NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The long-term growth and value creation strategy of Varian Medical Systems, Inc. (“VMS”) and subsidiaries (collectively, the “Company”) is to transform the Company from the global leader in radiation therapy to the global leader in multi-disciplinary, integrated cancer care solutions that leverages its clinical experience and strengths in technology development and new product innovation. The Company offers solutions in radiation therapy and medical oncology, as well as interventional oncology, an emerging area of cancer care. The Company designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy and brachytherapy, and offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolization. Software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices. The Company also develops, designs, manufactures, sells and services proton therapy products and systems for cancer treatment.
The Company has expanded its services offerings to include clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed at facilitating improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, the Company operates 12 multi-disciplinary cancer centers and one specialty hospital in India and one multi-disciplinary cancer center in Sri Lanka.
Basis of Presentation
The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of September 27, 2019, was derived from audited financial statements as of that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 27, 2019 (the “2019 Annual Report”).
The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic and the extent and duration of the future impact on the Company's business is highly uncertain and difficult to predict. The COVID-19 pandemic has adversely impacted, and is likely to further adversely impact, nearly all aspects of the Company’s business and markets, including its workforce and operations and the operations of its customers, suppliers, distributors and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including revenues, expenses, manufacturing, research and development costs, reserves and allowances, fair value measurements, asset impairment charges, contingent consideration obligations and the effectiveness of the Company's hedging instruments, will depend on future developments that are highly uncertain and difficult to predict.
The Company has approximately $1.3 billion in accessible liquidity, including approximately $668 million in cash and cash equivalents and approximately $661 million available under its $1.2 billion revolving credit facility. To date, the Company has not experienced a significant decline in customer credit quality or a significant increase in requests for changes or extension of payment terms as a result of COVID-19, although management will continue to closely monitor these metrics going forward. Furthermore, the Company's ability to estimate and make certain judgments may be materially impacted by the uncertainty caused by the pandemic. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.
In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of April 3, 2020, and September 27, 2019, results of operations and statements of comprehensive earnings for the three and six months ended April 3, 2020, and March 29, 2019, statements of cash flows for the six months ended April 3, 2020, and March 29, 2019, and statements of equity for the six months ended April 3, 2020, and March 29, 2019. The results of operations for the six months
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
ended April 3, 2020, are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.
Reclassifications
Certain reclassifications have been made to the amounts in the prior year in order to conform to the current year's presentation.
Fiscal Year
The fiscal years of the Company as reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2020 is the 53-week period ending October 2, 2020. Fiscal year 2019 was the 52-week period that ended on September 27, 2019. The fiscal quarters ended April 3, 2020 and March 29, 2019, were both 13-week periods.
Principles of Consolidation
The condensed consolidated financial statements include those of VMS and its wholly-owned and majority-owned or controlled subsidiaries. Intercompany balances, transactions and stock holdings have been eliminated in consolidation.
Consolidation of Variable Interest Entities
For entities in which the Company has variable interests, the Company focuses on identifying which entity has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. If the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s condensed consolidated financial statements. At April 3, 2020 and September 27, 2019, the Company consolidated its non-controlling interest in a joint venture, included within its Oncology Systems business, related to the Cancer Treatment Services International ("CTSI") operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
Due to the COVID-19 pandemic, the Company is subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply its significant accounting policies, such as impairment of goodwill and intangibles and the impairment of investments and loans receivables. As the COVID-19 pandemic and responsive actions continue to develop, management may make changes to these estimates and judgments, which could result in material impacts to the Company's financial statements in future periods.
Significant Accounting Policies
With the exception of the change for the accounting of leases as a result of the adoption of Accounting Standard Codification Topic 842, there have been no material changes to the Company's significant accounting policies provided in Note 1, "Summary of Significant Accounting Policies," within Item 8 of the Company's Annual Report on Form 10-K for the year ended September 27, 2019.
Leases
The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's operating lease right-of-use ("ROU") assets represents the right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate ("IBR"). The Company recognizes operating leases with lease terms of more than 12 months in operating lease right-of-use assets, accrued liabilities, and long-term lease liabilities on its Condensed Consolidated Balance Sheets.
The Company’s finance leases primarily represent certain sale and leaseback-sublease arrangements. The Company has entered into sale-leaseback arrangements with a third-party finance company for certain equipment and simultaneously subleased the
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
equipment to certain qualified customers. The Company’s leaseback arrangements have been accounted for as finance leases as they meet one or more of the finance lease classification criteria. The Company recognizes finance leases with lease terms of more than 12 months in property, plant, and equipment, net, accrued liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheets.
For purposes of calculating lease liabilities and the corresponding ROU assets, the Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
The Company generally does not have adequate information to determine the implicit rate in a lease, therefore the Company uses an estimated IBR. The Company does not maintain a public credit rating and its debt arrangements are unsecured, thus requiring significant judgment to calculate the IBR. The Company uses different data sets to estimate the IBR, including: (i) an estimated indicative credit rating of the Company; (ii) yields on comparable credit rating composite curves; (iii) foreign exchange rates; and (iv) an estimated adjustment for collateral. The Company also applies adjustments to account for considerations related to (i) tenor; and (ii) country credit rating that may not be fully incorporated by the aforementioned data sets.
