##### Table of Contents




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SECURITIES AND EXCHANGE COMMISSION





Washington, DC 20549





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FORM 10-Q





(Mark One)





|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|- |  | ---------------------------------------------------------------------------

ACT OF 1934





For the quarterly period ended June 28, 2002





OR





| ̈ |  | 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 000-25393





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VARIAN, INC.





(Exact Name of Registrant as Specified in its Charter)





Delaware

77-0501995(State or Other Jurisdiction of Incorporation or Organization)

(IRS Employer Identification
Number)3120 Hansen Way, Palo Alto, California

94304-1030(Address of Principal Executive Offices)

(Zip Code)





(650) 213-8000


(Registrants Telephone Number, Including Area Code)





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  þ    No  ̈





The
number of shares of the Registrants common stock outstanding as of July 26, 2002 was 33,950,292.





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##### Table of Contents




TABLE OF CONTENTS





Part I.

Financial Information

3Item 1.

Financial Statements

3Unaudited Consolidated Condensed Statements of Earnings

3Unaudited Consolidated Condensed Balance Sheets

4Unaudited Consolidated Condensed Statements of Cash Flows

5Notes to the Unaudited Consolidated Condensed Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

16Item 3.

Quantitative and Qualitative Disclosure about Market Risk

25Part II.

Other Information

26Item 6.

Exhibits and Reports on Form 8-K

26





RISK FACTORS RELATING TO FORWARD-LOOKING STATEMENTS





This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results of Varian, Inc. (the Company) to differ materially from managements current expectations. Those
risks and uncertainties include, without limitation: new product development and commercialization; continued growth in Scientific Instruments sales and the impact on these sales of the timing of shipments and the recognition of revenues on NMR
systems; renewed demand for vacuum products and contract electronics manufacturing; demand for and acceptance of the Companys products; competitive products and pricing; economic conditions in the Companys product and geographic markets;
foreign currency fluctuations that could adversely impact revenue growth and earnings; sustained or improved market investment in capital equipment; and other risks detailed from time to time in the Companys filings with the Securities and
Exchange Commission.




2




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##### Table of Contents




PART I.


FINANCIAL INFORMATION





ITEM 1.    FINANCIAL STATEMENTS





Varian, Inc. and Subsidiary Companies


Unaudited Consolidated Condensed Statements of Earnings


(In thousands, except per share amounts)





Quarter Ended

Nine Months EndedJun. 28, 2002

Jun. 29, 2001

Jun. 28, 2002

Jun. 29, 2001Sales

$
197,668

$
184,072

$
572,239

$
555,984Cost of sales


122,348


114,578


357,018


345,680Gross profit


75,320


69,494


215,221


210,304Operating expensesSales and marketing


33,412


32,491


96,336


96,946Research and development


10,580


9,345


29,199


26,445General and administrative


10,312


9,592


28,803


31,692Purchased in-process research and development








890


Total operating expenses


54,304


51,428


155,228


155,083Operating earnings


21,016


18,066


59,993


55,221Interest expense, net


639


244


1,438


821Earnings before income taxes and cumulative effect of change in accounting principle


20,377


17,822


58,555


54,400Income tax expense


7,335


6,951


21,400


21,216Earnings before cumulative effect of change in accounting principle


13,042


10,871


37,155


33,184Cumulative effect of change in accounting principle, net of tax of $4,767











(7,455
)Net earnings

$
13,042

$
10,871

$
37,155

$
25,729Net earnings per share:BasicBefore cumulative effect of change in accounting principle

$
0.39

$
0.33

$
1.11

$
1.01Cumulative effect of change in accounting principle, net of tax











(0.23
)After cumulative effect of change in accounting principle

$
0.39

$
0.33

$
1.11

$
0.78DilutedBefore cumulative effect of change in accounting principle

$
0.37

$
0.32

$
1.07

$
0.97Cumulative effect of change in accounting principle, net of tax











(0.22
)After cumulative effect of change in accounting principle

$
0.37

$
0.32

$
1.07

$
0.75Shares used in per share calculations:Basic


33,632


33,055


33,464


32,956Diluted


35,049


34,459


34,856


34,469





See accompanying Notes to the Unaudited Consolidated Condensed Financial
Statements.




3




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##### Table of Contents

Varian, Inc. and Subsidiary Companies


Unaudited Consolidated Condensed Balance Sheets


(In thousands, except share and par value amounts)





Jun. 28, 2002


Sept. 28, 2001ASSETSCurrent assetsCash and cash equivalents

$
45,181


$
59,879Accounts receivable, net


158,904



158,280Inventories


120,735



119,498Deferred taxes


27,905



26,303Other current assets


17,900



11,084Total current assets


370,625



375,044Property, plant and equipment, net


105,480



90,528Goodwill


114,947



85,906Intangible assets, net


12,626



4,019Other assets


3,763



3,760Total assets

$
607,441


$
559,257LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt

$
3,635


$
6,424Accounts payable


47,487



48,728Deferred profit


23,560



21,705Accrued liabilities


118,897



124,754Total current liabilities


193,579



201,611Long-term debt


37,980



39,656Deferred taxes


5,497



2,801Other liabilities


9,832



9,918Total liabilities


246,888



253,986Contingencies (Note 10)Stockholders equityPreferred stockpar value $.01, authorized1,000,000 shares; issuednone






Common stockpar value $.01, authorized99,000,000 shares; issued and outstanding33,724,578 shares at
Jun. 28, 2002 and 33,223,815 shares at Sept. 28, 2001


245,012



236,660Retained earnings


129,947



92,792Other comprehensive loss


(14,406
)


(24,181
)Total stockholders equity


360,553



305,271Total liabilities and stockholders equity

$
607,441


$
559,257





See accompanying Notes to the Unaudited Consolidated Condensed Financial
Statements.




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##### Table of Contents

Varian, Inc. and Subsidiary Companies


Unaudited Consolidated Condensed Statements of Cash Flows


(In thousands)





Nine Months EndedJun. 28, 2002


Jun. 29, 2001Cash flows from operating activitiesNet earnings

$
37,155


$
25,729Adjustments to reconcile net earnings to net cash provided by operating activities:Cumulative effect of change in accounting principle, net of tax






7,455Depreciation and amortization


15,560



15,627Loss (gain) on disposition of property, plant and equipment


94



(21
)Purchased in-process research and development


890



Tax benefit from stock option deductions


1,398



3,986Deferred taxes


(1,694
)


(8,354
)Changes in assets and liabilities, excluding effects of acquisitions:Accounts receivable, net


7,547



12,908Inventories


4,572



(14,544
)Other current assets


(2,949
)


(2,797
)Other assets


1,620



886Accounts payable


(4,165
)


(8,113
)Deferred profit


1,856



9,133Accrued liabilities


(8,921
)


4,222Other liabilities


19



(1,262
)Net cash provided by operating activities


52,982



44,855Cash flows from investing activitiesProceeds from sale of property, plant and equipment


392



589Purchase of property, plant and equipment


(15,241
)


(19,789
)Purchase of businesses, net of cash acquired


(53,325
)


(16,061
)Net cash used in investing activities


(68,174
)


(35,261
)Cash flows from financing activitiesNet payment of debt


(5,457
)


(4,493
)Issuance of common stock


6,955



4,265Net transfers to Varian Medical Systems, Inc.


