supplier’s timely development, delivery, and installation of magnets that perform to customer specifications. If we are unable to meet these challenges, it could have an adverse effect on the Company’s financial condition or results of operations. In addition, all of these factors can make it difficult for us to forecast shipment, installation, and acceptance of, and warranty costs on, leading-edge NMR systems and probes, which in turn can make it difficult for us to forecast the timing of revenue recognition and the achieved gross profit margin on these systems.

Competition. The industries in which the Company operates—scientific instruments, vacuum technologies, and electronics manufacturing—are highly competitive. In each of these industries, we compete against many U.S. and non-U.S. companies, most with global operations. Some of our competitors have greater financial resources than we have, which may enable them to respond more quickly to new or emerging technologies, take advantage of acquisition opportunities, compete on price, or devote greater resources to research and development, engineering, manufacturing, marketing, sales, or managerial activities. Others have greater name recognition and geographic and market presence or lower cost structures than the Company. In addition, weaker demand and excess capacity in our industries could cause greater price competition as our competitors seek to maintain sales volumes and market share. Additionally, in the case of electronics manufacturing, current and prospective customers continually evaluate the merits of manufacturing products internally; there is substantial excess manufacturing capacity in the industry; certain competitors manufacture or are seeking to manufacture outside the U.S. where there can be significant cost advantages, and certain customers may be willing to move to “off-shore” manufacturing for cost reasons; larger competitors might have greater direct buying power from suppliers; and electronics manufacturing processes are generally not subject to significant intellectual property protection. For all of the foregoing reasons, competition could result in lower revenues due to lost sales or price reductions, lower margins, and loss of market share, which could have an adverse effect on the Company’s financial condition or results of operations.

Key Suppliers. Some items purchased by the Company for the manufacture of its products, including superconducting magnets used in NMR systems, are purchased from limited or single sources of supply. The loss of a key supplier or the inability to obtain certain key raw materials or components could cause delays or reductions in shipments of our products or increase our costs, which could have an adverse effect on the Company’s financial condition or results of operations.

We have experienced and could again experience delivery delays in superconducting magnets used in NMR systems, which has caused and could again cause delays in our product shipments. In addition, end-users of our NMR systems require helium to operate those systems; shortages of helium could result in higher helium prices, and thus higher operating costs for NMR systems, which could impact demand for those systems.

The Company’s Electronics Manufacturing segment uses electronic components in the manufacture of its products. These components can be more or less difficult and expensive to obtain, depending on the overall demand for these components as a result of general economic cycles or other factors. Consequently, the Electronics Manufacturing segment’s results of operations could fluctuate over time.

Business Interruption. The Company’s facilities, operations, and systems could be impacted by fire, flood, terrorism, or other natural or man-made disasters. In particular, we have significant facilities in areas prone to earthquakes, such as our production facilities and headquarters in California. Due to the limited availability, broad exclusions, and prohibitive costs, we do not have insurance policies that would cover losses resulting from

an earthquake. If any of our facilities or surrounding areas were to be significantly damaged in an earthquake, it could disrupt our operations, delay shipments, and cause us to incur significant repair or replacement costs, which could have an adverse effect on the Company’s financial condition or results of operations.

The Company’s employees based in certain foreign countries are subject to factory-specific and/or industry-wide collective bargaining agreements. Of these, the Company’s employees in Australia are subject to a collective bargaining agreement that was tentatively renegotiated following a recent brief work stoppage. A further work stoppage, strike, or other labor action at this or other facilities of the Company could have an adverse effect on the Company’s financial condition or results of operations.

Intellectual Property. The Company’s success depends on its intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and licensing arrangements to establish and protect that intellectual property, but these protections might not be available in all countries, might not be enforceable, might not fully protect our intellectual property, and might not provide meaningful competitive advantages. Moreover, we might be required to spend significant resources to police and enforce our intellectual property rights, and we might not detect infringements of those intellectual property rights. If we fail to protect our intellectual property and enforce our intellectual property rights, our competitive position could suffer, which could have an adverse effect on the Company’s financial condition or results of operations.

The Company is currently the defendant in a patent infringement lawsuit brought by Unaxis Balzers Aktiengesellschaft Liechtenstein, which is seeking infringement damages (royalties and/or lost profits) for the period beginning when the Company’s alleged infringing product (a Vacuum Technologies leak detection system) was introduced in 1997 until the patent expired in 2001. During that period, the Company’s revenues on that product were $17.6 million. The Company believes that it has strong defenses and intends to vigorously defend against this lawsuit.