Certain of the Company’s lease arrangements include variable lease payments. Variable lease payments, not dependent on an index or discount rate, are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments generally include common area maintenance, utilities, maintenance charges, property taxes, insurance, and contingent rent payments. Certain of the Company's arrangements contain clauses that provide for contingent rent payments based on a percentage of revenue share and/or earnings before interest, taxes, depreciation and amortization.
The Company combines lease and non-lease components as a single lease component for both its operating and finance leases. In addition, the Company does not record operating and finance lease assets and liabilities for short-term leases, which have an initial term of 12 months or less.
Recently Adopted Accounting Pronouncements
In the first quarter of fiscal year 2020, the Company adopted the Financial Accounting Standards Board ("FASB") standard on accounting for leases, "Leases." The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record ROU assets and corresponding lease liabilities on the balance sheet. The Company adopted this standard under the optional transition method, which applies the standard on the effective date, rather than the earliest comparative period presented in the financial statements. The Company elected: (1) the "package of practical expedients," which does not require the Company to reassess its prior conclusions about lease identification, lease classification, and initial direct costs under the new standard; (2) not to separate non-lease components from lease components; and (3) not to recognize ROU assets and lease liabilities for short-term leases. The Company has implemented internal controls and key system functionalities to enable the preparation of financial information. The primary impact for the Company was the balance sheet recognition of ROU assets and lease liabilities for operating leases as a lessee. See Note 8, "Commitments and Contingencies," for more information on the impact of this adoption on the Company's condensed consolidated financial statements.
In the first quarter of fiscal year 2020, the Company adopted FASB guidance that added the Overnight Index Swap rate based on the Secured Overnight Financing Rate ("SOFR") as a benchmark interest rate for hedge accounting purposes. The amendment recognizes SOFR as a likely LIBOR replacement and supports the marketplace transition by adding the new reference rate as a benchmark interest rate. The Company has not executed interest rate hedges but adopted the amendment prospectively as the Company may consider interest rate hedges in the future. The Company is monitoring the LIBOR to SOFR migration and will coordinate the transition of outstanding LIBOR based debt and any related interest rate derivatives with counterparties when the market is liquid to ensure an orderly and efficient transition.
In the first quarter of fiscal year 2020, the Company adopted FASB guidance that allows companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act to retained earnings. The impact of adopting this amendment on the Company's condensed consolidated financial statements was not material.
Recent Accounting Standards or Updates Not Yet Effective
In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing certain exceptions to the current guidance and improving the consistent application of and simplification of other areas of the guidance. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
In August 2018, the FASB amended its guidance for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard becomes effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
In August 2018, the FASB issued guidance which modifies the disclosure requirements for employers that have sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.
In August 2018, the FASB issued guidance which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.
In June 2016, the FASB issued an amendment to its accounting guidance related to the impairment of financial instruments. The amendment adds a new impairment model that is based on expected losses, rather than incurred losses. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2020. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
2. OTHER FINANCIAL INFORMATION
Contracts with Customers
The following table provides the Company's unbilled receivables and deferred revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
|
|
|
|
Unbilled receivables - current
|
$
|
276.7
|
|
|
$
|
346.7
|
|
|
|
|
|
|
Unbilled receivables - long-term (1)
|
71.6
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenues - current
|
(798.1)
|
|
|
(766.0)
|
|
|
|
|
|
|
Deferred revenues - long-term (2)
|
(74.1)
|
|
|
(73.1)
|
|
|
|
|
|
|
Total net unbilled receivables (deferred revenues)
|
$
|
(523.9)
|
|
|
$
|
(457.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Included in other assets on the Company's Condensed Consolidated Balance Sheets.
(2)Included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets.
During the six months ended April 3, 2020, unbilled receivables decreased by $33.5 million, primarily due to the timing of billings in Oncology Systems, and deferred revenues increased by $33.1 million, primarily due to the contractual timing of billings occurring before the revenues were recognized.
During the three months and six months ended April 3, 2020, the Company recognized revenues of $162.4 million, and $476.9 million, respectively, which were included in the deferred revenues balances at September 27, 2019. During the three and six months ended March 29, 2019, the Company recognized revenues of $167.8 million and $431.2 million, respectively which were included in the deferred revenues balances at September 28, 2018.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Unfulfilled Performance Obligations
The following table represents the Company's unfulfilled performance obligations as of April 3, 2020, and the estimated revenues expected to be recognized in the future related to these unfulfilled performance obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years of Revenue Recognition
|
|
|
|
|
|
|
|
(In millions)
|
Remainder of 2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Unfulfilled Performance Obligations
|
$
|
1,174.3
|
|
|
$
|
2,345.7
|
|
|
$
|
1,006.5
|
|
|
$
|
2,415.9
|
|
The table above includes both product and service unfulfilled performance obligations, which includes a component of service performance obligations that has not been invoiced. The fiscal years presented reflect management’s best estimate of when the Company will transfer control to the customer and may change based on timing of shipment, readiness of customers’ facilities for installation, installation requirements and availability of products or customer acceptance terms.
Cash, Cash Equivalents, and Restricted Cash
The following table summarizes the Company's cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
Cash and cash equivalents
|
$
|
667.8
|
|
|
$
|
531.4
|
|
|
Restricted cash - current (1)
|
4.8
|
|
|
4.2
|
|
|
Restricted cash - long-term (2)
|
16.4
|
|
|
8.5
|
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
689.0
|
|
|
$
|
544.1
|
|
(1)Included in prepaid expenses and other current assets on the Company's Condensed Consolidated Balance Sheets.