(2,353
)


(1,392
)Net cash used in financing activities


(855
)


(1,620
)Effects of exchange rate changes on cash


1,349



(684
)Net (decrease) increase in cash and cash equivalents


(14,698
)


7,290Cash and cash equivalents at beginning of period


59,879



39,708Cash and cash equivalents at end of period

$
45,181


$
46,998Supplemental cash flow informationIncome taxes paid

$
18,760


$
20,779Interest paid

$
2,198


$
2,583





See accompanying Notes to the Unaudited Consolidated Condensed Financial
Statements.




5




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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES





NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS





Note 1.    Unaudited Interim 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 28, 2001 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 year ended September 28, 2001 filed with the SEC. In the opinion of the Companys management, the 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 28, 2002 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.





Certain amounts in the prior years financial
statements have been reclassified to conform to the current year presentation.





Note 2.    Description of Business
and Basis of Presentation





The Company is a major supplier of scientific instruments and consumable
laboratory supplies, vacuum technology products and services, and electronics manufacturing services. These businesses primarily serve life science, health care, semiconductor processing, communications, industrial, and academic 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-week periods
ending on the Friday nearest September 30. Fiscal year 2002 will comprise the 52-week period ending September 27, 2002, and fiscal year 2001 was comprised of the 52-week period ended September 28, 2001. The fiscal quarters and nine-month periods
ended June 28, 2002 and June 29, 2001 each comprised 13 weeks and 39 weeks, respectively.





As discussed in Note 2
to the financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended September 28, 2001, the Company adopted the provisions of SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), in the fourth quarter of fiscal year 2001, retroactive to the beginning of fiscal year 2001. As a result, in the fourth quarter of fiscal year 2001, the Company restated its sales and related cost of sales for
the first three quarters of fiscal year 2001 and recorded a non-cash charge for the cumulative effect of a change in accounting principle in the amount of $7.5 million after taxes in the first quarter of fiscal year 2001. The results of operations
for fiscal year 2001 presented in these unaudited consolidated condensed financial statements reflect the adoption of SAB 101.




6




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







Note 3.    Balance Sheet Detail





Jun. 28, 2002

Sept. 28, 2001(In thousands)INVENTORIESRaw materials and parts

$
61,908

$
63,193Work in process


13,460


12,175Finished goods


45,367


44,130$
120,735

$
119,498





Note 4.    Forward Exchange Contracts





The Company accounts for foreign exchange forward contracts pursuant to the requirements of Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. (FAS) 133, Accounting for Derivative Instruments and Hedging Activities, which was amended by FAS 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. FAS 133 and FAS 138 require derivatives to be measured at fair value and to be recorded as assets or liabilities on the balance sheet. The accounting for gains or losses resulting from changes in the fair values of
those derivatives is dependent upon the type of the derivative and whether it qualifies for hedge accounting. The Company estimates the fair value of its forward contracts based on changes in forward rates.





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 not designated as hedges and do not qualify for hedge accounting under FAS 133. 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 balances being hedged.





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. For such hedging transactions, the Company formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives are highly effective in
offsetting changes in the cash flows of the hedged items. Effectiveness is calculated by comparing the cumulative change in fair value of the underlying transaction being hedged to the cumulative change in fair value of the derivative based on
changes in forward rates. If a derivative qualifies as a cash flow hedge, changes in the fair value of the derivative, to the extent effective, are recorded in other comprehensive loss in stockholders equity. The Company could experience
ineffectiveness on any specific hedge transaction if the underlying transaction is cancelled or if the underlying transactions delivery date is re-scheduled. Should the Company experience ineffectiveness, any resulting gains or losses would be
included in general and administrative expenses when incurred. For cash flow hedges of forecasted sale transactions, gains and losses are deferred in other comprehensive loss and are then recorded to sales in the period in which the underlying sale
transaction is recorded. At June 28, 2002, forward contracts to sell Japanese yen having an aggregate notional value of $6.6 million were designated as cash flow hedges of forecasted sale transactions. A loss of $0.4 million (net of tax) was
recorded for these forward contracts in other comprehensive loss as of June 28, 2002. There was no ineffectiveness from these contracts during the fiscal quarter or nine months ended June 28, 2002.




7




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







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 28, 2002 follows:





NotionalValueSold

NotionalValue Purchased(in thousands)Euro

$


$
27,608Australian dollar





23,194Japanese yen


11,392


British pound


8,778


Canadian dollar


4,897


Total

$
25,067

$
50,802





Note 5.    Goodwill and Other Intangible Assets





In July 2001, the FASB issued FAS 141, Business Combinations, and FAS 142, Goodwill and Other Intangible
Assets. FAS 141 eliminates pooling-of-interests accounting prospectively and provides guidance on purchase accounting related to the recognition of intangible assets. FAS 142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Under FAS 142, goodwill must be tested for impairment annually and whenever events or circumstances occur indicating that
goodwill might be impaired. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 must cease, and intangible assets acquired prior to July 1, 2001 that do not meet the new criteria
for recognition as intangibles must be reclassified to goodwill.





The Company elected to adopt early the
provisions of FAS 142 on the first day of fiscal year 2002 (September 29, 2001). In accordance with FAS 142, the Company ceased amortizing goodwill with a net carrying value totaling $85.9 million as of that date, including certain intangible assets
previously classified as purchased intangible assets. In connection with the adoption of FAS 142, the Company performed a transitional impairment test and determined that there was no impairment of goodwill. Subsequently, in the fiscal quarter ended
March 29, 2002, the Company completed its first annual impairment test as required by FAS 142 and determined that there was still no impairment of goodwill. In future years, the Company expects to complete its annual impairment assessment in the
second fiscal quarter.




