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Article by DailyStocks_admin    (06-17-08 08:21 AM)

The Daily Magic Formula Stock for 06/17/2008 is Varian Semiconductor Equipment Associates Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

Varian Semiconductor Equipment Associates, Inc. (“Varian Semiconductor”) is the leading supplier of ion implantation systems used in the fabrication of semiconductor chips. Varian Semiconductor designs, manufactures, markets and services semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the United States (“U.S.”), Europe and Asia Pacific region. The VIISta™ ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. Varian Semiconductor has shipped more than 3,800 systems worldwide.

Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and productivity, reduce operating costs, and extend capital productivity of investments throughout multiple product generations. In fiscal year 2007, Varian Semiconductor was ranked number one in customer satisfaction in VLSI Research Inc.’s customer survey for all large suppliers of wafer processing equipment, an honor received in ten of the past eleven years.

Varian Semiconductor’s business is cyclical. The business depends upon semiconductor manufacturers’ expectations and resulting capacity investments for future integrated circuit demand. During calendar year 2005, there was an 11% decline in worldwide ion implanter sales. However, due to market share gains, Varian Semiconductor’s fiscal year 2005 revenue increased 13% over fiscal year 2004 as customers migrated to single wafer systems. Single wafer systems are now preferred over batch systems as they process wafers in such a way that results in higher yields for advanced device manufacturers. By offering a superior product to meet the requirements at the batch to single wafer inflection point, Varian Semiconductor grew its market share in 2006 from 39% to 43%. Calendar year 2007 market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Varian Semiconductor maintains a website at www.vsea.com. The information contained on the Varian Semiconductor website is not included in, or incorporated by reference into, this Annual Report on Form 10-K. Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are made available through the Varian Semiconductor website, free of charge, as soon as reasonably practicable following the electronic filing or furnishing of such materials by Varian Semiconductor to the Securities and Exchange Commission (“SEC”) and are available at the SEC’s website at www.sec.gov.

The Industry

The semiconductor industry is essentially two different, but connected industries—microchip and capital equipment (“capex”). The microchip industry is where microprocessors, dynamic random access memory (“DRAM”), operational amplifiers and hundreds of other electronic circuits are created on small squares of silicon known as “chips” or “die”. The manufacturers of these circuits can be categorized as either logic, memory, foundry, analog or discrete. Logic, memory and foundry represent the bulk of the industry. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information, and they too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped the demand for logic chips. As the demand for memory-intensive applications such as cameras, phones and MP3 players grows, it is expected that memory will continue to represent the bulk of chips made worldwide.

The capex industry is where Varian Semiconductor participates. The capex industry is comprised of companies that manufacture equipment used in the production of microchips. The two segments of the capex industry are known as Front End of the Line (“FEOL”) and Back End of the Line (“BEOL”). In the FEOL, the various circuit components such as transistors, diodes, resistors and capacitors are formed. In the BEOL, the wires, or interconnect, that join all of the components together to form the circuit are created. Varian manufactures tools that form the circuit components in the FEOL. The entire semiconductor industry has grown so rapidly because it is continually able to provide more functionality for a lower cost. In order to achieve this dynamic and be successful, capex companies must innovate through aggressive research and development. The technology and the applications that drive the entire industry are developed by the capex companies.

During the past five to ten years, however, the semiconductor capital equipment market has experienced a slowdown in growth as compared to historical levels. This is the result of improved productivity and efficiencies of capital equipment, the transition to more productive 300mm (300 millionths of a meter) wafers, changing demand for next generation processing chips and the increasing technical difficulties with putting more and more transistors on a microchip.

Semiconductor manufacturing is highly competitive with each manufacturer seeking to provide products that consume the least amount of power, and have the lowest cost and fastest processing speed. Integrated circuit manufacturers generally rely on equipment suppliers for the timely development of equipment and processes to meet their rapidly changing and complex requirements. Today, a semiconductor fabrication factory, or “fab,” can cost over $3 billion. As the industry transitions to 45nm (45 billionths of a meter) devices, these costs are expected to increase.

The fabrication of integrated circuits requires a number of complex and repetitive processing steps, including deposition, photolithography, etch, metrology, anneal and ion implantation. Deposition is a process in which a film of either electrically insulating or electrically conductive material is deposited on the surface of a wafer. Photolithography is used to transfer a circuit pattern onto a light-sensitive material called photo-resist that, after development, can be used in turn to transfer the pattern onto the silicon surface. The etch process completes the transfer of the pattern into the various thin films used to make the integrated circuit. Metrology measures critical features and properties of the device to assure correct fabrication. Anneal is used to incorporate implanted impurities into the silicon crystal matrix and make them electrically active. Ion implantation provides a means for introducing impurities into the silicon crystal, typically into selected areas defined by the photolithographic process. The selective implanting of ions into defined areas creates electrically conductive areas that form the transistors of the integrated circuits.

Semiconductor manufacturers have historically sought to increase the number of transistors on each microchip by “shrinking” device structures. Through this relentless miniaturization, microchips have chronologically increased their processing capability or memory storage capacity. This is accomplished by exploiting advancements in photolithography. Each new advancement in photolithography is described by the minimum resolvable geometry and is commonly referred to as a “device node.” State-of-the-art production is now accomplished at 65nm nodes with production of 45nm in transition at more technologically advanced fabs. Research and development for 32nm is underway at multiple customer sites and semiconductor research labs.

Improved productivity has been accomplished by transitioning to larger and larger silicon substrates, or wafers. From 25mm wafers used in the 1970’s to the current state of the art wafer size at 300mm, each successive generation increases the number of die or microchips per wafer thereby increasing productivity. The use of a larger wafer generally requires a great deal of infrastructure changes in equipment and factory automation systems, so transitions only occur about every 10 years. The use of 200mm wafers in production began at the end of the 1980’s. The migration from 200mm to 300mm began at the end of the 1990’s. 300mm tool sales now represent the majority of all new tool sales.

To achieve higher yields, implant systems must be capable of repeating the original process on a consistent basis for all devices on the wafer and for every wafer. These characteristics are known in the industry as “uniformity” and “repeatability.” In addition, implant systems must process wafers without damaging the device structures or introducing device damaging contamination, which is typically characterized by “cross contamination levels” and “particle defect adders.” In many cases implant performance is measured directly from the electrical performance of actual devices or device test structures. This is called “electrical parametrics.” In production fabs, there are typically multiple ion implantation systems performing the same processes in order to meet the production demands of the fab. In order to allow the greatest flexibility, semiconductor manufacturers require that each system perform equally well on each device step. This characteristic is known as “tool-to-tool” matching. In advanced device production, semiconductor manufacturers will often adjust the implant processes to compensate for variability in processes upstream from the implanter, making the implanter’s accuracy another important attribute. Uniformity, repeatability, accuracy, cross contamination, defect adders, parametrics and tool-to-tool matching are all critical in achieving commercially acceptable yields.

Semiconductor manufacturers generally measure the cost performance of their production equipment in terms of “cost of ownership,” which is determined by factoring in the fixed costs for acquisition and installation of the equipment, its variable operating costs and total wafer output. Equipment with higher wafer throughput increases total output and allows the semiconductor manufacturer to recover the purchase and installation costs of the equipment over a greater number of wafers and thereby reduces the cost of ownership of the equipment on a per wafer basis. Throughput is most accurately measured on a net or overall basis, which takes into account the processing speed of the equipment and any system setup and non-operational downtime for cleaning, maintenance or other repairs. The increased difficulty of achieving desired transistor performance at advanced nodes has made high yields important in selecting processing equipment. The most desired systems are those that can achieve process results within critical tolerance limits and still operate at desired throughput rates.

The continuing evolution of semiconductor devices to smaller geometries and more complex multi-level circuitry has significantly increased the cost and performance requirements of the capital equipment used to manufacture these devices. As wafer fabs are projected to increase in cost substantially for each subsequent device node, yield losses and depreciation costs will become a much larger percentage of the aggregate production costs for semiconductor manufacturers relative to labor, materials and other variable manufacturing costs. As a result, there has been increasing focus by the semiconductor industry on obtaining increased capability and productivity to maintain returns from semiconductor manufacturing equipment, thereby increasing the revenue generated and reducing the effective cost of ownership of such systems.