(2)Included in other assets on the Company's Condensed Consolidated Balance Sheets.
Inventories
The following table summarizes the Company's inventories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
|
|
|
|
|
Raw materials and parts
|
$
|
412.6
|
|
|
$
|
376.5
|
|
|
Work-in-process
|
80.8
|
|
|
71.8
|
|
|
Finished goods
|
110.6
|
|
|
103.2
|
|
|
Total inventories
|
$
|
604.0
|
|
|
$
|
551.5
|
|
Other Long-Term Liabilities
The following table summarizes the Company's other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
Income taxes payable
|
$
|
168.7
|
|
|
$
|
180.3
|
|
|
|
|
|
|
|
Deferred income taxes
|
75.4
|
|
|
75.3
|
|
|
Deferred revenues
|
74.1
|
|
|
73.1
|
|
|
|
|
|
|
|
Contingent consideration
|
34.0
|
|
|
42.3
|
|
|
Defined benefit pension plan
|
28.7
|
|
|
31.1
|
|
|
Other
|
42.2
|
|
|
38.0
|
|
|
Total other long-term liabilities
|
$
|
423.1
|
|
|
$
|
440.1
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Other Income (Expense), Net
The following table summarizes the Company's other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
|
|
|
Gain (loss) on equity investments
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
$
|
1.4
|
|
|
$
|
21.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency exchange gain (loss)
|
(1.4)
|
|
|
(0.5)
|
|
|
1.0
|
|
|
0.8
|
|
|
|
|
|
Other, net
|
0.5
|
|
|
0.9
|
|
|
1.1
|
|
|
0.6
|
|
|
|
|
|
Total other income (expense), net
|
$
|
(0.9)
|
|
|
$
|
0.2
|
|
|
$
|
3.5
|
|
|
$
|
23.2
|
|
|
|
|
3. FAIR VALUE
Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at April 3, 2020
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
Type of Instruments
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Balance
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
100.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
100.0
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
MPTC Series B-1 Bonds
|
|
—
|
|
|
28.1
|
|
|
—
|
|
|
28.1
|
|
|
MPTC Series B-2 Bonds
|
|
—
|
|
|
26.2
|
|
|
—
|
|
|
26.2
|
|
|
APTC securities
|
|
—
|
|
|
6.1
|
|
|
—
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
—
|
|
|
3.4
|
|
|
—
|
|
|
3.4
|
|
|
Total assets measured at fair value
|
|
$
|
100.0
|
|
|
$
|
63.8
|
|
|
$
|
—
|
|
|
$
|
163.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75.0)
|
|
|
$
|
(75.0)
|
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75.0)
|
|
|
$
|
(75.0)
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 27, 2019
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant Unobservable Inputs
|
|
Total
|
|
Type of Instruments
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Balance
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
MPTC Series B-1 Bonds
|
|
—
|
|
|
27.1
|
|
|
—
|
|
|
27.1
|
|
|
MPTC Series B-2 Bonds
|
|
—
|
|
|
25.1
|
|
|
—
|
|
|
25.1
|
|
|
APTC securities
|
|
—
|
|
|
6.6
|
|
|
—
|
|
|
6.6
|
|
|
Derivative assets
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
Total assets measured at fair value
|
|
$
|
0.2
|
|
|
$
|
61.6
|
|
|
$
|
—
|
|
|
$
|
61.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75.3)
|
|
|
$
|
(75.3)
|
|
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(75.3)
|
|
|
$
|
(75.3)
|
|
The Company classifies its money market funds as Level 1 because they have daily liquidity, quoted prices for the underlying investments can be obtained, and there are active markets for the underlying investments. The Company's Level 2 available-for-sale securities consist of bonds for the Maryland Proton Therapy Center ("MPTC") and the Alabama Proton Therapy Center (“APTC”). The observable inputs for these securities are comparable bond issues, broker/dealer quotations for the same or similar investments in active markets, and other observable inputs such as yields, credit risks, default rates, and volatility. The Company's available-for-sale securities are included in other assets on the Company's Condensed Consolidated Balance Sheets, except for amounts related to short-term interest receivable. See Note 14, "Proton Solutions Loans and Investments," for further information about the available-for-sale securities. As of April 3, 2020, and September 27, 2019, the carrying amount of the Company's Level 1 money market funds and Level 2 available-for-sale securities approximated their respective fair values.
The Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. The Company’s derivative instruments are generally short-term in nature, typically one month to fifteen months in duration.
The Company generally measures the fair value of its Level 3 contingent consideration liabilities based on Monte Carlo pricing models with key assumptions that include estimated revenues of the acquired business, the probability of completing certain milestone targets during the earn-out period, revenue volatility and estimated discount rates corresponding to the periods of expected payments. If the estimated revenues or probability of completing certain milestones were to increase or decrease during the respective earn-out period, the fair value of the contingent consideration would increase or decrease, respectively. If the estimated discount rates were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. Changes in key assumptions may result in an increase or decrease in the fair value of contingent consideration. The Company's contingent consideration is from its business combinations and is included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.