Other third parties might claim that the Company infringes their intellectual property rights, and we may be unaware of intellectual property rights that we are infringing. Any litigation regarding intellectual property of others could be costly and could divert personnel and resources from our operations. Claims of intellectual property infringement might also require us to develop non-infringing alternatives or enter into royalty-bearing license agreements. We might also be required to pay damages or be enjoined from developing, manufacturing, or selling infringing products. We sometimes rely on licenses to avoid these risks, but we cannot be assured that these licenses will be available in the future or on favorable terms. Failure to protect against these risks could have an adverse effect on the Company’s financial condition or results of operations.

Acquisitions. The Company has acquired companies and operations, and intends to acquire companies and operations in the future, as part of its growth strategy. Acquisitions must be carefully evaluated and negotiated if they are to be successful. Once completed, acquired operations must be carefully integrated to realize expected synergies, efficiencies, and financial results. Some of the challenges in doing this include retaining key employees, managing operations in new geographic areas, retaining key customers, and managing transaction costs. All of this must be done without diverting management and other resources from other operations and activities. Failure to successfully evaluate, negotiate, and integrate acquisitions could have an adverse effect on the Company’s financial condition or results of operations.

Foreign Operations and Currency Exchange Rates. A significant portion of the Company’s sales, manufacturing activities, and employees are outside of the United States. As a result, the Company is subject to various risks, including the following: duties, tariffs, and taxes; restrictions on currency conversions, fund transfers, or profit repatriations; import, export, and other trade restrictions; protective labor regulations and union contracts; compliance with local laws and regulations; travel and transportation difficulties; and adverse developments in political or economic environments in countries where we operate. These risks could have an adverse effect on the Company’s financial condition or results of operations.

Additionally, the U.S. dollar value of the Company’s sales and operating costs varies with currency exchange rate fluctuations. Because the Company manufactures and sells in the U.S. and a number of other countries, the impact that currency exchange rate fluctuations have on the Company is dependent on the interaction of a number of variables. These variables include, but are not limited to, the relationships between various foreign currencies, the relative amount of the Company’s revenues that are denominated in U.S. dollars or in U.S. dollar-linked currencies, customer resistance to currency-driven price changes, and the suddenness and severity of changes in certain currency exchange rates. In addition, the Company hedges most of its balance sheet exposures denominated in other-than-local currencies based upon forecasts of those exposures; in the event that these forecasts are overstated or understated during periods of currency volatility, foreign exchange losses could result. For all of these reasons, currency exchange fluctuations could have an adverse effect on the Company’s financial condition or results of operations.

Key Personnel. The Company’s success depends upon the efforts and abilities of key personnel, including research and development, engineering, manufacturing, finance, administrative, marketing, sales, and management personnel. The availability of qualified personnel can vary significantly based on factors such as the strength of the general economy. However, even in weak economic periods, there is still intense competition for personnel with certain expertise in the geographic areas where we compete for personnel. In addition, certain employees have significant institutional and proprietary technical knowledge, which could be difficult to quickly replace. Failure to attract and retain qualified personnel, who generally do not have employment agreements or post-employment non-competition agreements, could have an adverse effect on the Company’s financial condition or results of operations.

Environmental Matters. The Company’s operations are subject to various foreign, federal, state, and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. These regulations increase the costs and potential liabilities of the Company’s operations. However, the Company does not currently anticipate that its compliance with these regulations will have a material effect on the Company’s capital expenditures, earnings, or competitive position.

VMS 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 VAI is alleged to have shipped manufacturing waste for recycling, treatment, or disposal. In addition, VMS is overseeing and, as applicable, reimbursing third parties for environmental investigation, monitoring, and/or remediation activities under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities. Under the terms of the Distribution, the Company and VSEA are each obligated to indemnify VMS for one-third of these environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs).

2003. As to each of these sites and facilities, it was determined that a particular amount within the range of estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.4 million at June 27, 2003. The Company therefore had an accrual of $5.0 million as of June 27, 2003, which represents the best estimate of its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.8 million described in the preceding paragraph.

Governmental Regulations. The Company’s businesses are subject to many governmental regulations in the U.S. and other countries, including with respect to protection of the environment, employee health and safety, labor matters, product safety, medical devices, import, export, competition, and sales to governmental entities. These regulations are complex and change frequently. We incur significant costs to comply with governmental regulations, and failure to comply could result in suspension of or restrictions on our operations, product recalls, fines and other civil and criminal penalties, private party litigation, and damage to our reputation, which could have an adverse effect on the Company’s financial condition or results of operations.