Products

Varian Semiconductor designs, markets, manufactures and services ion implantation systems which are used to build the transistors that are the basis of integrated circuits. Ion implanters have the ability to implant selected elements into the silicon wafers at precise locations and depths by bombarding the silicon surface with a precisely controlled beam of electrically charged ions of specific atomic mass and energy. These ions are embedded into the silicon crystal structure, changing the electrical properties of the silicon. The precision of ion implantation techniques permits customers to achieve the necessary control of this doping process to construct up to 500 billion transistors of uniform characteristics on a 300mm wafer using state-of-the-art processes. Since these transistors are the starting point of all subsequent process steps, repeatability, uniformity and yield are extremely important.

The most advanced device fabs might have as many as 30 separate implant steps. An implant is characterized by the dose (amount of dopant) and the energy (depth that dopant goes into the silicon wafer). Varian Semiconductor provides four different single wafer implanter products which cover the full range of required applications in these implant sectors: high current—high dose, low energy; ultra high dose—very high dose, very low energy; medium current—low dose, medium energy; high energy—low dose, very high energy. There is some overlap of each implanter’s application coverage with the next. However, each implanter is designed to provide maximum productivity and yield within their respective application ranges.

Varian Semiconductor currently offers the following products:

Medium Current

Recognized as the industry benchmark for medium current performance and productivity, Varian Semiconductor’s single wafer VIISta 900XP series ion implanters provide superior overall throughput, precision doping capability and unmatched contamination control. These systems excel at threshold voltage (“Vt”), channel, retrograde well, pocket, and halo implants. Varian Semiconductor’s other medium current systems include the VIISta 810HP and VIISta 810XE ion implanters. In addition, Varian Semiconductor continues to provide support for its older generation VIISta and legacy medium current ion implanters still in use by its customers.

To achieve higher device speeds, chip designers often increase manufacturing process complexity by utilizing multiple transistor designs in the same integrated circuit. An example of this is the use of multiple device Vt’s, which require separate medium current steps in the same integrated circuits for each Vt desired. This increase in the number of applications tends to be offset by the increasing productivity of medium current systems.

Medium current implanters are used in logic, memory and foundry manufacturers. Annually, medium current represents about 30% of the total available market, or TAM, for ion implant. For 2006 the TAM for medium current was $414 million.

High Current

The high current VIISta HCP series single wafer ion implanter provides the highest productivity and best contamination performance. In addition, these systems feature implant angle accuracy, beam steering correction and high-tilt angle capability—all of which are required for advanced device fabrication. The VIISta HCP has excellent process control capability for advanced ultra shallow junction applications, and can be used for source/drain, source/drain extension, gate doping, pre-amorphization, and materials modification applications. Varian Semiconductor’s other high current system is the VIISta HC ion implanter. In addition, Varian Semiconductor continues to provide support for its older generation VIISta and legacy high current ion implanters still in use by its customers.

The high current sector is expected to grow relative to the overall implant market due to an increase in the number of implant steps needed to produce many advanced semiconductors. Due to the very low energies and high dose concentrations that are necessary for increased transistor speed and lower device power consumption, the productivity of high current systems tends to decline with advancing technology nodes, requiring more high current implanters. Most advanced devices require single wafer systems, and single wafer high current is expected to grow to nearly 80% of the high current market in calendar year 2007. Varian Semiconductor was the first to introduce single wafer systems to this market sector through its VIISta platform.

High current implanters are used in logic, memory and foundry manufacturers. Annually, high current represents about 53% of the TAM for ion implant. For 2006 the TAM for high current was $720 million.

High Energy

The high energy VIISta 3000XP features true zero degree implant and low contamination. The VIISta 3000XP is the only single wafer high energy implanter available on the market today, an advantage for semiconductor manufacturers that need increased device packing density in high-performance devices. The VIISta 3000XP has outstanding process accuracy, offers excellent productivity, uniformity, angle control and medium current back-up flexibility. Varian Semiconductor’s high energy products cover retrograde well, triple well, buried layers, and pocket applications. Varian Semiconductor continues to provide support for its legacy high energy ion implanters still in use by its customers.

High energy implanters are used in most wafer fabs, but predominantly by memory manufacturers. Annually, high energy represents about 17% of the TAM for ion implant. For 2006 the TAM for high energy was $230 million.

Ultra High Dose

Medium current, high current and high energy tools utilize a focused ion beam to achieve the desired dose and energy for particular implant specie. For ultra high dose applications, the VIISta PLAD tool uses an altogether different technology. A plasma, or ionized gas, of the desired specie is created in a chamber where the wafer is held to a platen. A pulsed DC voltage is applied to the wafer platen which draws ions to the wafer at an energy proportional to the DC pulse. This approach creates very high dose rates at low energies and provides conformal doping capability where the dopant covers all the angled surface features of the wafer uniformly. Varian Semiconductor has implemented many advanced control features on VIISta PLAD such as closed loop dosimetry to ensure accurate dosing of the wafer. With throughput up to six times greater than traditional beamline or modified-source beamline technologies, the VIISta PLAD has become an attractive solution for new critical very low-energy, very high-dose applications, such as dual poly gate.

Ultra high dose systems are currently used only in memory and foundry manufacturers. As applications develop, Varian Semiconductor expects ultra high dose tools to be used in all types of wafer fab facilities. For 2007, the TAM for ultra high dose is expected to be about $70 million.

VIISta Platform

The VIISta 900XP, VIISta HCP, VIISta PLAD and VIISta 3000XP are based on the same platform, thereby providing a high degree of commonality in subsystems and overall architecture. The VIISta platform provides customers with a great deal of flexibility in managing overall bay productivity, resulting in a reduction in customers’ time to first silicon, greater productivity across all applications, and an increase on their return on investment. Varian Semiconductor has shipped more than 800 VIISta systems. The VIISta platform of ion implanters is the only single wafer platform solution for all production applications. All of the VIISta products feature the Varian Control System (“VCS™”), the Varian Positioning Systems (“VPS™”), and the VIISta single wafer endstation. This high degree of commonality across the VIISta platform facilitates process matching throughout the system set, and provides flexibility in managing capacity, product mix changes, spare parts and training.

Customer Support and Services

Varian Semiconductor provides customer support services designed to maximize the productivity of its customers’ equipment and to increase uptime through the effective management of machine maintenance, parts inventory and support services. All of these services provide a direct link to Varian Semiconductor’s manufacturing facility and research centers.

Varian Semiconductor provides a wide range of programs, from a complete turnkey solution that supports the fab’s ion implant performance, to economical service plans for those who require less support. These programs are customized to specific customer requirements, provide dedicated labor to maintain and troubleshoot the ion implanter, and make available on-call 24/7 service for around-the-clock support. Since 1984, Varian Semiconductor has been developing upgrades for the installed base that extends the life of the capital equipment. These upgrades provide its customers with benefits that are focused around increasing productivity and the reduction of cost-of-ownership. Specifically, the benefits are realized as enhancements to throughput, yield, uptime, maintenance and ergonomics improvements.

For parts management, Varian Semiconductor has approximately 30 parts banks strategically placed around the world that support more than 200 customer fabs. The use of a global enterprise resource planning system provides Varian Semiconductor with a distribution structure that efficiently manages inventory, delivery and logistics services. Varian Semiconductor also offers a comprehensive consumable and non-consumable parts program that can be tailored to individual fab needs to minimize its customers’ cost of ownership from the ordering of individual piece parts over its eCommerce site, vShop, to complete stocking and inventory management programs like Fab Specific Parts Programs.

Through VEDoc™, an electronic documentation system, customers can easily access information about their ion implanters. All assembly drawings, schematics, parts lists, maintenance and operation manuals, and video-illustrated maintenance procedures are available in a CD-ROM format.