The following table presents the reconciliation for liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Contingent
Consideration
|
|
Balance at September 27, 2019
|
|
|
$
|
(75.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments due to the effect of foreign exchange
|
|
|
0.2
|
|
|
Change in fair value recognized in earnings
|
|
|
0.1
|
|
|
Balance at April 3, 2020
|
|
|
$
|
(75.0)
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
There were no transfers of assets or liabilities between fair value measurement levels during either the three and six months ended April 3, 2020, or the three and six months ended March 29, 2019. Transfers between fair value measurement levels are recognized at the end of the reporting period.
Fair Value of Other Financial Instruments
The fair values of certain of the Company’s financial instruments, including bank deposits included in cash equivalents, trade and unbilled receivables, net of allowance for doubtful accounts, accounts payable, and short-term borrowings approximate their carrying amounts due to their short maturities.
As of April 3, 2020, the fair value of the CPTC Loans (as defined in Note 14, "Proton Solutions Loans and Investments,") approximated its carrying value of $10.0 million. The Company recorded a $40.5 million impairment charge on the CPTC Loans in the three months ended April 3, 2020. The carrying value is based on the present value of expected future cash payments discounted at a rate reflecting the nature and duration of the loans, risks involved with CPTC, and its industry. As a result, the CPTC Loans are categorized as Level 3 in the fair value hierarchy. See Note 14, "Proton Solutions Loans and Investments," for further information.
The Company's equity investments in privately-held companies were $56.4 million and $64.2 million at April 3, 2020 and September 27, 2019, respectively. The Company measures these investments at cost, and these investments are adjusted through net earnings when they are deemed to be impaired or when there is an adjustment from observable price changes.
The fair value of the outstanding long-term notes receivable, including accrued interest, approximated their carrying value of $34.9 million and $33.6 million at April 3, 2020 and September 27, 2019, respectively, because they are based on terms of recent comparable transactions and are categorized as Level 3 in the fair value hierarchy. The fair value is based on the income approach by using the discounted cash flow model with key assumptions that include discount rates corresponding to the terms and risks as well as underlying cash flow assumptions. See Note 14, "Proton Solutions Loans and Investments," for information on the long-term notes receivable.
4. RECEIVABLES
The following table summarizes the Company's trade and unbilled receivables, net, and long-term notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
Trade and unbilled receivables, gross
|
$
|
1,131.2
|
|
|
$
|
1,193.5
|
|
|
Allowance for doubtful accounts
|
(48.9)
|
|
|
(46.5)
|
|
|
Trade and unbilled receivables, net
|
$
|
1,082.3
|
|
|
$
|
1,147.0
|
|
|
Short-term
|
$
|
1,004.8
|
|
|
$
|
1,106.3
|
|
|
Long-term (1)
|
$
|
77.5
|
|
|
$
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term notes receivable (1) (2)
|
$
|
34.9
|
|
|
$
|
33.6
|
|
(1)Included in other assets on the Company's Condensed Consolidated Balance Sheets.
(2)Balances include accrued interest and are recorded in other assets on the Company's Condensed Consolidated Balance Sheets.
A financing receivable represents a financing arrangement with a contractual right to receive money, on demand or on fixed or determinable dates, and that is recognized as an asset on the Company’s Condensed Consolidated Balance Sheets. The Company’s financing receivables consist of trade receivables with contractual maturities of more than one year and notes receivable. A small portion of the Company's financing trade receivables are included in short-term trade accounts receivable. As of April 3, 2020, and September 27, 2019, the allowance for doubtful accounts is entirely related to short-term trade and unbilled receivables. See Note 14, "Proton Solutions Loans and Investments," for more information on the Company's long-term notes receivable balances.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
5. GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the activity of goodwill by reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Oncology Systems
|
|
|
|
Other
|
|
Total (1)
|
|
Balance at September 27, 2019
|
$
|
447.9
|
|
|
|
|
$
|
164.3
|
|
|
$
|
612.2
|
|
|
Business combination
|
2.6
|
|
|
|
|
—
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
Measurement period adjustments to business combinations in prior year
|
(0.1)
|
|
|
|
|
—
|
|
|
(0.1)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 3, 2020
|
$
|
450.4
|
|
|
|
|
$
|
164.3
|
|
|
$
|
614.7
|
|
(1)The total carrying value of goodwill at both April 3, 2020, and September 27, 2019 is net of $50.5 million of accumulated impairment charges related to the Company recording an impairment charge for the full value of the Proton Solutions operating segment goodwill in fiscal year 2019.
Due to certain indicators identified related to the Company's Interventional Solutions reporting unit in the second quarter of fiscal year 2020, including a significant decrease in near term revenue projections due to COVID-19, the Company identified a triggering event and performed an interim impairment test on its $164.3 million of goodwill in its Interventional Solutions reporting unit, within the Other reportable operating segment. The fair value of the Interventional Solutions’ reporting unit was in excess of its carrying value by approximately $20 million, or 7%. Management believes the methodology and assumptions used to calculate the fair value to be reasonable. However, the Interventional Solutions reporting unit could be at risk for a future goodwill impairment if there are adjustments to certain assumptions used in the fair value calculation, including revenue growth rates, operating margins, and weighted-average cost of capital and/or working capital requirements. Given the uncertain impact of COVID-19 and/or other market factors on the Company's business, its cash flow projections for this business could decrease in the future, which could lead to an impairment of goodwill.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, operating margins, working capital requirements, weighted-average cost of capital, future economic and market conditions, estimation of the long-term rate of growth for the Company's business and determination of appropriate market comparables. Management bases the fair value estimates on assumptions it believes to be reasonable but that are inherently uncertain. Actual future results related to assumed variables could differ from these estimates. In addition, management makes certain judgments and assumptions in allocating assets and liabilities to determine the carrying values for each reporting unit.