8




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







The following table reflects pro forma consolidated results adjusted
as though the adoption of FAS 142 occurred as of the beginning of the fiscal quarter and nine months ended June 29, 2001:





Quarter Ended

Nine Months EndedJun. 28, 2002

Jun. 29, 2001

Jun. 28, 2002

Jun. 29, 2001 (1)(in thousands, except per share amounts)Net earningsAs previously reported

$
13,042

$
10,871

$
37,155

$
33,184Add back: Goodwill amortization, net of tax





662





1,929As adjusted

$
13,042

$
11,533

$
37,155

$
35,113Net earnings per basic shareAs previously reported

$
0.39

$
0.33

$
1.11

$
1.01Add back: Goodwill amortization, net of tax





0.02





0.06As adjusted

$
0.39

$
0.35

$
1.11

$
1.07Net earnings per diluted shareAs previously reported

$
0.37

$
0.32

$
1.07

$
0.97Add back: Goodwill amortization, net of tax





0.01





0.05As adjusted

$
0.37

$
0.33

$
1.07

$
1.02


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|(1) |  | Excludes cumulative effect of a change in accounting principle which reduced net earnings by $7,455 and net earnings per basic and diluted share by $0.23 and
$0.22, respectively, during the nine months ended June 29, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Note
6.    Acquisitions





ANSYS Technologies, Inc.    In February
2002, the Company acquired 100% of the outstanding capital stock of ANSYS Technologies, Inc. (ANSYS), a supplier of consumable products for life science and other applications. As a result of this acquisition, the Company added
ANSYS complementary separations and diagnostics consumable products to the Companys existing line of consumable laboratory supplies.





The Company acquired ANSYS for total consideration of $46.1 million, including $44.9 million in cash, assumed debt of $0.7 million and direct acquisition costs of $0.5 million. The total purchase price
was allocated to the estimated fair value of assets acquired (excluding acquired cash) and liabilities assumed (excluding assumed debt) as follows:





(in millions)Current assets

$
6.5Property, plant and equipment, net


11.1Other assets


0.2Goodwill


23.0Existing technology and other identified intangibles


7.8Total assets acquired


48.6Liabilities assumed


(3.4
)Net assets acquired


45.2Purchased in-process research and development


0.9Total consideration

$
46.1




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







The amounts allocated to existing technology and other identified
intangible assets have a weighted average useful life of approximately 9.5 years. These intangible assets are being amortized using the straight-line method over their respective estimated useful lives. The amount allocated to purchased in-process
research and development relates to several new consumables products that were in the research and development phase at the time of the acquisition. The percentage of completion for these products ranged from 49% to 73%. An external appraisal was
performed which used the income approach, the royalty savings approach and the cost approach to determine the fair value of ANSYS significant identifiable intangible assets, including the portion of the purchase price attributed to in-process
research and development. Risk-adjusted discount rates ranging from 15% to 29% were applied to cash flow projections to determine the present value of the different intangible assets including the in-process research and development.





During the fiscal quarter ended June 28, 2002, an audit of ANSYS closing balance sheet was completed, a purchase price
adjustment payable to ANSYS former stockholders was recorded, and certain asset valuation work was completed. Adjustments due to these activities were recorded during the fiscal quarter ended June 28, 2002 and resulted in a net decrease in
goodwill of $0.8 million. The ANSYS purchase price allocation is still preliminary pending completion of certain operational matters. Upon resolution of these matters, any further adjustments necessary will be made to the purchase price allocation
and will result in corresponding adjustments to goodwill.





Other Acquisitions.During the first three
quarters of fiscal year 2002, the Company made three other acquisitions having an aggregate purchase price of $10.0 million in cash. These acquisitions did not have a material effect on the Companys financial position or results of operations.





All of the above acquisitions were accounted for using the purchase method of accounting. Accordingly, the
Companys unaudited consolidated condensed statements of earnings for the fiscal quarter and nine months ended June 28, 2002 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 any 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.





Note 7.    Net Earnings
Per Share





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 28, 2002 and June 29, 2001, options to purchase 623,902 and 682,898 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 28, 2002 and June 29, 2001, options to purchase 659,773 and 536,911 shares, respectively, were excluded from the
calculation of diluted earnings per share as their effect would be anti-dilutive.




10




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







A reconciliation follows:





Quarter Ended

Nine Months EndedJun. 28, 2002

Jun. 29, 2001

Jun. 28, 2002

Jun. 29, 2001(in thousands, except per share amounts)BasicBefore cumulative effect of change in accounting principle

$
13,042

$
10,871

$
37,155

$
33,184Cumulative effect of change in accounting principle, net of tax











(7,455
)After cumulative effect of change in accounting principle

$
13,042

$
10,871

$
37,155

$
25,729Weighted average shares outstanding


33,632


33,055


33,464


32,956Before cumulative effect of change in accounting principle

$
0.39

$
0.33

$
1.11

$
1.01Cumulative effect of change in accounting principle, net of tax











(0.23
)After cumulative effect of change in accounting principle

$
0.39

$
0.33

$
1.11

$
0.78DilutedBefore cumulative effect of change in accounting principle

$
13,042

$
10,871

$
37,155

$
33,184Cumulative effect of change in accounting principle, net of tax











(7,455
)After cumulative effect of change in accounting principle

$
13,042

$
10,871

$
37,155

$
25,729Weighted average shares outstanding


33,632


33,055


33,464


32,956Net effect of dilutive stock options


1,417


1,404


1,392


1,513Total shares


35,049


34,459


34,856


34,469Before cumulative effect of change in accounting principle

$
0.37

$
0.32

$
1.07

$
0.97Cumulative effect of change in accounting principle, net of tax











(0.22
)After cumulative effect of change in accounting principle

$
0.37

$
0.32

$
1.07

$
0.75





Note 8.    Comprehensive Income





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 $25.3 million and $10.4 million for the fiscal quarters ended June 28, 2002 and June 29, 2001, respectively, and $46.9 million and $21.4 million for the nine months ended June 28, 2002
and June 29, 2001, respectively.





Note 9.    Debt and Credit Facilities





During the fiscal quarter ended March 29, 2002, the Company established a three-year unsecured revolving bank credit facility (the
Revolver) in the amount of $50.0 million for working capital purposes. No amounts were outstanding under this credit facility as of June 28, 2002. Borrowings under the Revolver 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. The Revolver 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 of June 28, 2002, the Company also had
$39.5 million in uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No amount was outstanding under these credit facilities as of June 28, 2002. All of these
credit facilities contain certain conditions and events of default customary for such facilities, with which the Company was in compliance.




11




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##### Table of Contents



VARIAN, INC. AND SUBSIDIARY COMPANIES





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







Note 10.    Contingencies





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 upon 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 and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below.