Varian Semiconductor’s commitment to customer service also includes extensive and comprehensive customer training programs. Varian Semiconductor offers a full range of technical training, from the basic operation and maintenance of the toolset to electronic troubleshooting and alignments. Training is available for all ion implanter products manufactured at Varian Semiconductor (medium current, high current, high energy and PLAD tools), with specialized courses available in process applications.

Marketing and Sales

Varian Semiconductor markets, sells, installs and services ion implantation systems directly to semiconductor industry manufacturers and has sold ion implantation products to most of the 20 largest semiconductor manufacturers in the world. Varian Semiconductor’s sales objective is to work closely with customers to secure purchases of multiple systems as customers expand capacity, update existing facilities, introduce new manufacturing processes or build new wafer manufacturing facilities. Varian Semiconductor seeks to build customer loyalty and to achieve a high level of repeat business by offering highly reliable products that give its customers a competitive edge, comprehensive field support and responsive parts replacement and service programs.

Varian Semiconductor has historically sold at least half of its systems in any particular period to a relatively small number of customers, some of which include Elpida Memory, Inc. (“Elpida”), Hynix Semiconductor, Inc. (“Hynix”), Hynix-ST Semiconductor Limited (“Hynix-ST”), IM Flash Technologies, LLC. (“IM Flash”), Inotera Memories, Inc. (“Inotera”), Intel Corporation (“Intel”), Micron Technology, Inc. (“Micron”), Nan Ya Technology Corporation (“Nan Ya”), Promos Technologies, Inc. (“Promos”), Qimonda AG (“Qimonda”), Rexchip Electronics Corporation (“Rexchip”), Samsung Electronics Company Limited (“Samsung”), Semiconductor Manufacturing International Corporation (“SMIC”), Taiwan Semiconductor Manufacturing Corporation, Limited (“TSMC”), and United Microelectronics Corporation (“UMC”). Some of these customers have individually accounted for more than 10% of Varian Semiconductor’s total revenue in some periods. Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future.

Revenue from Varian Semiconductor’s ten largest customers in fiscal years 2007, 2006 and 2005 accounted for approximately 72%, 63% and 66% of total revenue, respectively, including the non-recurring royalties in fiscal year 2005 of $18.9 million received from Applied Materials, Inc. (“Applied Materials”). In fiscal year 2007, revenue from one customer accounted for 17% of Varian Semiconductor’s total revenue. In fiscal year 2006, revenue from three customers accounted for 11%, 10% and 10%, respectively, of Varian Semiconductor’s total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and 14% of Varian Semiconductor’s total revenue.

None of Varian Semiconductor’s customers has entered into a long-term agreement requiring it to purchase Varian Semiconductor’s products. Although Varian Semiconductor’s largest customers have varied from year to year, the loss of a significant customer or a reduction in orders from any significant customer, including reductions due to market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits, could adversely affect Varian Semiconductor’s business, financial condition and results of operations. In addition, sales of Varian Semiconductor’s systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity in an existing fab facility, to introduce a new manufacturing process or to transfer a manufacturing process to a new fab facility, all of which typically involve a significant capital commitment. Due to these and other factors, Varian Semiconductor’s products typically have a lengthy sales cycle during which Varian Semiconductor may expend substantial funds and management effort.

Varian Semiconductor’s ability to respond with prompt and effective field support is critical to Varian Semiconductor’s sales efforts. Due to substantial operational and financial commitments, customers who purchase ion implantation systems require assurance that the manufacturer can provide the necessary installation and operational support. Varian Semiconductor’s strategy of supporting its installed base through its customer support and research and development groups has served to encourage the use of Varian Semiconductor’s systems in production applications and has accelerated penetration of certain key accounts. Varian Semiconductor believes that its marketing efforts are enhanced by the technical expertise of its research and development personnel, who provide customer process support and participate in a number of industry forums.

Varian Semiconductor markets, sells, distributes and services its products directly. Varian Semiconductor has six sales and service offices located in the U.S., six in Europe and 26 in Asia Pacific, for a total of 38 worldwide. Varian Semiconductor’s sales, marketing and service engineers are linked through Varian Semiconductor’s information technology systems, allowing Varian Semiconductor to review bookings and sales forecasts globally against detailed account management plans.

International sales accounted for 78% of Varian Semiconductor’s total revenues in each of fiscal years 2007, 2006 and 2005, and more specifically, sales to the Asia Pacific region have accounted for 71%, 67% and 68% of total revenues in fiscal years 2007, 2006 and 2005, respectively. (Refer to the footnotes to the financial statements for additional information on the geographic distribution of revenues and long-lived assets.)

Varian Semiconductor’s business is generally not seasonal in nature, but it is cyclical based on the capital equipment investment expenditures of major semiconductor manufacturers. These expenditure patterns are based on many factors, including anticipated market demand for integrated circuits, the development of new technologies and global economic conditions.

Backlog

Varian Semiconductor had backlog of $179.0 million and $255.1 million at the end of fiscal years 2007 and 2006, respectively. Varian Semiconductor includes in its backlog only those orders for which it has accepted purchase orders and assigned system shipment dates within the following twelve months. Orders are typically subject to cancellation or rescheduling by customers. Due to possible changes in system delivery schedules, cancellation of orders and delays in systems shipments, Varian Semiconductor’s backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Manufacturing

Varian Semiconductor manufactures its products at its facility in Gloucester, Massachusetts. Varian Semiconductor benefits from the use of advanced manufacturing methods and technologies, including lean manufacturing, demand flow technology and statistical process control.

Varian Semiconductor purchases various unique raw materials from multiple suppliers worldwide. Varian Semiconductor closely monitors future markets and supply stream to ensure continuous availability. Additionally, long-lead agreements with suppliers are employed to provide a strategic safety stock at supplier locations.

CEO BACKGROUND

Mr. Dickerson has served as Varian Semiconductor’s Chief Executive Officer and a Director of Varian Semiconductor since October 2004. Prior to joining Varian Semiconductor, Mr. Dickerson was President and Chief Operating Officer of KLA-Tencor from July 2002 to April 2004. From July 1999 to June 2002, he served as Chief Operating Officer of KLA-Tencor. Previously at KLA-Tencor, Mr. Dickerson was the Executive Vice President of the Customer Group from July 1997 to June 1999, Group Vice President for the Wafer Inspection Group from January 1996 to June 1997, and General Manager of the Wisard Division from July 1994 to December 1995.

Mr. Halliday has served as Varian Semiconductor’s Executive Vice President and Chief Financial Officer since October 2006. From October 2004 to October 2006, he served as Executive Vice President, Treasurer and Chief Financial Officer. From November 2002 to October 2004, Mr. Halliday served as Varian Semiconductor’s Vice President, Treasurer and Chief Financial Officer. From March 2001 to November 2002, Mr. Halliday served as Varian Semiconductor’s Vice President and Chief Financial Officer. Prior to joining Varian Semiconductor, Mr. Halliday was Vice President and Chief Financial Officer of Unica Corporation, a software company. Previously, Mr. Halliday was at Ionics, Inc., a manufacturer of water treatment capital equipment. At Ionics, Inc., he was Chief Operating Officer in 2000; Vice President of the Consumer Water Group from 1996 to 2000; and Chief Financial Officer from 1990 to 2000. Mr. Halliday has been a director of Zoll Medical Corporation since July 2003.

Dr. Perlmutter has served as Varian Semiconductor’s Executive Vice President of Implant Business Units since October 2006. Prior to joining Varian Semiconductor, Dr. Perlmutter was a Group Vice President of KLA-Tencor from July 2006 to October 2006. From October 2001 to June 2006, he served as Vice President and General Manager of KLA-Tencor’s WIN Division—responsible for the brightfield and darkfield patterned wafer inspection product lines. Previously at KLA-Tencor, Dr. Perlmutter was Vice President and General Manager of the Surfscan Division from October 1999 to October 2001. From September 1995 to September 1999, Dr. Perlmutter served as a Sr. Director and then, Vice President of Engineering for KLA-Tencor’s Reticle and Photomask Inspection Division.