The following table summarizes the gross carrying amount and accumulated amortization of the Company's intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
|
|
|
|
September 27, 2019
|
|
|
|
|
|
(In millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Technologies and patents
|
$
|
226.9
|
|
|
$
|
(98.4)
|
|
|
$
|
128.5
|
|
|
$
|
226.4
|
|
|
$
|
(85.9)
|
|
|
$
|
140.5
|
|
|
Customer contracts, supplier relationships, and partner relationships
|
121.1
|
|
|
(30.4)
|
|
|
90.7
|
|
|
121.1
|
|
|
(25.7)
|
|
|
95.4
|
|
|
Trade names
|
55.1
|
|
|
(5.0)
|
|
|
50.1
|
|
|
55.1
|
|
|
(3.0)
|
|
|
52.1
|
|
|
Other
|
6.1
|
|
|
(6.1)
|
|
|
—
|
|
|
6.1
|
|
|
(6.1)
|
|
|
—
|
|
|
Total intangible with finite lives
|
409.2
|
|
|
(139.9)
|
|
|
269.3
|
|
|
408.7
|
|
|
(120.7)
|
|
|
288.0
|
|
|
In-process research and development with indefinite lives
|
12.3
|
|
|
—
|
|
|
12.3
|
|
|
12.7
|
|
|
—
|
|
|
12.7
|
|
|
Total intangible assets
|
$
|
421.5
|
|
|
$
|
(139.9)
|
|
|
$
|
281.6
|
|
|
$
|
421.4
|
|
|
$
|
(120.7)
|
|
|
$
|
300.7
|
|
Amortization expense for intangible assets was $9.5 million and $6.7 million during the three months ended April 3, 2020 and March 29, 2019, respectively, and $19.6 million and $11.4 million during the six months ended April 3, 2020 and March 29, 2019, respectively.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
As of April 3, 2020, the Company estimates its remaining amortization expense for intangible assets with finite lives will be as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Years:
|
Remaining Amortization Expense
|
|
Remainder of 2020
|
$
|
18.5
|
|
|
2021
|
35.6
|
|
|
2022
|
33.8
|
|
|
2023
|
32.8
|
|
|
2024
|
25.7
|
|
|
Thereafter
|
122.9
|
|
|
Total remaining amortization for intangible assets
|
$
|
269.3
|
|
6. BORROWINGS
The following table summarizes the Company's total short-term borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
|
|
September 27, 2019
|
|
|
|
(In millions, except for percentages)
|
Amount
|
|
Weighted-Average Interest Rate
|
|
Amount
|
|
Weighted-Average Interest Rate
|
|
Short-term borrowings:
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
$
|
520.0
|
|
|
2.05
|
%
|
|
$
|
410.0
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
Total short-term borrowings
|
$
|
520.0
|
|
|
|
|
$
|
410.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On November 1, 2019, the Company entered into Amendment No.2 (the "Amendment") to its Credit Agreement dated April 3, 2018, (the "Credit Agreement"), by and among the Company, certain lenders party thereto, and Bank of America, N.A. (“BofA”), as administrative agent, swing line lender and letter of credit issuer. The Amendment extended the maturity date from April 2023 to November 2024. The Amendment reduced the aggregate principal amount available under Credit Agreement's five-year revolving credit facility (the "Revolving Credit Facility") from $1.8 billion to $1.2 billion, added a $500 million sub-limit for multi-currency borrowings, increased the letter of credit sub-limit from $50.0 million to $225 million, and reduced the commitment fee. In addition, there is a sub-limit for swing line loans of up to $25 million. Under the Revolving Credit Facility, the Company has the right to (i) request to increase the aggregate commitments by an aggregate amount for all such requests of up to $100.0 million and (ii) request an additional increase in the commitments or establish one or more term loans, provided that, in each case, the lenders are willing to provide such new or increased commitments and certain other conditions are met. The proceeds of the Revolving Credit Facility may be used for working capital, capital expenditures, Company share repurchases, permitted acquisitions and other corporate purposes.
Borrowings under the Revolving Credit Facility accrue interest based on either (i) the Eurodollar Rate plus a margin of 1.000% to 1.375% based on a net leverage ratio involving funded indebtedness and EBITDA, or (ii) a base rate of (a) the federal funds rate plus 0.50%, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus 1.00%, whichever is highest, plus a margin of 0.000% to 0.375% based on the same leverage ratio, depending upon instructions from the Company. Borrowings under the Eurodollar Rate have a contract repayment date of 12 months, or less. Borrowings under the base rate can be made on an overnight basis and have a final maturity of five years.
The Company must pay a commitment fee on the unused portion of the Revolving Credit Facility at a rate from 0.100% to 0.225% based on a net leverage ratio. The Company may prepay, reduce or terminate the commitments without penalty. Swing line loans under the Revolving Credit Facility will bear interest at the base rate plus the then applicable margin for base rate loans.