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. VMS is also involved in various stages of
environmental investigation, monitoring, and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are
undertaking such investigation, monitoring, and/or remediation activities.





For certain of these sites and
facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of June 28, 2002, it was nonetheless
estimated that the Companys share of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.6 million to $4.7 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 28, 2002. 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 accrued $1.6 million as of June 28, 2002.





As to other sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of June 28, 2002, it was estimated that the Companys share
of the future exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $7.3 million to $14.9 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 28, 2002. 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 liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $8.4 million at June 28, 2002. The
Company therefore accrued $5.8 million as of June 28, 2002, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.6 million described in the preceding
paragraph.





Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be
incurred in the future, were filed by VAI against various insurance companies and other third parties. One insurance company agreed to pay a portion of certain of VAIs (now VMS) future environmental-related expenditures for which the
Company has an indemnity obligation, and the Company therefore has a $1.4 million receivable in Other Assets as of June 28, 2002 for the Companys share of such recovery. The Company has not reduced any environmental-related liability in
anticipation of recovery on claims made against third parties.




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VARIAN, INC. AND SUBSIDIARY COMPANIES





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







The Companys management believes that its reserves for the
foregoing and certain 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 or 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 and its best assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of these
environmental-related matters are not reasonably likely to have a material adverse effect on the Companys financial position or results of operations.





Legal Proceedings. Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings relating to
the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after
April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in its own legal actions and could incur an uninsured liability
in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Companys financial position
or results of operations.





Note 11.    Industry Segments





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, control,
measure or test 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 contract manufacturing services, including
design, support, manufacturing and post-manufacturing services, of advanced electronics assemblies and subsystems for a wide range of customers, in particular small-and medium-sized companies with low-to-medium volume, high-mix requirements.




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VARIAN, INC. AND SUBSIDIARY COMPANIES





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







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 may 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 may not be meaningful.





Quarter Ended

Quarter EndedJun. 28, 2002

Jun. 29, 2001

Jun. 28, 2002


Jun. 29, 2001Sales

Sales

Pretax Earnings


Pretax Earnings(in millions)Scientific Instruments

$
123.3

$
104.3

$
12.9


$
10.6Vacuum Technologies


27.9


32.9


4.1



5.7Electronics Manufacturing


46.4


46.9


5.3



3.0Total industry segments


197.6


184.1


22.3



19.3General corporate








(1.3
)


(1.3
)Interest expense, net








(0.6
)


(0.2
)Total

$
197.6

$
184.1

$
20.4


$
17.8Nine Months Ended

Nine Months EndedJun. 28, 2002

Jun. 29, 2001

Jun. 28, 2002


Jun. 29, 2001Sales

Sales

Pretax Earnings


Pretax Earnings(in millions)Scientific Instruments

$
359.3

$
307.5

$
40.0


$
30.1Vacuum Technologies


81.6


115.4


12.1



23.4Electronics Manufacturing


131.3


133.1


12.4



7.9Total industry segments


572.2


556.0


64.5



61.4General corporate








(4.5
)


(6.2
)Interest expense, net








(1.4
)


(0.8
)Total

$
572.2

$
556.0

$
58.6


$
54.4





Note 12.    Recent Accounting Pronouncements





In August 2001, the FASB issued FAS 143, Accounting for Asset Retirement Obligations, which is effective for fiscal
years beginning after June 15, 2002. 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
Company does not expect the adoption of FAS 143 to have a significant impact on its financial position 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




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VARIAN, INC. AND SUBSIDIARY COMPANIES





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




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. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of FAS 144 to have a significant impact on its financial position or results of operations.





In April 2002, the FASB issued FAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, which is effective for transactions occurring after May 15, 2002. FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from extinguishment of debt. FAS 44 set forth industry-specific
transitional guidance that did not apply to the Company. FAS 145 amends FAS 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback
transactions. FAS 145 also makes technical corrections to certain existing pronouncements that are not substantive in nature. The adoption of FAS 145 in the third quarter of fiscal year 2002 did not have a significant impact on the Companys
financial position 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 (EITF) Issue No. 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 Company has not yet determined whether FAS 146 will have a significant impact on its financial position or results of operations.




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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------




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 contract 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, a Tax Sharing Agreement, and a Transition Services Agreement.





The
Companys fiscal years reported are the 52-week periods ending on the Friday nearest September 30. Fiscal year 2002 will comprise the 52-week period ending September 27, 2002, and fiscal year 2001 was comprised of the 52-week period ended
September 28, 2001. The fiscal quarters and nine-month periods ended June 28, 2002 and June 29, 2001 each comprised 13 weeks and 39 weeks, respectively.





Results of Operations





Third Quarter of Fiscal Year 2002 Compared to Third Quarter of
Fiscal Year 2001





Sales.    Sales were $197.6 million in the third quarter of
fiscal year 2002, an increase of 7.4% from sales of $184.1 million in the third quarter of fiscal year 2001. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 18.3%, (15.0%) and
(1.1%), respectively.





In the fourth quarter of fiscal year 2001, the Company adopted the provisions of SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) retroactive to the beginning of fiscal year 2001. As a result, in the fourth quarter of fiscal year 2001, the Company restated its sales and
related cost of sales for the first three quarters of fiscal year 2001 and recorded a non-cash charge for the cumulative effect of a change in accounting principle in the amount of $7.5 million after taxes in the first quarter of fiscal year 2001.
The results of operations for the third quarter of fiscal year 2001 presented in the financial statements included in this Form 10-Q reflect the adoption of SAB 101.





Geographically, sales in North America of $124.1 million, Europe of $46.1 million and the rest of the world of $27.4 million in the third quarter of fiscal year 2002
represented increases of 6.1%, 9.6%, and 9.4%, respectively, as compared to the third quarter of fiscal year 2001. The increase in North America primarily resulted from an increase in Scientific Instruments North America sales. This increase
was partially offset by a sales decline in Vacuum Technologies due to lower demand from industrial capital equipment manufacturers. The increases in Europe and the rest of the world were primarily driven by growth in Scientific Instruments sales,
partially offset by a sales decline in Vacuum Technologies.





Gross Profit.    Gross
profit was $75.3 million (representing 38.1% of sales) in the third quarter of fiscal year 2002, compared to $69.5 million (representing 37.8% of sales) in the third quarter of fiscal year 2001. The $5.8 million increase in gross profit resulted
primarily from the increase in sales in the third quarter of fiscal year 2002 compared to the third quarter of fiscal year 2001.