Dr. Kim has served as Varian Semiconductor’s Executive Vice President since October 2004. He has served as Varian Semiconductor’s Vice President and General Manger of its Asia Pacific Operations since May 2000 and President of Varian Korea, Limited since April 1999. From April 1997 to March 1999, he served as Executive Vice President of Varian Korea, Limited. From July 1994 to March 1997, he was Director of Sales and Marketing for the Asia Pacific Region. Mr. Kim joined Varian Associates, Inc. in August 1989 and held various managerial positions in Applications, Marketing and Sales. Previously, Mr. Kim worked for IBM’s T.J. Watson Research Center in Yorktown Heights, New York, from July 1988 to August 1989, and earlier at Massachusetts Institute of Technology in Cambridge, Massachusetts from 1983 to July 1988.

Mr. Baker has served as Varian Semiconductor’s Vice President of Finance since October 2006. From June 2003 to October 2006, Mr. Baker was Varian Semiconductor’s Corporate Controller and served as Operations Controller and Assistant Controller from February 2001 to June 2003. Mr. Baker was Chief Financial Officer of Chelton Microwave, a manufacturer of microwave components, from 1996 to 2001. Prior to that, he was Corporate Controller of Robertson-Ceco Corporation, a leading manufacturer of metal buildings.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Varian Semiconductor is the leading supplier of ion implantation equipment used in the fabrication of semiconductor chips. Varian Semiconductor designs, manufactures, markets and services semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. The VIISta ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. Varian Semiconductor has shipped more than 3,800 systems worldwide.

Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and productivity, reduce operating costs, and extend capital productivity of investments through multiple product generations. In fiscal year 2007, Varian Semiconductor was ranked number one in customer satisfaction in VLSI Research Inc.’s customer survey for all large suppliers of wafer processing equipment, an honor received in ten of the past eleven years.

Varian Semiconductor’s business is cyclical. The business depends upon semiconductor manufacturers’ expectations and resulting capacity investments for future integrated circuit demand. During calendar year 2005, there was an 11% decline in worldwide ion implanter sales. However, due to market share gains, Varian Semiconductor’s fiscal year 2005 revenue increased 13% over fiscal year 2004 as customers migrated to single wafer systems. Single wafer systems are now preferred over batch systems as they process wafers in such a way that results in higher yields for advanced device manufacturers. By offering a superior product to meet the requirements at the batch to single wafer inflection point, Varian Semiconductor grew its market share in 2006 from 39% to 43%. Calendar year 2007 market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Wafer size and market. The migration from 200mm to 300mm began at the end of the 1990s and 300mm fabs now represent more than half of semiconductor expansions. Most advanced devices below 130nm are produced on 300mm wafers. Varian Semiconductor believes the increase in shipments from 200mm to 300mm will continue and is evidence that Varian Semiconductor’s tools meet the newest technology requirements. Memory manufacturers typically produce integrated circuits used for DRAM, flash, etc. which store and retrieve information, while logic manufacturers typically produce integrated circuits used to process data. Significant purchasing fluctuations from memory, logic and foundry fabs could lead to significant fluctuations in Varian Semiconductor’s revenues, even if the total ion implant market remains flat.

The first table below shows Varian Semiconductor’s calendar year 2006, 2005 and 2004 market share, as reported by Gartner Dataquest in April 2007, April 2006 and April 2005, respectively. Market share estimates are calculated on a subset of revenue, and information reported by Gartner Dataquest may not be consistent on a company by company basis. The second table below shows the total available market for ion implanter sales in calendar years 2006, 2005 and 2004, also reported by Gartner Dataquest in April 2007, April 2006 and April 2005. The total available market represents an estimated worldwide total revenue for ion implanters sold by all companies which sell ion implanters during each of the calendar years.

Market Share and Total Available Market . Market share and total available market research data is also published by VLSI Research Inc. In April 2007, VLSI Research Inc. reported that Varian Semiconductor’s overall market share was 46% and that the total available market was $1,285 million for calendar year 2006.

Varian Semiconductor’s four point increase in market share in calendar year 2006 and a 22% increase in the total available market for ion implanter sales, both as reported by Gartner Dataquest, led to increased revenues during 2006, compared to 2005. Varian Semiconductor’s increase in high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes (65nm and below). Varian Semiconductor began developing single wafer high current tools during 1994 and believes it is currently the industry leader. The increase in high energy market share is primarily related to customer mix in the total available market for high energy tools. The decrease in medium current market share is primarily related to growth in the medium current market in Japan, where Varian Semiconductor has more competition in the medium current sector. Varian Semiconductor continues to invest heavily in research and development to maintain its medium current market share lead. Calendar year 2007 market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Critical Accounting Policies and Significant Accounting Estimates

Varian Semiconductor’s discussion and analysis of its financial condition and results of operations are based upon Varian Semiconductor’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The preparation of these consolidated financial statements requires Varian Semiconductor to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, Varian Semiconductor makes estimates and judgments on revenues, inventories, accounts receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies. Varian Semiconductor operates in a highly cyclical and competitive industry that is influenced by a variety of diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and geographic and macroeconomic trends. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian Semiconductor bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors discussed in Item 1A. “Risk Factors.”

Varian Semiconductor believes that the following sets forth the critical accounting policies used by Varian Semiconductor in the preparation of its consolidated financial statements.

Revenue Recognition

Product revenue includes established products, new products, upgrades and spare parts.

Varian Semiconductor recognizes revenue from product sales upon shipment, provided title and risk of loss has passed to the customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance.

For established and new products, a portion of the total purchase price is typically not due until installation occurs and the customer accepts the product. For established products, the lesser of the amount allocated to the equipment or the contractual amount due upon delivery is recorded as product revenue upon delivery. The amount deferred is recognized as revenue upon customer acceptance. For new products, revenue allocated to the equipment is recognized upon customer acceptance. Revenue related to spare parts and upgrade sales is recognized upon the later of delivery or when the title and risk of loss passes to the customer.

Products are classified as established products if post-delivery acceptance provisions and the installation process have been determined to be routine, due to the fact that the acceptance provisions are generally a replication of pre-shipment procedures, and there is a demonstrated history of achieving predetermined installation cost targets. The majority of products are designed and manufactured to meet contractual customer specifications. To ensure customer specifications are satisfied, the systems are tested at Varian Semiconductor’s manufacturing facility prior to shipment. To the extent that customers’ conditions cannot be replicated in Varian Semiconductor’s facilities or if there is not a demonstrated history of meeting newer customer specifications, then the product is treated as new for revenue recognition purposes. Varian Semiconductor has predetermined criteria for changing the classification of a new product to an established product. A new product must achieve a set number of acceptances and a set target for installation cost. Once the criteria have been achieved for a new product, the product is considered established.

Service revenue includes revenue from maintenance and service contracts, extended warranties, paid service and system installation services. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Extended warranty revenue is deferred and recognized ratably over the applicable warranty term. Revenue related to paid service is recorded when earned and revenue related to installation is recorded upon fulfillment of the service obligation and customer acceptance. It takes approximately three to six weeks for Varian Semiconductor technicians to complete the installation of Varian Semiconductor products and perform tests agreed to with customers. Certain customers formally document their acceptance of Varian Semiconductor’s products at this time. Other customers elect to perform additional internal testing prior to formal acceptance, and this process generally takes eight to twelve weeks.

Royalty and license revenue is recognized when contractual obligations are met, and in the case of royalties, upon receipt of a royalty report from the customer, evidence of an arrangement exists, fees are fixed or determinable and collection is reasonably assured. When fees are not fixed or determinable, revenue is recorded when payments become due.

Varian Semiconductor’s transactions frequently include the sale of systems and services under multiple element arrangements. Revenue under these arrangements is allocated to all elements, except systems, based upon the fair value of those elements. All elements may not be delivered and recognized as revenue during the same period. In such cases, Varian Semiconductor defers the relative fair value of the undelivered element until that element is delivered. The amount allocated to installation is based upon hourly rates at the estimated time to complete the service. The fair value of all other elements is based upon the price charged when these amounts are sold separately and unaccompanied by other elements. The amount of revenue allocated to systems is done on a residual method basis. Under this method, the total value of the arrangement is allocated first to the undelivered elements based on their fair values, with the remainder being allocated to systems revenue. If fair value cannot be determined for any of the undelivered elements, the entire value of the arrangement is deferred.