The Credit Agreement provides that certain material domestic subsidiaries must guarantee the Revolving Credit Facility, subject to certain limitations on the amount secured. As of April 3, 2020, no subsidiary guarantees were required to be executed under the Credit Agreement.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The Credit Agreement contains provisions that limit the Company's ability to, among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments and capital expenditures, sell stock or assets and pay dividends, and consummate certain mergers or acquisitions.
The Credit Agreement contains affirmative and negative covenants applicable to the Company and its subsidiaries that are typical for credit facilities of this type, and that are subject to materiality and other qualifications, carve-outs, baskets and exceptions. The Company agreed to maintain a financial covenant which requires a maximum consolidated net leverage ratio. The Company was in compliance with all financial covenants under the Credit Agreement for all periods within these condensed consolidated financial statements.
Other Borrowings
VMS’s Japanese subsidiary (“VMS KK”) has an unsecured uncommitted credit agreement with Sumitomo that enables VMS KK to borrow and have outstanding at any given time a maximum of 3.0 billion Japanese Yen (the “Sumitomo Credit Facility”). In February 2020, the Sumitomo Credit Facility was extended and will expire in February 2021. Borrowings under the Sumitomo Credit Facility accrue interest based on the basic loan rate announced by the Bank of Japan plus a margin of 0.5%. As of April 3, 2020, the Company did not have an outstanding principal balance on its Sumitomo Credit Facility.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company measures all derivatives at fair value on the Condensed Consolidated Balance Sheets. The accounting for gains or losses resulting from changes in the fair value of those derivatives depends upon the use of the derivative and whether it qualifies for hedge accounting.
The fair value of derivative instruments reported on the Company's Condensed Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3,
2020
|
|
September 27, 2019
|
|
|
|
(In millions)
|
Balance Sheet
Location
|
|
Fair Value
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
Prepaid expenses and other current assets
|
|
$
|
3.4
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
$
|
3.4
|
|
|
$
|
2.8
|
|
|
|
As of April 3, 2020, and September 27, 2019, the Company did not have any derivatives not designated as hedging instruments.
Cash Flow Hedging Activities
The Company had the following outstanding foreign currency forward contracts that were entered into to hedge forecasted revenues and designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
September 27, 2019
|
|
|
|
|
(In millions)
|
Notional Value Sold
|
|
|
|
|
|
|
Euro
|
$
|
45.7
|
|
|
$
|
76.5
|
|
|
|
|
|
Japanese Yen
|
30.4
|
|
|
56.7
|
|
|
|
|
|
|
$
|
76.1
|
|
|
$
|
133.2
|
|
|
|
|
The following table presents the amounts, before tax, recognized in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain Recognized in Other Comprehensive Earnings (Loss)
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
April 3, 2020
|
|
March 29, 2019
|
|
April 3, 2020
|
|
March 29, 2019
|
|
Foreign currency forward contracts
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
2.6
|
|
|
$
|
—
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
As of April 3, 2020, the net unrealized gain on derivatives, before tax, of $3.4 million was included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets and is expected to be reclassified into net earnings over the next 12 months.
The effect of cash flow hedge accounting on the Condensed Consolidated Statements of Earnings was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location and Amount Recognized in Earnings on Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
April 3, 2020
|
|
|
|
April 3, 2020
|
|
|
|
(In millions)
|
Revenues
|
|
|
|
Revenues
|
|
|
|
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings in which the effects of fair value and cash flow hedges are recorded
|
$
|
794.5
|
|
|
|
|
$
|
1,623.4
|
|
|
|
|
Gain on cash flow hedge relationships:
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from accumulated other comprehensive loss into net earnings
|
$
|
1.1
|
|
|
|
|
$
|
1.9
|
|
|
|
The Company did not have any gains or losses reclassified from accumulated other comprehensive loss into net earnings in the three and six months ended March 29, 2019.
Balance Sheet Hedging Activities
The Company also hedges balance sheet exposures from its various subsidiaries and business units where the U.S. Dollar is the functional currency. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in other income, net in the Condensed Consolidated Statements of Earnings. Changes in the values of these hedging instruments are offset by changes in the values of foreign-currency-denominated assets and liabilities.
The notional amount of the Company's outstanding foreign currency forward contracts relating to balance sheet hedging activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
April 3,
2020
|
|
September 27,
2019
|
|
|
Notional value sold
|
$
|
382.8
|
|
|
$
|
385.0
|
|
|
|
Notional value purchased
|
$
|
105.9
|
|
|
$
|
52.3
|
|
|
The following table presents the gains recognized in the Condensed Consolidated Statements of Earnings related to the foreign currency forward contracts that are not designated as hedging instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain Recognized in Net Earnings on Derivative Instruments
|
|
Amount of Gain Recognized in Net Earnings on Derivative Instruments
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Other income (expense), net
|
|
$
|
23.2
|
|
|
$
|
3.6
|
|
|
$
|
18.2
|
|
|
$
|
6.4
|
|
The gains (losses) on these derivative instruments were significantly offset by the gains (losses) resulting from the re-measurement of monetary assets and liabilities denominated in currencies other than the U.S. Dollar functional currency.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
8. COMMITMENTS AND CONTINGENCIES
Product Warranty
The following table reflects the changes in the Company’s accrued product warranty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
April 3,
2020
|
|
March 29,
2019
|
|
Accrued product warranty, at beginning of period
|
$
|
43.1
|
|
|
$
|
44.8
|
|
|
Charged to cost of revenues
|
33.4
|
|
|
27.7
|
|
|
Actual product warranty expenditures
|
(33.3)
|
|
|
(25.7)
|
|
|
Accrued product warranty, at end of period
|
$
|
43.2
|
|
|
$
|
46.8
|
|
Accrued product warranty was included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.