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Sales and Marketing.    Sales and marketing expenses
were $33.4 million (representing 16.9% of sales) in the third quarter of fiscal year 2002, compared to $32.5 million (representing 17.7% of sales) in the third quarter of fiscal year 2001. The decline as a percentage of sales relates primarily to
increased sales of Scientific Instruments and to cost reduction programs undertaken beginning in the second half of fiscal year 2001 to further reduce sales and marketing costs.





Research and Development.    Research and development expenses were $10.6 million (representing 5.4% of sales) in the third quarter of fiscal
year 2002, compared to $9.3 million (representing 5.1% of sales) in the third quarter of fiscal year 2001. Research and development expenses increased from the prior year quarter primarily because the Company continued to increase its focus within
the Scientific Instruments segment on new product development for life science and health care research applications, including the nuclear magnetic resonance (NMR) product line.





General and Administrative.    General and administrative expenses were $10.3 million (representing 5.2% of sales) in the third quarter of fiscal
year 2002, compared to $9.6 million (representing 5.2% of sales) in the third quarter of fiscal year 2001. During the third quarter of fiscal year 2002, general and administrative expenses included $0.5 million in intangible asset amortization,
compared to $0.9 million in amortization of goodwill and intangible assets in the third quarter of fiscal year 2001. The decrease in amortization resulted primarily from the Company's adoption at the beginning of fiscal year 2002 of FAS 142, which
eliminated the amortization of goodwill, partially offset by new amortization of intangible assets from acquisitions made in the first half of fiscal year 2002.





Net Interest Expense.    Net interest expense was $0.6 million (representing 0.3% of sales) for the third quarter of fiscal year 2002, compared to $0.2 million (representing
0.1% of sales) for the third quarter of fiscal year 2001. The increase in net interest expense resulted primarily from decreased interest income due to a lower level of invested cash as a result of acquisitions made during fiscal year 2002 as well
as lower interest rates on invested cash.





Taxes on Earnings.    The effective income
tax rate was 36.0% for the third quarter of fiscal year 2002, compared to 39.0% for the third quarter of fiscal year 2001. The fiscal year 2002 period rate was lower than the fiscal year 2001 period rate due mainly to reductions in foreign tax rates
in jurisdictions where the Company has significant manufacturing operations.





Net
Earnings.    Net earnings were $13.0 million ($0.37 net earnings per diluted share) in the third quarter of fiscal year 2002 compared to net earnings of $10.9 million ($0.32 net earnings per diluted share) in the third
quarter of fiscal year 2001. The net earnings improvement resulted primarily from increased sales.





Segments.    Scientific Instruments sales of $123.3 million in the third quarter of fiscal year 2002 increased 18.3% over third quarter of fiscal year 2001 sales of $104.3 million. The revenue growth was
primarily driven by demand for a number of products used in diverse life science applications, by sales of new products for chemical analysis applications, and by the acquisition of ANSYS Technologies, Inc. ("ANSYS") in the second quarter of fiscal
year 2002. The Company expects year-to-year revenue growth in the fourth fiscal quarter to be less than the 18.3% in the third fiscal quarter because the Scientific Instruments segment had very strong revenues in the fourth quarter of fiscal year
2001. However, the Company expects fourth quarter 2002 revenues to continue the trend of sequential quarter-to-quarter growth of recent quarters. Earnings from operations in the third quarter of fiscal year 2002 of $12.9 million (10.5% of sales)
increased from $10.6 million (10.1% of sales) in the third quarter of fiscal year 2001. Operating profit as a percent of sales increased primarily as a result of sales of products targeted toward life science applications (which typically have
higher margins), partially offset by higher research and development expenses and higher installation costs for new high-field and imaging NMR systems. During the third quarter of fiscal year 2002, operating expenses for Scientific Instruments
included $0.5 million in intangible asset amortization, compared to $0.8 million in amortization of goodwill and intangible




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assets in the third quarter of fiscal year 2001. The decrease in amortization resulted primarily from the Company's adoption at the beginning of fiscal year 2002 of FAS 142, which eliminated the
amortization of goodwill, partially offset by new amortization of intangible assets from acquisitions made in the first half of fiscal year 2002.





Vacuum Technologies sales of $27.9 million in the third quarter of fiscal year 2002 decreased 15.0% from third quarter of fiscal year 2001 sales of $32.9 million. The revenue decrease compared to the
prior year period was caused primarily by weaker demand from industrial capital equipment manufacturers. While sales decreased from the prior year period, third quarter fiscal year 2002 sales increased $0.6 million or 2.5% sequentially over the
second quarter of fiscal year 2002. This sequential increase was primarily attributable to higher sales to semiconductor equipment manufacturers. Earnings from operations in the third quarter of fiscal year 2002 of $4.1 million (14.7% of sales) were
down from the $5.7 million (17.1% of sales) in the third quarter of fiscal year 2001. The decreased earnings were primarily the result of lower sales in the third quarter of fiscal year 2002.





Electronics Manufacturing sales in the third quarter of fiscal year 2002 of $46.4 million decreased 1.1% from third quarter of fiscal year 2001 sales of $46.9 million
but increased 5.9% sequentially from second quarter of fiscal year 2002 sales of $44.0 million. The revenue decrease from the prior year quarter was caused by weaker demand from communications and industrial customers, mostly offset by increased
sales to health care equipment companies who became new customers during fiscal year 2001. The sequential increase from the second quarter of fiscal year 2002 was primarily the result of increased sales to communications and industrial customers.
Earnings from operations in the third quarter of fiscal year 2002 of $5.3 million (11.4% of sales) increased from $3.0 million (6.6% of sales) in the third quarter of fiscal year 2001. Operating efficiencies and unusually low new customer start-up
costs contributed to the improved operating margin in the third quarter of fiscal year 2002. The Company expects that operating margins will decrease to the 89% range in the fourth quarter of fiscal year 2002 primarily due to higher new
customer start-up costs.





First Nine Months of Fiscal Year 2002 Compared to First Nine Months of Fiscal Year
2001





Sales.    Sales were $572.2 million in the first nine months of fiscal year
2002, an increase of 2.9% from sales of $556.0 million in the first nine months of fiscal year 2001. Sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 16.9%, (29.3%) and (1.4%),
respectively.





In the fourth quarter of fiscal year 2001, the Company adopted the provisions of SAB 101
retroactive to the beginning of fiscal year 2001. As a result, in the fourth quarter of fiscal year 2001, the Company restated its sales and related cost of sales for the first three quarters of fiscal year 2001 and recorded a non-cash charge for
the cumulative effect of a change in accounting principle in the amount of $7.5 million after taxes in the first quarter of fiscal year 2001. The results of operations for the first nine months of fiscal year 2001 presented in the financial
statements included in this Form 10-Q reflect the adoption of SAB 101.