Inventory and Purchase Order Commitments

Varian Semiconductor values its inventory at the lower of cost or market. The determination of lower of cost or market requires that Varian Semiconductor make significant assumptions about future demand for products and the transition to new product offerings from legacy products. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian Semiconductor also provides for losses on those open purchase order commitments in which Varian Semiconductor’s estimated obligation to receive inventory under the commitments exceeds expected production demand. These assumptions include, but are not limited to, future manufacturing schedules, customer demand, supplier lead time and technological and market obsolescence. Once inventory is written down and a new cost basis has been established, it is not written back up if demand increases. If market conditions are less favorable than those projected by management, additional inventory provisions may be required. If market conditions are more favorable than those projected by management, and specific inventory previously written down is subsequently sold, gross profit could benefit by the amount of the specific write-down to carrying value previously recorded. In the case of purchase order commitments, more favorable market conditions or successful negotiations with suppliers will result in a reduction of provisions in the period the excess purchase order commitments are reduced.

Valuation Allowance on Deferred Tax Assets and Income Tax Provision

Varian Semiconductor records a valuation allowance against deferred tax assets if it is more likely than not that a portion of the deferred tax asset will not be realized. On a quarterly basis, Varian Semiconductor evaluates both the positive and negative evidence bearing upon the realizability of its deferred tax assets. Varian Semiconductor considers future taxable income, ongoing prudent and feasible tax planning strategies, and the ability to utilize tax losses and credits in assessing the need for a valuation allowance. A valuation allowance related to certain state tax credit carryforwards has been recorded. Management has concluded that it is more likely than not that these credits will not be utilized since historically the annual amount of state credits generated exceeds the amount of credits that can be used. Should Varian Semiconductor determine that it is not able to realize all or part of its other deferred tax assets in the future, a valuation allowance would be required resulting in an expense recorded within the provision for income taxes in the statement of income in the period in which such determination was made. It is possible that the amount of the deferred tax asset considered realizable could be reduced in the near term if future taxable income is reduced. Varian Semiconductor’s effective tax rate is affected by levels of taxable income in domestic and foreign tax jurisdictions, U.S. tax credits generated and utilized for research and development expenditures, U.S. foreign income exclusion, investment tax credits and other tax incentives specific to domestic and foreign operations.

Product Warranties

Varian Semiconductor provides for the estimated cost of product warranties, the amount of which is based primarily upon historical information, at the time product revenue is recognized. While Varian Semiconductor engages in extensive product quality programs and processes including actively monitoring and evaluating the quality of its component supplies, Varian Semiconductor’s warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to Varian Semiconductor. Should actual product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, or supplier warranties on parts differ from Varian Semiconductor’s estimates, revisions to the estimated warranty liability would be required.

Results of Operations

Fiscal Year

Varian Semiconductor’s fiscal year is a 52- or 53-week period that ends on the Friday nearest September 30. Fiscal year 2007 was comprised of a 52-week period ended on September 28, 2007. Fiscal year 2006 was comprised of a 52-week period ended on September 29, 2006. Fiscal year 2005 was comprised of a 52-week period ended on September 30, 2005.

Fiscal Year 2007 Compared to Fiscal Year 2006 and

Fiscal Year 2006 Compared to Fiscal Year 2005

Revenue

Product

Varian Semiconductor’s product sales increased by 50% during fiscal year 2007 after a 31% increase during fiscal year 2006. The fiscal year 2007 increase was primarily due to increased tool sales to memory customers. On a unit basis, the number of tools recorded in revenue increased 51% during fiscal year 2007 compared to fiscal year 2006. Revenue from parts and upgrades sales increased 16% during fiscal year 2007. In fiscal year 2006, Varian Semiconductor’s product sales increased by 31% due to a unit increase in system sales of 33%, primarily related to high current system sales, and an increase in sales of parts. Varian Semiconductor believes that market share gains, particularly in the high current sector, and an overall increase in industry spending, were the primary reasons for Varian Semiconductor’s increase in sales in fiscal year 2006. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Service

Service revenue increased by 9% in fiscal year 2007 as compared to fiscal year 2006, primarily as a result of increases in installation revenue resulting from increased tool sales. Generally, installation revenue is influenced by shipment volume of systems, product mix, customer mix, timing of customer acceptance and the fair value of installations. As products mature and the installation requires less effort to complete, the fair value of installation revenue per system is reduced, which reduces installation revenue per tool. System installation revenues decreased by 6% in fiscal year 2006 compared to fiscal year 2005, primarily as a result of the reduction in fair value of system installations. Service contract revenues partially offset this decrease by increasing 8% from fiscal year 2005 to fiscal year 2006, primarily as a result of sales of service contracts with new systems.

Royalty and License

In fiscal year 2005, Varian Semiconductor received payments from Applied Materials of $18.9 million for past due royalties. Applied Materials was also required to make quarterly unit-based royalties payments to Varian Semiconductor on future sales of certain products found to be within the scope of the Agreement through the expiration of the Agreement in March 2007. In fiscal years 2007, 2006 and 2005, Varian Semiconductor recognized an additional $4.5 million, $6.4 million, and $5.3 million, respectively, as royalty revenue related to this agreement.

Pursuant to the terms of a Settlement and License Agreement between Lam and Varian Semiconductor, Lam was required to make quarterly cash payments of $1.25 million through the first quarter of fiscal year 2005 for future use of the patents. These quarterly cash payments were recognized as revenue through fiscal year 2005.

Customers

Revenue from Varian Semiconductor’s ten largest customers in fiscal years 2007, 2006 and 2005 accounted for approximately 72%, 63% and 66% of revenue, respectively. Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue for the foreseeable future. In fiscal year 2007, revenue from one customer accounted for 17% of Varian Semiconductor’s total revenue. In fiscal year 2006, revenue from three customers accounted for 11%, 10% and 10%, respectively, of Varian Semiconductor’s total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and 14% of Varian Semiconductor’s total revenue.

Shipment Mix

Varian Semiconductor’s tools are used primarily for 200mm and 300mm wafer size implants. In addition, Varian Semiconductor’s tools are used by logic, memory and foundry manufacturers—for integrated circuits. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information and they, too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped logic. As the demand for memory intensive applications such as cameras, phones and MP3 players grows, it is expected that memory will continue to represent the bulk of chips made worldwide. The following table sets forth tool shipments by wafer size and market, as a percent of total tool shipments, for fiscal years 2007, 2006 and 2005. Percentages are based on the number of tools shipped during the respective period.

Cost of Product Revenue

Cost of product revenue was $511.1 million and gross margin was 47% for fiscal year 2007, compared to the cost of product revenue of $371.1 million and gross margin of 42% for fiscal year 2006. For fiscal year 2005, cost of product revenue was $280.4 million and gross margin was 43%. The increase in gross margin from fiscal year 2006 to fiscal year 2007 was primarily due to product mix and more efficient factory operations due to higher sales volume. Improved supply chain management and more efficient regional service support also contributed to the increases in gross margin in fiscal year 2007. These positive factors more than offset the decreases in gross margin attributable to the overall sales mix. As tool sales become a higher portion of total sales, overall margins decrease. This is due to the fact that tools generally have lower margins than parts and upgrades. Gross margin decreased during fiscal year 2006 compared to fiscal year 2005 also due to higher tool sales as a portion of total sales. In addition, during fiscal year 2006 there were increased product transition costs and market share penetrations, where the initial costs to support the first system in the fab were higher than for follow-on business. Cost of product revenue in fiscal years 2006 and 2005 was favorably impacted by $1.7 million in each year, from the sale of certain inventory for which the carrying value had been reduced in previous periods. Cost of product revenue for fiscal year 2007 and fiscal year 2006 included $1.3 million and $1.1 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123 (R)”) as of October 1, 2005.