Leases
The Company leases its facilities and certain equipment under operating leases. The Company's operating leases have remaining lease terms ranging from less than one year to 21 years. Facilities primarily include general and administrative office space, and space for manufacturing, research and development, and other services. Equipment primarily includes vehicles and various office equipment. The Company's finance leases primarily relate to its sale and leaseback-subleases arrangements for certain equipment and have a remaining lease terms ranging from one year to 7 years.
Lease cost for operating leases is recognized on a straight-line basis over the lease term. Lease cost for finance leases is recognized as amortization of the finance lease ROU asset and interest expense on the finance lease liability over the lease term. The Company also has variable lease cost that primarily relate to its operating leases and include common area maintenance, utilities, maintenance charges, property taxes, insurance, and contingent rent.
The following table summarizes the components of the Company's lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(In millions)
|
April 3, 2020
|
|
April 3, 2020
|
|
|
|
|
|
|
Operating lease cost
|
$
|
7.6
|
|
|
$
|
15.4
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
0.2
|
|
0.3
|
|
Interest on lease liabilities
|
0.2
|
|
0.3
|
|
|
|
|
|
|
Variable lease cost
|
4.2
|
|
8.7
|
|
|
Total lease cost
|
$
|
12.2
|
|
|
$
|
24.7
|
|
The following table summarizes the supplemental cash flow information related to the Company's operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
(In millions)
|
|
April 3, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for leases
|
|
$
|
16.6
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The following table summarizes supplemental balance sheet information related to the Company's operating and finance leases:
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
April 3, 2020
|
|
Operating leases:
|
|
|
|
Operating right-of-use assets
|
|
$
|
123.8
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
24.4
|
|
|
Long-term lease liabilities
|
|
100.4
|
|
|
Total lease liabilities
|
|
$
|
124.8
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
12.8
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
3.5
|
|
|
Other long-term liabilities
|
|
9.2
|
|
|
Total lease liabilities
|
|
$
|
12.7
|
|
The following table summarizes the weighted lease term and discount rate by operating and finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
Weighted average remaining lease term in years
|
|
|
|
Operating leases
|
|
7.5
|
|
Finance leases
|
|
4.6
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
|
5.0
|
%
|
|
Finance leases
|
|
4.0
|
%
|
As of April 3, 2020, the future minimum lease payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Operating Leases
|
|
Finance leases
|
|
Remainder of 2020
|
$
|
15.0
|
|
|
$
|
1.8
|
|
|
2021
|
28.0
|
|
|
3.3
|
|
|
2022
|
22.4
|
|
|
2.8
|
|
|
2023
|
17.6
|
|
|
2.8
|
|
|
2024
|
13.3
|
|
|
1.1
|
|
|
Thereafter
|
63.6
|
|
|
2.0
|
|
|
Total minimum lease payments
|
$
|
159.9
|
|
|
$
|
13.8
|
|
|
Less: imputed interest
|
35.1
|
|
|
1.1
|
|
|
Total lease liability
|
$
|
124.8
|
|
|
$
|
12.7
|
|
At September 27, 2019, the Company was committed to minimum rentals under non-cancellable operating leases (including rent escalation clauses) for fiscal years 2020 through 2024 and thereafter, as determined under the prior accounting guidance of Accounting Standard Codification 840, as follows: $32.5 million, $26.3 million, $20.2 million, $14.5 million, $10.9 million and $49.9 million, respectively.
Lessor Arrangements
The Company leases some of its equipment to certain customers on operating leases generally over a period of 15 years. As of April 3, 2020, the Company had $23.5 million and $7.5 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment leased to customers. As of September 27, 2019, the Company had $22.5 million and $5.5 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment leased to customers. The Company recorded income of $2.1 million and $4.6 million during the three months and six months
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
ended April 3, 2020, respectively, on these equipment leases. The Company recorded income of $2.1 million and $4.2 million during the three and six months ended March 29, 2019, respectively, on these equipment leases.
Contingencies
Environmental Remediation Liabilities
The Company’s operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities on the Company in connection with its past and present operations. Those include facilities sold as part of the Company’s electron devices business in 1995 and thin film systems business in 1997. As a result, the Company oversees various environmental cleanup projects and receives reimbursements from third parties for a portion of the costs of its cleanup activities.
As of April 3, 2020, and September 27, 2019, the Company had accrued $4.5 million and $4.8 million, respectively, net of third parties' indemnification obligations, for environmental remediation liabilities. The Company believes its reserve is adequate; however, as the scope of the Company’s obligations becomes more clearly defined, the Company may modify the reserve, and charge or credit future earnings accordingly. Based on information currently known to management, management believes the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company in any one fiscal year.
The Company also reimburses certain third parties for cleanup activities. The amount the Company spent on environmental cleanup costs, third-party claim costs, project management costs and legal costs in the six months April 3, 2020, and March 29, 2019, was not material.