Geographically, sales in North America of
$345.9 million, Europe of $146.8 million and the rest of the world of $79.5 million in the first nine months of fiscal year 2002 represented increases (decreases) of 1.7%, 11.6%, and (5.6%), respectively, as compared to the first nine months of
fiscal year 2001. The increase in North America primarily resulted from an increase in Scientific Instruments North America sales. This increase was offset by the sales decline in Vacuum Technologies due to lower demand from semiconductor
equipment and industrial capital equipment manufacturers. The increase in Europe was primarily driven by growth in Scientific Instruments sales. The decrease in the rest of the world was primarily due to the decline of Vacuum Technologies sales into
the Pacific Rim.





Gross Profit.    Gross profit was $215.2 million (representing 37.6%
of sales) in the first nine months of fiscal year 2002, compared to $210.3 million (representing 37.8% of sales) in the first nine months of fiscal year 2001. The slight decrease in gross profit percentage was driven primarily by a lower gross
profit percentage for




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Vacuum Technologies which was negatively impacted by market weakness in the semiconductor equipment and industrial capital equipment sectors.





Sales and Marketing.    Sales and marketing expenses were $96.3 million (representing 16.8% of sales) in the first nine months of fiscal
year 2002, compared to $96.9 million (representing 17.4% of sales) in the first nine months of fiscal year 2001. The decline as a percentage of sales relates primarily to increased sales of Scientific Instruments, particularly high-field NMR systems
which typically generate lower operating expense ratios. The decline is also attributable to cost reduction programs undertaken since the first half of fiscal year 2001 to further reduce sales and marketing costs.





Research and Development.    Research and development expenses were $29.2 million (representing 5.1% of sales)
in the first nine months of fiscal year 2002, compared to $26.4 million (representing 4.8% of sales) in the first nine months of fiscal year 2001. Research and development expenses increased from the first nine months of fiscal year 2001 primarily
because the Company continued to increase its focus on new product development for life science and health care research applications within the Scientific Instruments segment.





General and Administrative.    General and administrative expenses were $28.8 million (representing 5.0% of sales) in the first nine months of
fiscal year 2002, compared to $31.7 million (representing 5.7% of sales) in the first nine months of fiscal year 2001. During the first nine months of fiscal year 2002, general and administrative expenses included $1.1 million in amortization of
intangible assets, compared to $2.7 million in amortization of goodwill and intangible assets in the first nine months of fiscal year 2001. The decrease in amortization resulted primarily from the Company's adoption at the beginning of fiscal year
2002 of FAS 142, which eliminated the amortization of goodwill, partially offset by new amortization of intangible assets from acquisitions made in the first half of fiscal year 2002. The decrease in general and administrative expenses is also
attributable to cost reduction programs undertaken beginning in the second half of fiscal year 2001 to further reduce general and administrative costs.





Purchased In-Process Research and Development.    In connection with the acquisition of ANSYS in February 2002, the Company capitalized approximately $30.8 million in
goodwill and identified intangible assets. In addition, the Company recorded a one-time charge of $0.9 million for purchased in-process research and development in the second fiscal quarter ended March 29, 2002 relating to several consumables
products which were in process at the time of the acquisition.





Net Interest
Expense.    Net interest expense was $1.4 million (representing 0.3% of sales) for the first nine months of fiscal year 2002, compared to $0.8 million (representing 0.1% of sales) for the first nine months of fiscal year
2001. The increase in net interest expense resulted primarily from decreased interest income due to a lower level of invested cash as a result of acquisitions made during fiscal year 2002 as well as lower interest rates on invested cash.





Taxes on Earnings.    The effective income tax rate was 36.6% (36.0% excluding the
impact of the purchased in-process research and development charge) for the first nine months of fiscal year 2002, compared to 39.0% for the first nine months of fiscal year 2001. The fiscal year 2002 rate was lower than the fiscal year 2001 rate
due mainly to reductions in foreign tax rates in jurisdictions where the Company has significant manufacturing operations.





Net Earnings.    Net earnings were $37.2 million ($1.07 net earnings per diluted share) in the first nine months of fiscal year 2002 ($38.0 million or $1.09 net earnings per diluted share prior to the
purchased in-process research and development charge), compared to net earnings of $33.2 million ($0.97 net earnings per diluted share) in the first nine months of fiscal year 2001 prior to the cumulative effect of a change in accounting principle
(SAB 101). Excluding the impact of the purchased in-process research and development charge in 2002 and the adoption of SAB 101 in 2001, the improvement in net earnings resulted primarily from increased sales.




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Segments.    Scientific Instruments sales of $359.3
million in the first nine months of fiscal year 2002 increased 16.9% over the first nine months of fiscal year 2001 sales of $307.5 million. The revenue growth was primarily driven by increased sales of NMR products, certain products selling into
life science applications, and the acquisition of ANSYS in the second quarter of fiscal year 2002. Earnings from operations in the first nine months of fiscal year 2002 were $40.0 million (11.1% of sales). Excluding the purchased in-process research
and development charge, earnings from operations of $40.9 million (11.4% of sales) increased from $30.1 million (9.8% of sales) in the first nine months of fiscal year 2001, primarily as a result of increased sales of products targeted toward life
science applications and revenues from after-market products and services, all of which typically have higher margins. During the first nine months of fiscal year 2002, operating expenses for Scientific Instruments included $1.1 million in
amortization of intangible assets, compared to $2.4 million in amortization of goodwill and intangible assets in the first nine months of fiscal year 2001. The decrease in amortization resulted primarily from the Company's adoption at the beginning
of fiscal year 2002 of FAS 142, which eliminated the amortization of goodwill, partially offset by new amortization of intangible assets from acquisitions made in the first half of fiscal year 2002.





Vacuum Technologies sales of $81.6 million in the first nine months of fiscal year 2002 decreased 29.3% from the first nine months of
fiscal year 2001 sales of $115.4 million. The revenue decrease was caused primarily by weak demand from semiconductor equipment and other industrial capital equipment manufacturers. Earnings from operations in the first nine months of fiscal year
2002 of $12.1 million (14.8% of sales) were down from the $23.4 million (20.2% of sales) in the first nine months of fiscal year 2001. The lower earnings were primarily the result of lower sales in the first nine months of fiscal year 2002.