Cost of Service Revenue

Cost of service revenue was $54.8 million and gross margin was 36% for fiscal year 2007, compared to $50.1 million and gross margin of 37% for fiscal year 2006 and $51.4 million and gross margin of 39% for fiscal year 2005. The decreases in service margins were related to decreased margins on installations which were influenced by lower fair value of installations, product and regional mix. The fair value of installations is assessed periodically and is largely based upon the historical experience of the effort and cost to complete installations. The fair value of tool installation is determined at the time of tool shipment. As products have matured and the installation requires less effort to complete, the fair value of installation revenue per installation is reduced. Based upon the results of the first quarter 2006, the fair value was reduced for certain products shipped in the remaining quarters of fiscal year 2006 thus reducing the gross margin. Generally, installation revenue is influenced by shipment volume of systems, product mix, customer mix, timing of customer acceptances and the fair value of installations. Cost of service revenue for each of fiscal years 2007 and 2006 included $1.0 million of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as of October 1, 2005.

Research and Development

Research and development expenses were $104.0 million for fiscal year 2007, compared to $90.6 million for fiscal year 2006 and $77.7 million for fiscal year 2005, an increase of $13.4 million, or 15% from fiscal year 2006 to fiscal year 2007, and an increase of $12.9 million, or 17% from fiscal year 2005 to fiscal year 2006. The increases in research and development spending are attributable to Varian Semiconductor’s rapid product development cycle (which aims to introduce new products every nine to twelve months) and continuing efforts to improve productivity and technical development of its products. Varian Semiconductor focuses on maintaining its leadership position in the markets for medium current and high current implanters, improving its position in the high energy business and continuing to invest in additional new and next generation products. Research and development expense for fiscal year 2007 and fiscal year 2006 included $3.9 million and $3.7 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as of October 1, 2005.

Marketing, General and Administrative

Marketing, general and administrative expenses were $128.1 million for fiscal year 2007, compared to $116.1 million for fiscal year 2006 and $104.9 million for fiscal year 2005, an increase of $12.0 million, or 10% from fiscal year 2006 to fiscal year 2007, and an increase of $11.2 million, or 11% from fiscal year 2005 to fiscal year 2006. The increase in expense from fiscal year 2006 to fiscal year 2007 was due to increases in headcount and incentive compensation in support of the increase in overall business activity. Additionally, information technology and finance professional consulting expenses were higher due to spending related to Varian Semiconductor’s implementation of its global reorganization plan which is designed to better align its processes with the geographic location of its customers and suppliers. The increase in expense from fiscal year 2005 to fiscal year 2006 was primarily the result of the expensing of stock based compensation. Increased product marketing expenses, service expenses, and IT expenses also contributed to the increase. These increases were partially offset by decreases in marketing expenses related to the customer evaluations and demonstration of new generation products, and decreases in legal expenses. Marketing, general and administrative expenses for fiscal year 2007 and fiscal year 2006 included $13.5 million and $13.2 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as of October 1, 2005. Additionally, the first quarter of fiscal year 2005 included a $3.5 million charge, largely non-cash, associated with the retirement of the President and Chief Operating Officer of Varian Semiconductor.

Restructuring Costs

During fiscal year 2005, Varian Semiconductor recognized $0.9 million in restructuring costs. The restructuring costs related to reductions in headcount and facilities in Europe. The restructuring reserve balance of $0.2 million as of September 30, 2005, was paid during fiscal year 2006. There were no additional charges in fiscal years 2006 or 2007.

Interest Income and Interest Expense

During fiscal year 2007, Varian Semiconductor earned $19.5 million in net interest income, compared to $21.5 million for fiscal year 2006 and $16.3 million for fiscal year 2005. The decrease in interest income for fiscal year 2007 was related to a decrease in average cash and investment balances, primarily attributable to share repurchases during fiscal year 2007 of $426.5 million. Interest income in fiscal year 2006 included $1.6 million related to the release of tax refunds by the IRS upon the conclusion of a multi-year tax examination. Interest income in fiscal year 2005 included $5.7 million in interest on the past due royalties received from Applied Materials. In addition, interest income, during both fiscal years 2006 and 2005, increased due to higher cash balances and rates, along with an increased portfolio of investments. At September 28, 2007, Varian Semiconductor had $57.5 million in cash equivalents whose interest was exempt from US federal taxation. The rates of return on these cash equivalents were approximately 33% lower than rates earned on comparable fully-taxable cash equivalents.

Other Income (Expense), Net.

During fiscal year 2007, Varian Semiconductor recorded other income of $0.3 million related to foreign exchange gains offset by miscellaneous charges. During fiscal year 2006, Varian Semiconductor recorded other income of $0.9 million, primarily related to a gain on the sale of certain non-operating real estate owned by Varian Semiconductor. During fiscal year 2005, Varian Semiconductor recorded other income of $2.8 million, primarily related to the reduction of an estimated loss contingency of $2.7 million associated with patent infringement and antitrust litigation.

Provision for Income Taxes

Varian Semiconductor’s effective income tax rate was 49% in fiscal year 2007, 24% in fiscal year 2006 and 31% in fiscal year 2005. The 2007 provision was impacted by tax charges related to Varian Semiconductor’s realignment of its global business structure and establishment of international operations that will provide operational and financial services to all of its international locations. A significant element of the new structure involves the sharing of certain expenses related to the ongoing development of intangible property. Tax charges to implement the new structure impacted the fiscal year 2007 effective tax rate by approximately 15 percentage points. These charges consisted primarily of additional royalty payments that will be taxed in the United States and the loss of certain U.S. tax deductions related to research and development and certain other administration expenses. Varian Semiconductor anticipates that it may experience an effective tax rate in the 30% to 32% range in fiscal 2008, and possibly a lower rate in subsequent years, as it begins to realize operational and tax efficiencies resulting from this realignment.

Exclusive of the effects of the discrete tax benefit received in the first quarter of fiscal year 2006, as discussed in the following paragraph, and other discrete items, the effective tax rate would have been 32% for the fiscal year 2006. The rate is lower than the U.S. federal statutory rate in fiscal years 2006 and 2005, principally due to credits and lower-taxed foreign income. Future tax rates may vary from these historic rates depending on the worldwide composition of earnings and the continuing availability of income tax credits, as well as the potential resolution of tax contingencies.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various tax authorities, including the IRS. The IRS conducted an examination for the tax years 1999 through 2003 as part of its routine examinations of Varian Semiconductor’s income tax returns. The IRS completed fieldwork for this examination of Varian Semiconductor in the fourth quarter of fiscal year 2005 and submitted its report to the Joint Committee for final approval. Varian Semiconductor was notified of Joint Committee approval in the first quarter of fiscal year 2006. Related to the conclusion of this examination, Varian Semiconductor recorded a discrete tax benefit of $9.0 million in the first quarter of fiscal year 2006. The IRS is currently examining certain refund claims filed by Varian Semiconductor for fiscal year 2000 through fiscal year 2004. The favorable resolution of these claims could result in a benefit to the financial statements.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Revenue

Product

During the first quarter of fiscal year 2008, product revenue was $235.5 million, compared to $202.4 million for the same period a year ago. The increase in product revenue was primarily due to increased tool sales to memory customers. On a unit basis, the number of tools recorded in revenue increased 9% for the first quarter of fiscal year 2008 compared to the first quarter of fiscal year 2007. This increase was primarily attributable to an increase in high current implanter sales. In addition, revenue from parts and upgrades sales during the first quarter of fiscal year 2008 increased 13% compared to the same fiscal quarter a year ago due to a higher installed base along with higher fab utilization.

Service

Service revenue during the first quarter of fiscal year 2008 was $18.5 million, compared to $21.5 million for the same period a year ago. This decrease is primarily related to a decrease in installation revenue. Installation revenue is influenced by shipment volume of systems, product mix, customer mix, timing of customer acceptance and the fair value of installations. As products mature and the installation requires less effort to complete, the fair value of installation revenue per system is reduced, which reduces installation revenue per tool.

Revenue by Territory

The Asia Pacific region accounts for a significant percentage of Varian Semiconductor’s revenues. Increases in revenue from this region for the first quarter of fiscal year 2008 as compared to the same period in fiscal year 2007, indicate that a substantial proportion of the worldwide semiconductor manufacturing expansion continues to occur in this region.