The Company typically hedges its foreign currency exposures associated with certain assets and liabilities denominated in non-functional currencies and, from time to time, hedges certain forecasted foreign currency cash flows. The success of the Company’s hedging activities depends on its ability to forecast balance sheet exposures and transaction activity in various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. However, the Company believes that in most cases gains or losses would be substantially offset by losses or gains from the related foreign exchange forward contracts. The Company therefore believes that the direct effect of an immediate 10% change in the exchange rate between the U.S. dollar and all other currencies is not reasonably likely to have a material adverse effect on the Company’s financial condition or results of operations. The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity.

At June 27, 2003, there were no outstanding forward contracts designated as cash flow hedges of forecasted sale transactions. During the nine months ended June 27, 2003, a loss of $0.1 million from hedge ineffectiveness was recognized and included in general and administrative expenses. A summary of all forward exchange contracts that were outstanding as of June 27, 2003 follows:

The Company has no material exposure to market risk for changes in interest rates. The Company invests any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to the Company’s financial condition or results of operations. The Company primarily enters into debt obligations to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At June 27, 2003, the Company’s debt obligations had fixed interest rates.

Based upon rates currently available to the Company for debt with similar terms and remaining maturities, the carrying amounts of long-term debt and notes payable approximate their estimated fair values.

Although payments under certain of the Company’s operating leases for its facilities are tied to market indices, the Company is not exposed to material interest rate risk associated with its operating leases.

Principal Amounts and Related Weighted-Average Interest Rates By Year of Maturity

Within the 90-day period prior to the filing of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the disclosure controls subsequent to the date of that evaluation.

(b) Reports on Form 8-K filed or furnished during the fiscal quarter ended June 27, 2003:

The registrant furnished a Current Report on Form 8-K on April 23, 2003 for its press release reporting results for the second quarter of its fiscal year 2003.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VARIAN, INC. (Registrant)

By:		/s/ G. EDWARD MCCLAMMY
		G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

Delaware		77-0501995
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

3120 Hansen Way, Palo Alto, California		94304-1030
(Address of Principal Executive Offices)		(Zip Code)

		Page
PART I	Financial Information
Item 1.	Financial Statements:
	Unaudited Consolidated Condensed Statement of Earnings	3
	Unaudited Consolidated Condensed Balance Sheet	4
	Unaudited Consolidated Condensed Statement of Cash Flows	5
	Notes to the Unaudited Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30

PART II	Other Information
Item 6.	Exhibits and Reports on Form 8-K	31

	Fiscal Quarter Ended				Nine Months Ended
	June 27, 2003		June 28, 2002		June 27, 2003		June 28, 2002
Sales	$	208,734	$	197,668	$	609,091	$	572,239
Cost of sales		130,773		122,348		376,456		357,018

Gross profit		77,961		75,320		232,635		215,221

Operating expenses
Sales and marketing		36,153		33,412		104,328		96,336
Research and development		12,066		10,580		34,028		29,199
General and administrative		13,037		10,312		36,051		28,803
Purchased in-process research and development		—		—		—		890

Total operating expenses		61,256		54,304		174,407		155,228

Operating earnings		16,705		21,016		58,228		59,993
Interest expense, net		211		639		831		1,438

Earnings before income taxes		16,494		20,377		57,397		58,555
Income tax expense		5,773		7,335		20,089		21,400

Net earnings	$	10,721	$	13,042	$	37,308	$	37,155


Net earnings per share:
Basic	$	0.32	$	0.39	$	1.10	$	1.11

Diluted	$	0.31	$	0.37	$	1.07	$	1.07


Shares used in per share calculations:
Basic		33,886		33,632		33,876		33,464

Diluted		35,048		35,049		35,000		34,856

	June 27, 2003		Sept. 27, 2002
ASSETS

Current assets
Cash and cash equivalents	$	111,138	$	65,145
Accounts receivable, net		167,814		168,958
Inventories		134,545		116,252
Deferred taxes		29,104		30,644
Other current assets		19,780		16,084

Total current assets		462,381		397,083
Property, plant, and equipment, net		114,779		105,871
Goodwill		125,431		115,922
Intangible assets, net		17,496		12,153
Other assets		3,463		3,575

Total assets	$	723,550	$	634,604


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Notes payable	$	2,544	$	—
Current portion of long-term debt		3,109		3,321
Accounts payable		60,457		52,086
Deferred profit		16,693		20,952
Accrued liabilities		144,499		122,819

Total current liabilities		227,302		199,178
Long-term debt		36,202		37,635
Deferred taxes		9,243		8,191
Other liabilities		10,647		9,879

Total liabilities		283,394		254,883


Contingencies (Note 13)

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—33,929 shares at June 27, 2003 and 33,951 shares at Sept. 27, 2002		248,488		251,904
Retained earnings		181,727		144,419
Accumulated other comprehensive income (loss)		9,941		(16,602	)