Electronics Manufacturing sales in the first nine months of fiscal year 2002 of $131.3 million decreased 1.4%
from the first nine months of fiscal year 2001 sales of $133.1 million. The revenue decrease from the prior year period was caused by weaker demand from communications and industrial customers, mostly offset by increased sales to health care
equipment companies who became new customers during fiscal year 2001. Earnings from operations in the first nine months of fiscal year 2002 of $12.4 million (9.4% of sales) increased from $7.9 million (6.0% of sales) in the first nine months of
fiscal year 2001. The lower earnings in the first nine months of fiscal year 2001 were primarily the result of the costs of integrating an acquisition and start-up costs relating to new customers.





Critical Accounting Policies





The preparation of financial statements in conformity with generally accepted accounting principles requires management to exercise certain judgments in selecting and applying accounting policies and methods. The following is a
summary of what management considers to be the Companys most critical accounting policiesthose that are most important to the portrayal of its financial condition and results of operations and that require managements most
difficult, subjective or complex judgmentsthe effects of those accounting policies applied, the judgments made in their application, and the likelihood of materially different reported results if different assumptions or conditions were to
prevail.





Revenue Recognition.    The Company derives revenues from three sources:
system sales, part sales and service contracts. Generally, the Company recognizes revenue when persuasive evidence of an arrangement exists, the product is delivered, title and risk of loss has passed to the customer, and collection of the resulting
receivable is probable. The Companys sales are typically not subject to rights of return and sales returns have not historically been significant. System sales of existing products that involve installation services are accounted for as
multiple element arrangements, where the larger of the contractual billing hold back or the fair value of the installation service is deferred when the product is shipped and recognized when the installation is complete. In all cases, the fair value
of undelivered elements, such as accessories, is deferred until those items are delivered to the customer. For certain other system sales involving unique customer acceptance terms, or new specifications or technology with customer acceptance
provisions, all revenue is generally deferred until customer acceptance. Revenue related to part sales is recognized when the parts have been shipped and title and risk of loss have




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passed to the customer. Revenue related to service contracts is recognized ratably over the duration of the contracts. Unearned maintenance and service contract revenue is included in accrued
liabilities. Management determines when and how much revenue may be recognized on a particular transaction in a particular period based on its best estimates of the fair value of undelivered elements and its judgment of when the Companys
performance obligations have been met. These judgments and estimates impact reported revenues.





Allowances for
Doubtful Accounts Receivable.    The Company sells its products and extends trade credit to a large number of customers. These customers are dispersed across many different industries and geographies and no single customer
accounts for 10% or more of the Companys total revenues. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from them. Although bad debt write-offs have historically not been significant,
allowances are established for amounts that are considered to be uncollectible. These allowances represent managements best estimates and are based on managements judgment after considering a number of factors including third-party
credit reports, actual payment history, customer-specific financial information and broader market and economic trends and conditions. In the event that actual uncollectible amounts differ from these best estimates, changes in allowances for
doubtful accounts might become necessary.





Inventory Valuation.    Inventories are
stated at the lower of cost or market, with cost being computed on an average cost basis. Provisions are made to write down potentially excess, obsolete or slow moving inventories to their net realizable value. These provisions are based on
managements best estimates after considering historical demand, projected future demand (including current backlog), inventory purchase commitments, industry and market trends and conditions and other factors. In the event that actual excess,
obsolete or slow moving inventories differ from these best estimates, changes to inventory reserves might become necessary.





Product Warranty.    The Companys products are generally subject to warranties, and liabilities are therefore established for the estimated future costs of repair or replacement in cost of sales at
the time the related sale is recognized. These liabilities are adjusted based on managements best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. In the event that
actual experience differs from these best estimates, changes in the Companys warranty liabilities might become necessary.





Environmental Liabilities.    As discussed more fully below under the heading Environmental Matters, under the terms of the Distribution, the Company and VSEA each agreed to indemnify VMS for
one-third of certain environmental investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs). The liabilities recorded by the Company relating to these matters are
based on managements best estimates after considering currently available information regarding the cost and timing of remediation efforts, pending legal matters, insurance recoveries and other environmental-related events. As additional
information becomes available, these amounts are adjusted accordingly. Should the cost or timing of remediation efforts, pending legal matters, insurance recoveries or other environmental-related events (including any which may be currently
unidentified) differ from the Companys current expectations and best estimates, changes to the Companys environmental liability balance might become necessary.





Liquidity and Capital Resources





The Company generated
$53.0 million of cash from operating activities in the first nine months of fiscal year 2002, which compares to $44.9 million in the first nine months of fiscal year 2001. The increase in cash from operating activities resulted primarily from
improved net earnings.





The Company used $68.2 million of cash for investing activities in the first nine months
of fiscal year 2002, which compares to $35.3 million in the first nine months of fiscal year 2001. This increase in cash used for investing activities in the first nine months of fiscal year 2002 was primarily due to four acquisitions completed
during that period.




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The Company used $0.9 million of cash for financing activities in the first nine
months of fiscal year 2002, which compares to $1.6 million used for financing activities in the first nine months of fiscal year 2001.





During the fiscal quarter ended March 29, 2002, the Company established a three-year unsecured revolving bank credit facility (the Revolver) in the amount of $50.0 million for working capital purposes. No amounts
were outstanding under this credit facility as of June 28, 2002. Borrowings under the Revolver 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. The Revolver 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 of June 28, 2002, the Company also had $39.5 million in uncommitted and unsecured credit facilities for working capital
purposes with interest rates to be established at the time of borrowing. No amount was outstanding under these credit facilities as of June 28, 2002. All of these credit facilities contain certain conditions and events of default customary for such
facilities, with which the Company was in compliance.





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 costs, expenses, and other liabilities relating to certain discontinued, former, and corporate
operations of VAI, including certain environmental liabilities (see Environmental Matters below).





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.





Contractual Obligations and Other Commercial Commitments





The following table summarizes future principal payments on outstanding long-term debt and minimum rentals due for certain facilities and
other leased assets under long-term, non-cancelable operating leases as of June 28, 2002:





Three Months Ending Sept. 27, 2002

Fiscal Years2003

2004

2005

2006

2007

Thereafter

Total(in thousands)Long-term debt (including current portion)

$
563

$
3,324

$
2,764

$
3,732

$
3,732

$
2,500

$
25,000

$
41,615Operating leases


1,797


5,881


4,461


3,743


2,658


1,927


28,063


48,530Total contractual cash obligations

$
2,360

$
9,205

$
7,225

$
7,475

$
6,390

$
4,427

$
53,063

$
90,145





Except for those included in the above table, the Company does not
have any significant long-term, non-cancelable contractual cash obligations as of June 28, 2002. In addition, the Company does not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence
of some contingent event.





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




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not currently anticipate that its compliance with these regulations will have a material effect upon the Companys capital expenditures, earnings, or competitive position.