Royalty and License

Royalty revenue during the first quarter of fiscal year 2008 was less than $0.1 million, compared to $1.8 million for the same period in fiscal year 2007 as most agreements have now expired.

Customers

During the first quarter of fiscal year 2008, revenue from three customers accounted for 16%, 15% and 14%, respectively, of Varian Semiconductor’s total revenue, compared to two customers accounting for 14% and 11% of revenue, respectively, during the first quarter of fiscal year 2007. Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future.

Fluctuations in the timing and mix of product shipments, customer requirements for systems, and the completion of the installation of the product will continue to have a significant impact on the timing and amount of revenue in any given reporting period (see also “Risk Factors”).

Shipment Mix

Varian Semiconductor’s tools are used primarily for 300mm and 200mm wafer size implants. In addition, Varian Semiconductor’s tools are used by logic, memory and foundry manufacturers for integrated circuits. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information and they, too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped the demand for logic chips. As the demand for memory intensive applications such as cameras, phones, and MP3 players grows, it is expected that memory will continue to represent the bulk of chips made worldwide. The following table sets forth tool shipments by wafer size and market, as a percent of total tool shipments, for the first quarter of fiscal years 2008 and 2007. Percentages are based on the number of tools shipped during the respective period.

Cost of Product Revenue

Cost of product revenue was $119.6 million and gross margin was 49% for the first quarter of fiscal year 2008, compared to cost of product revenue of $111.5 million and gross margin of 45% for the first quarter of fiscal year 2007. The primary reasons for the increase in gross margin are product mix and more efficient factory operations due to higher sales volume. Improved supply chain management and more efficient regional service support also contributed to the increase in gross margin in the first quarter of fiscal year 2008.

Cost of Service Revenue

Cost of service revenue was $12.3 million and gross margin was 34% for the first quarter of fiscal year 2008, compared to cost of service revenue of $13.7 million and gross margin of 36% for the first quarter of fiscal year 2007. Fluctuations in service margins are attributed to the change in installation margins, which are influenced by product and regional mix. The fair value of installations is assessed periodically and is largely based upon the historical experience of the effort and cost to complete installations.

Research and Development

Research and development expense was $28.7 million for the first quarter of fiscal year 2008, compared to $24.2 million for the first quarter of fiscal year 2007. The increase in research and development spending is attributable to Varian Semiconductor’s rapid product development cycle, which aims to introduce new products every nine to twelve months and continuing efforts to improve productivity and technical development of its products. Varian Semiconductor focuses on maintaining its leadership position in the markets for medium current, high current and plasma doping implanters, improving its position in the high energy business and continuing to invest in other new and next generation products.

Marketing, General and Administrative

Marketing, general and administrative expense was $32.6 million for the first quarter of fiscal year 2008, compared to $30.5 million for the first quarter of fiscal year 2007. The increase was primarily due to increases in incentive compensation, relocation of personnel associated with the alignment of legal entities, and additional management in Japan due to increased business activity.

Interest Income and Interest Expense

During the first quarter of fiscal year 2008, Varian Semiconductor earned $2.7 million in net interest income, compared to $5.6 for the same period of fiscal year 2007. The decrease in net interest income for the first quarter of fiscal year 2008 was due to a decrease in average cash and investment balances, primarily attributable to share repurchases during fiscal year 2007 of $426.5 million.

Other Income, Net

Other income, net, was less than $0.1 million for the first quarter of fiscal year 2008, compared to $0.7 million for the same period of fiscal year 2007. Other income for the first quarter of fiscal year 2007 included $0.8 million for the reversal of a liability related to the expiration of the statute of limitations on a pre-spin liability.

Provision for Income Taxes

Varian Semiconductor’s effective income tax rate was a provision of 31% for the first quarter of fiscal year 2008 and 29% for the same period in fiscal year 2007. The provision for the first quarter of fiscal year 2008 included a net discrete benefit of $1.2 million related primarily to Swiss net operating loss carryforwards, which reduced the first quarter effective tax rate by approximately 2 percentage points. The 2007 first quarter provision included a discrete net benefit of approximately $2.1 million related to the retroactive reinstatement of the research and development tax credit. This discrete tax benefit reduced the first quarter 2007 effective tax rate by approximately 4 percentage points.

In fiscal 2007, Varian Semiconductor implemented a plan to realign the legal entities within its worldwide affiliated group. The impact of this realignment in the first quarter of fiscal 2008, exclusive of the discrete benefit, caused Varian Semiconductor’s effective tax rate to increase by approximately 1 percentage point due to tax charges related to the ongoing implementation of the new structure.

Net Income

As a result of the foregoing factors, in the first quarter of fiscal year 2008, Varian Semiconductor recorded net income of $43.7 million compared to net income of $37.0 million for the same period of fiscal year 2007. Net income per diluted share was $0.57 for the first quarter of fiscal year 2008, compared to net income per diluted share of $0.44 for the first quarter of fiscal year 2007.

CONF CALL

Robert Halliday - Executive Vice President and Chief Financial Officer

Good afternoon. I’m Bob Halliday, Varian Semiconductor’s Chief Financial Officer. I want to thank you for joining us for our fiscal 2008 second quarter conference call and webcast. With me on the call this afternoon is Gary Dickerson, our Chief Executive Officer.

Before getting into our financial results, we want to remind you that during the course of this call we may make various comments about the company’s future expectations, plans and prospects. These forward-looking statements are subject to various risks including those detailed in the company’s public filings including our most recent 10-K filing. The company cannot guarantee that these forward-looking statements will actually occur and we assume no obligation to update these forward-looking statements.

We will refer to measures not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation to the most directly comparable GAAP measures is available on our website under the presentations tab of our Investor Relations page.

Recent highlights for Varian include our overall market share increased to 64.5% in calendar 2007 and our gross margins are holding up well in a difficult market. Now, I will review the results for our second quarter ended March 28, 2008.

Second quarter 2008 revenue totaled $255 million, the third highest quarterly revenue in Varian's history and 6% higher than the 242 million we recorded for the second quarter of fiscal 2007. During the quarter, sales to two memory manufacturers, a major logic company and a large foundry in Asia, each accounted for 10% or more of our total revenues.

We shipped 36 single wafer high current tools in the second quarter of 2008, the same number we shipped in the fourth quarter of fiscal 2007. 34 out of 36 of those tools were 300 millimeter tools. Our installed base of single wafer high current tools now exceeds 500 tools.

Our book-to-bill ratio in the second quarter approximated the industry average. Second quarter 2008 net income was $34 million or $0.45 per share. Second quarter revenues and operating margin were approximately what we expected for the quarter.

However, the outlook for the remainder of the year softened during the quarter particularly in Asia. This reduced forward outlook result in a higher share of US taxable income for Varian, which is taxed at a higher tax rate. The projected tax rate for the remainder of the year has increased to 39.5% with a second quarter catch up tax rate of 45%.

The higher tax rate in the second quarter reduced earnings by $0.10 per share. With our original estimated tax rate, we would have been at $0.55 per share, the high end of our guidance. Second quarter 2008 pretax income at $62 million was close to the first quarter's pretax income.

The geographic breakdown of our revenue this quarter based on fab locations was: Asia 70%, North America 25%, Europe 5%. Second quarter 2008 tool shipments in units were approximately 56% memory, 16% logic and 28% foundry compared with 82% memory, 9%logic and 9% foundry in the first quarter of 2008. Shipment pulling from a major Taiwanese foundry in the second quarter offset push-outs by two memory companies.

300 millimeter tool shipments increased to a record 97% of total tool shipments in the second quarter. During the second quarter, we recognized revenue for six PLAD tools at three different customers including two different fabs at a major memory manufacturer.

Our installed base of PLAD tools has now reached 26. We are forecasting seven PLAD tool sales in the third quarter of fiscal 2008. Second quarter 2008 gross margin was 47.5%, at the high end of our guidance. Second quarter margins were lower than the first quarter of 2008 mainly due to an unfavorable customer and tool mix, partially offset by continued cost reduction in a strong spare parts business. In fact, we set another record for parts and service revenue in the second quarter.