Total stockholders’ equity		440,156		379,721

Total liabilities and stockholders’ equity	$	723,550	$	634,604

	Nine Months Ended
	June 27, 2003			June 28, 2002
Cash flows from operating activities
Net earnings	$	37,308		$	37,155
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		17,432			15,560
(Gain) loss on disposition of property, plant, and equipment		(124	)		94
Purchased in-process research and development		—			890
Tax benefit from stock option exercises		1,352			1,398
Deferred taxes		2,865			(1,694	)
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable, net		14,086			7,547
Inventories		(7,855	)		4,572
Other current assets		2,585			(2,949	)
Other assets		254			1,620
Accounts payable		5,318			(4,165	)
Deferred profit		(4,413	)		1,856
Accrued liabilities		14,827			(8,921	)
Other liabilities		576			19

Net cash provided by operating activities		84,211			52,982

Cash flows from investing activities
Proceeds from sale of property, plant, and equipment		473			392
Purchase of property, plant, and equipment		(15,561	)		(15,241	)
Purchase of businesses, net of cash acquired		(23,586	)		(53,325	)

Net cash used in investing activities		(38,674	)		(68,174	)

Cash flows from financing activities
Net issuance (repayment) of debt		116			(5,457	)
Repurchase of common stock		(10,368	)		—
Issuance of common stock		5,600			6,955
Net transfers to Varian Medical Systems, Inc.		(739	)		(2,353	)

Net cash used in financing activities		(5,391	)		(855	)

Effects of exchange rate changes on cash and cash equivalents		5,847			1,349

Net increase (decrease) in cash and cash equivalents		45,993			(14,698	)
Cash and cash equivalents at beginning of period		65,145			59,879

Cash and cash equivalents at end of period	$	111,138		$	45,181


Supplemental cash flow information
Income taxes paid	$	7,336		$	18,760

Interest paid	$	1,892		$	2,198

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	June 27, 2003		Sept. 27, 2002
(in thousands)
Inventories
Raw materials and parts	$	68,327	$	61,098
Work in process		13,960		12,570
Finished goods		52,258		42,584

	$	134,545	$	116,252

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	45,820
Australian dollar		—		17,460
Japanese yen		8,398		—
Canadian dollar		6,012		—
British pound		—		4,359
Swedish krona		—		4,172

	$	14,410	$	71,811

	Scientific Instruments			Vacuum Technologies		Electronics Manufacturing		Total Company
(in thousands)
Balance as of September 27, 2002	$	112,854		$	966	$	2,102	$	115,922
Fiscal year 2003 acquisitions		9,531			—		—		9,531
Other adjustments		(22	)		—		—		(22	)

Balance as of June 27, 2003	$	122,363		$	966	$	2,102	$	125,431

	Amount Allocated
(in millions)
Inventories	$	3.2
Property, plant, and equipment		2.4
Goodwill		9.5
Identified intangible assets		7.2

Total assets acquired		22.3
Liabilities assumed		(0.1	)

Net assets acquired	$	22.2

(in thousands)
Balance as of September 27, 2002	$	9,029
Charges to costs and expenses		4,283
Warranty expenditures		(3,938	)

Balance as of June 27, 2003	$	9,374

	Three Months Ending Oct. 3, 2003		Fiscal Years												Total
	Three Months Ending Oct. 3, 2003		2004		2005		2006		2007		2008		Thereafter		Total
(in thousands)
Operating leases	$	2,314	$	6,231	$	4,856	$	2,927	$	2,099	$	1,782	$	26,488	$	46,697
Notes payable		—		2,544		—		—		—		—		—		2,544
Long-term debt (including current portion)		297		2,812		4,351		4,351		2,500		6,250		18,750		39,311

Total contractual cash obligations	$	2,611	$	11,587	$	9,207	$	7,278	$	4,599	$	8,032	$	45,238	$	88,552

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	45,820
Australian dollar		—		17,460
Japanese yen		8,398		—
Canadian dollar		6,012		—
British pound		—		4,359
Swedish krona		—		4,172

	$	14,410	$	71,811

Exhibit No.		Description
10.8*		Amended and Restated Varian, Inc. Supplemental Retirement Plan dated as of August 1, 2003.

99.1		Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification Pursuant to Section 1350 to Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	June 27, 2003			Sept. 27, 2002
(in thousands)
Intangible assets
Customer contracts and related relationships	$	5,905		$	1,105
Existing technology		6,972			6,972
Patents and core technology		4,572			3,072
Trade names and trademarks		2,176			1,476
Other		2,023			1,733

		21,648			14,358
Accumulated amortization		(4,152	)		(2,205	)

	$	17,496		$	12,153