Under the terms of the Distribution, the Company and VSEA each agreed to indemnify VMS for one-third of certain environmental
investigation and remediation costs (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs), as further described below.





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. VMS is also involved in various stages of environmental investigation, monitoring,
and/or remediation under the direction of, or in consultation with, foreign, federal, state, and/or local agencies at certain current VMS or former VAI facilities, or is reimbursing third parties which are undertaking such investigation, monitoring,
and/or remediation activities.





For certain of these sites and facilities, various uncertainties make it difficult
to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. As of June 28, 2002, it was nonetheless estimated that the Companys share of the future
exposure for environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $1.6 million to $4.7 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 28, 2002. 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 accrued $1.6 million as of June 28, 2002.





As to other sites and
facilities, sufficient knowledge has been gained to be able to better estimate the scope and costs of future environmental activities. As of June 28, 2002, it was estimated that the Companys share of the future exposure for
environmental-related investigation and remediation costs for these sites and facilities ranged in the aggregate from $7.3 million to $14.9 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 28, 2002. 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 liability than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $8.4 million at June 28, 2002. The Company therefore accrued
$5.8 million as of June 28, 2002, which represents the best estimate of its share of these future costs discounted at 4%, net of inflation. This accrual is in addition to the $1.6 million described in the preceding paragraph.





Lawsuits for recovery of environmental investigation and remediation costs already incurred, and to be incurred in the future,
were filed by VAI against various insurance companies and other third parties. One insurance company agreed to pay a portion of certain of VAIs (now VMS) future environmental-related expenditures for which the Company has an indemnity
obligation, and the Company therefore has a $1.4 million receivable in Other Assets as of June 28, 2002 for the Companys share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recovery on
claims made against third parties.





The Companys management believes that its reserves for the foregoing and
certain 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 or 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 and its best assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of these environmental-related matters
are not reasonably likely to have a material adverse effect on the Companys financial position or results of operations.




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Legal Proceedings





Under the terms of the Distribution, the Company agreed to defend and indemnify VSEA and VMS for costs, liabilities, and expenses with respect to legal proceedings relating
to the Instruments Business of VAI, and agreed to reimburse VMS for one-third of certain costs and expenses (after adjusting for any insurance proceeds and tax benefits recognized or realized by VMS for such costs and expenses) that are paid after
April 2, 1999 and arise from actual or potential claims or legal proceedings relating to discontinued, former, or corporate operations of VAI. From time to time, the Company is involved in its own legal actions and could incur an uninsured liability
in one or more of them. While the ultimate outcome of all of the foregoing legal matters is not determinable, management believes that these matters are not reasonably likely to have a material adverse effect on the Companys financial position
or results of operations.





Euro Conversion





On January 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their existing currencies (legal currencies) and one new common currency  the
Euro. The Euro then began trading on currency exchanges and began to be used in certain business transactions. The transition period for the introduction of the Euro occurs through June 2002. Beginning January 1, 2002, new Euro-denominated bills and
coins were issued. Simultaneously, legacy currencies began to be withdrawn from circulation with the completion of the withdrawal scheduled for no later than July 1, 2002.





Because of the Companys significant sales and operating profits generated in the European Union, the Company completed a program to identify and address risks arising
from the conversion to the Euro currency. That program included converting information technology systems to handle the new currency, evaluating the competitive impact of one common currency due to, among other things, increased cross-border price
transparency, evaluating the Companys exposure to currency exchange risks during and following the transition period to the Euro, and determining the impact on the Companys processes for preparing and maintaining accounting and taxation
records. Management believes that it has taken appropriate steps to prepare for the Euro conversion and to mitigate its effects on the Companys business, and that the Euro conversion is not reasonably likely to have a material adverse effect
on the Companys business or financial condition.





Recent Accounting Pronouncements





In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No.
(FAS) 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. 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 Company does not expect the adoption of FAS 143 to have a significant impact on its financial position 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. FAS 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of FAS 144 to have a significant impact on its financial position or results of operations.





In April 2002, the FASB issued FAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, which is effective for transactions occurring after May 15, 2002. FAS 145 rescinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from




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extinguishment of debt. FAS 44 set forth industry-specific transitional guidance that did not apply to the Company. FAS 145 amends FAS 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. FAS 145 also makes technical corrections to certain existing pronouncements that are not substantive in nature. The adoption
of FAS 145 in the third quarter of fiscal year 2002 did not have a significant impact on the Companys financial position 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 (EITF) Issue No. 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 Company has not yet determined whether FAS 146 will have
a significant impact on its financial position or results of operations.





ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK





Foreign Currency Exchange Risk.    The Company typically hedges its currency exposures associated with certain assets and liabilities denominated in non-functional currencies and with certain forecasted
foreign currency cash flows. As a result, the effect of an immediate 10% change in exchange rates would not be material to the Companys financial condition or results of operations. The gains or losses from the change in exchange rates would
be substantially offset by losses or gains from the related foreign exchange forward contracts. The Companys foreign exchange forward contracts generally range from one to 12 months in original maturity.





At June 28, 2002, forward contracts to sell Japanese yen having an aggregate notional value of $6.6 million were designated as cash flow
hedges of forecasted sale transactions. These contracts were deemed to be highly effective and, as a result, a loss of $0.4 million (net of tax) on these contracts is included in other comprehensive loss in stockholders equity. A summary of
all forward exchange contracts that were outstanding as of June 28, 2002 follows:





NotionalValueSold

NotionalValue Purchased(in thousands)Euro

$


$
27,608Australian dollar





23,194Japanese yen


11,392


British pound


8,778


Canadian dollar


4,897


Total

$
25,067

$
50,802





Interest Rate Risk





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 28, 2002, 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.




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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.





Debt Obligations





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





Three Months Ending Sept. 27, 2002


Fiscal Years2003


2004


2005


2006


2007


Thereafter


Total(dollars in thousands)Long-term debt (including current portion)

$
563


$
3,324


$
2,764


$
3,732


$
3,732


$
2,500


$
25,000


$
41,615Average interest rate


3.9
%


6.2
%


6.7
%


4.8
%


4.8
%


7.2
%


6.7
%


6.3
%





PART II





OTHER INFORMATION





ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K





| | (a) |  | Exhibits:
| | --- |  | ---------




| | 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
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | Reports on Form 8-K filed during the fiscal quarter ended June 28, 2002:
| | --- |  | ------------------------------------------------------------------------




| |  |  | None.
| |  |  | -----



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SIGNATURES





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 McClammyG. Edward McClammy Vice President, Chief
Financial Officer and Treasurer (Duly Authorized Officer and
Principal Financial Officer)





Dated: August 8, 2002




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