R&D expenses of $28.5 million came in slightly under our guidance due to the timing of engineering materials purchases. Marketing, general and administrative expenses increased slightly from the first quarter of 2008 to approximately $33 million, inline with our guidance.

At the end of the second quarter, our full time equivalent headcount was 1,906, down from 1,999 at the end of the first quarter of fiscal 2008. This decrease was due primarily to lower manufacturing headcount.

During the second quarter, we bought back nearly $40 million or 1.2 million shares of our stock. Through today, we have bought back a cumulative total of about 20.1 million shares of our outstanding shares at September 30, 2005 at a cost of approximately $653 million. Since the start of our buyback in the first quarter of 2006, we have reduced our net outstanding shares even after the impact of additional option exercises by approximately 14% including 11% in the last 15 months. Earlier today, we announced that our Board authorized an additional $100 million to repurchase more shares. As a result, we plan to continue to buyback our shares.

Second quarter 2008 capital spending was $2.5 million. Depreciation expense for the quarter was $4.2 million. In the third quarter of fiscal 2008, we anticipate revenues of between 175 and $185 million. In the third quarter, we anticipate the tool shipments in units will be approximately 54% memory, 29% logic and 17% foundry. Despite lower revenues, we expect that gross margins will increase to between 48 and 48.5% in the third quarter of fiscal 2008. This is due to a higher percentage of spare parts sales in the third quarter combined with continued cost reductions, partially offset by an unfavorable customer mix.

Our gross margins have held up for several reasons. One, our gross margins are favorably impacted by our growing upgrades and spare parts business. We put a lot of focus on developing and delivering high value upgrades and spare parts to our growing installed base.

Secondly, we anticipate that sales of our PLAD tool, which carries higher margins than are beamline tools, will almost double in fiscal year 2008 from $46 million in fiscal 2007.

Third, VIISta common product platform allows us to buy the same parts and assemblies for all of our tools. We continue to reduce product cost as we increase our worldwide sourcing activity. We also are shortening our manufacturing cycle times. Somewhat slowing our gross margin improvement this year is a challenging pricing environment especially in terms of mix. Also, we have some but not large unfavorable manufacturing absorption issues.

Our gross margins translate well into operating margin leverage because R&D expense is very efficient with the VIISta common platform. We expect that R&D expense will decline by approximately $1 million to about $27.5 million in the third quarter. We are tightly managing program expenditures in light of the current business environment.

Marketing, general and administrative expenses should decline to approximately $32 million in the third quarter due to tight spending constraints. Included in our third quarter outlook for marketing expense is an increase in our funding for new evaluation tools, which should lead to future market share opportunities. As a result, we anticipate operating profits of approximately $28.5 million. These profits will be taxed at a higher estimated tax rate of 39.5% and translate into earnings per share between $0.21 and $0.26 in the third quarter of 2008. With a more normalized business mix in the future, we expect Varian’s tax rate to trend down over the next few years. We expect capital expenditures in the third quarter to be approximately $3 million, mainly for R&D projects and facilities improvements.

Now, I’ll turn the call over to Gary for his remarks.

Gary Dickerson - Chief Executive Officer

Thanks Bob. In 2007, Varian increased its overall market share from 43.2% to 64.5% of the implant market. We increased our high current share from 46% to 78%, our medium current share from 53% to 57%, and we maintained 100% share of the ultra high dose or PLAD market, which grew from almost nothing in 2006 to 64 million in 2007.

In 2006, Varian’s dollar market share was 1.8% higher than its unit share. In 2007, Varian’s dollar share was 5.6% higher than its unit share. What this comparison of dollars and units points out is that Varian is widening the gap in the value proposition we provide to our customers and our competitors are largely selling older technology at higher discounts. This is also seen in the 10% decline in our competitors' average selling price in 2007 versus 2006.

In 2007, there were 193 tools not sold by Varian. Included in this total were 76 million current tools mostly in Japan, 44 high current batch tools, 31 batch high energy tools and 29 high current and medium current tools where Varian has been selected as production tool of record. Varian is well positioned in all four of these categories.

The 29 tools where Varian has already been selected as production tool of record will be Varian’s to the extent these customers buy. The 44 batch high current tools where Varian already has been selected for the next technology node or is actively engaged this is mostly in Japan. The 76 medium current tools where Varian gained 4% share in 2007 and has the best most valuable medium current implanter in the world and the 31 batch high energy tools where Varian has a single wafer solution to help customers produce more die per wafer and increase yields.

The segmentation of the market has changed over the last three years in ways that are beneficial for Varian. In 2005, there was no ultra high dose market. In 2007, the ultra high dose or PLAD segment was $64 million market, which could grow to approximately 90 million in calendar 2008.

The high current market remains the largest segment at 50% in 2007. In 2005, approximately 55% of the high current market was single wafer tools. In 2007, approximately 82% of the high current market was single wafer. In 2007, there was a significant shift between the high energy and medium current markets. From 2006 to 2007, the medium current TAM increased 10% and the high energy TAM decreased 37%.

The major driver for the change from high energy to medium current is the transition of some well implants from high energy to medium current tools. Varian captured a number of these sales in the Taiwanese memory market with its VIISta 900XP, a medium current tool capable of doing some traditional high energy well implants. For instance, in the Taiwanese market, high energy was 11% of the market in 2005 and 6% in 2007. Another large change in TAM was in Japan. The Japanese market was down from 28% of the worldwide TAM in 2005 to 19% in 2007. Within the Japanese market, high energy was 19% of the total in 2005 and only 11% in 2007. In 2007, it appears that Japanese customers also transitioned some steps from high energy to medium current and reallocated some of their previously purchased high energy tools for their new production requirements.

We better understand our customers' new production requirements because of our large market share and the people that we have added to the company with strong process and device backgrounds. The R&D customers are now working much more closely with Varian's process directors to find implant solutions to their challenging device performance requirements. This cooperative working relationship combined with Varian's technology leadership and the development leverage of the VIISta platform are powerful enablers of future improved operating performance by Varian.

Customer spending could be off by more than 20% in 2008. However, we see 2008 as a year of opportunity and positioning for additional share gains. The PLAD segment should continue to grow in 2008 and we plan to introduce several new implant tools this year, which will provide opportunities for future growth.

In the high energy segment, we will offer customers the option of purchasing either our VIISta 900XP or VIISta 3000XP, both of which provide precise zero degree well implants on production proven tools. Zero degree implants can only be done on single wafer tools. We believe the customers, particularly cost conscious memory customers, can get more chips per wafer and higher yields with precise zero degree single wafer tools.

Our beamline and plasma doping tools are recognized as the most accurate and cleanest in the fab. This opens the door for the broader use of implant beyond traditional electrical applications into precision material modification.

Since we last discussed our customers' interest in new implant applications at Investor Day, we have made considerable progress. We are currently engaged with major customers in the memory, foundry and logic markets to develop and implement several potential new applications. Opportunities exist for materials modification and photolithography, etch and films processes. Our applications team is encouraging great customer pull for new potential uses for implant technology for both beamline and PLAD.

We have seen customers add new implant process test to solve problem including resist stabilization steps to solve yield problems and steps to resolve issues with etch microloading. We have many customers evaluating additional applications including ways to increase strain, improve electromigration and other film modification implant steps.

In the last couple of years, we have brought in key process technologists to help us exploit these new opportunities. We have built our regional technical expertise to help drive our share growth and TAM expansion. We have brought in people with knowledge of lithography, etch, and films processes to drive these new applications.

With our strong share growth, our installed base is expanding, creating future business in service and support. We are engaging with our customers to solve some of their most challenging problems through new innovative implant technology for both electrical and precision material modification.

2008 should be a strong launching point for Varian given our share position, product pipeline and development and financial leverage of the VIISta platform and the emerging applications we see for our beamline and PLAD tools for both electrical and precision material modification. Although, we are just customer spending in 2008 is affecting total sales for the industry, Varian should enter 2009 with a very strong product, operating and financial model.

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