Other Matters
On October 16, 2018, Best Medical International, Inc. sued the Company in U.S. District Court in the District of Delaware, alleging infringement of four patents related to treatment planning. The Company intends to defend the suit vigorously. This lawsuit is in the initial stages, and at this time, the Company is unable to predict the ultimate outcome of this matter or estimate a range of possible exposure. Therefore, no amounts have been accrued as of April 3, 2020.
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated, or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision.
In addition to the above, the Company is involved in other legal matters. However, such matters are subject to many uncertainties, and outcomes are not predictable with assurance. The Company is unable to estimate a loss or a range of reasonably possible losses with respect to such matters. There can be no assurances as to whether the Company will become subject to significant additional claims and liabilities with respect to ongoing or future proceedings. If actual liabilities significantly exceed the estimates made, the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected. Legal expenses relating to legal matters are expensed as incurred.
9. RETIREMENT PLANS
The Company sponsors multiple defined benefit pension plans for regular full-time employees in Germany, Japan, Switzerland and the United Kingdom. The Company also sponsors a post-retirement benefit plan that provides healthcare benefits to certain eligible retirees in the United States.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The components of net periodic benefit costs were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2.6
|
|
|
$
|
1.8
|
|
|
$
|
5.1
|
|
|
$
|
3.6
|
|
|
Interest cost
|
0.5
|
|
|
1.0
|
|
|
1.0
|
|
|
1.9
|
|
|
Expected return on plan assets
|
(2.0)
|
|
|
(1.6)
|
|
|
(3.9)
|
|
|
(3.2)
|
|
|
Amortization of prior service cost
|
(0.2)
|
|
|
(0.2)
|
|
|
(0.4)
|
|
|
(0.4)
|
|
|
Recognized actuarial loss
|
1.1
|
|
|
0.5
|
|
|
2.2
|
|
|
1.1
|
|
|
Net periodic benefit cost
|
$
|
2.0
|
|
|
$
|
1.5
|
|
|
$
|
4.0
|
|
|
$
|
3.0
|
|
10. INCOME TAXES
The Company’s effective tax rate was 18.5% and 21.7% for the three months ended April 3, 2020, and March 29, 2019, respectively, and 20.2% and 23.2% for the six months ended April 3, 2020, and March 29, 2019. The Company’s effective tax rate was lower for the three months ended April 3, 2020, as compared to the year-ago period, primarily because earnings in the current period included the release of $8.2 million of contingent consideration related to the Company's acquisition of CTSI that resulted in no tax charge. The Company's effective tax rate was lower for the six month period ended April 3, 2020, as compared to the year-ago period, primarily because the prior period included the tax effect of a change in law due to the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.
The Company’s effective income tax rate differs from the U.S. federal statutory rate primarily because the Company’s foreign earnings are taxed at rates that are, on average, lower than the U.S. federal rate, and because the Company’s domestic earnings are subject to state income taxes. The total amount of unrecognized tax benefits did not materially change during the six months ended April 3, 2020; however, the amount of unrecognized tax benefits has increased as a result of positions taken during the current and prior years and has decreased as the result of the expiration of the statutes of limitation in various jurisdictions.
11. STOCKHOLDERS’ EQUITY
Share Repurchase Program
In November 2016, the VMS Board of Directors authorized the repurchase of an additional 8.0 million shares of VMS common stock commencing on January 1, 2017. Share repurchases under the Company's authorizations may be made in open market purchases, in privately negotiated transactions (including accelerated share repurchase programs), or under Rule 10b5-1 share repurchase plans, and may be made from time to time in one or more blocks. All shares that were repurchased under the Company's share repurchase programs have been retired. As of April 3, 2020, approximately 1.6 million shares of VMS common stock remained available for repurchase under the November 2016 authorization. At the beginning of the third quarter of fiscal year 2020, as a precautionary measure due to the COVID-19 pandemic, the Company has paused its share repurchase program.
The Company repurchased shares of VMS common stock during the periods presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions, except per share amounts)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Number of shares
|
0.3
|
|
|
0.4
|
|
|
0.6
|
|
|
0.7
|
|
|
Average repurchase price per share
|
$
|
126.01
|
|
|
$
|
120.89
|
|
|
$
|
133.02
|
|
|
$
|
115.71
|
|
|
Total cost of shares repurchased
|
$
|
39.8
|
|
|
$
|
50.8
|
|
|
$
|
86.2
|
|
|
$
|
85.6
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Accumulated Other Comprehensive Loss
The changes in accumulated other comprehensive loss by component and related tax effects are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net Unrealized Gains
(Losses) Defined
Benefit Pension and
Post-Retirement
Benefit Plans
|
|
Net
Unrealized
Gains (Losses)
Cash Flow
Hedging
Instruments
|
|
|
|
Cumulative
Translation
Adjustment
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Balance at September 27, 2019
|
$
|
(61.7)
|
|
|
$
|
2.1
|
|
|
|
|
$
|
(42.5)
|
|
|
$
|
(102.1)
|
|
|
Other comprehensive earnings (loss) before reclassifications
|
—
|
|
|
2.6
|
|
|
|
|
(1.7)
|
|
|
0.9
|
|
|
Amounts reclassified out of other comprehensive earnings (loss)
|
1.7
|
|
|
(1.9)
|
|
|
|
|
—
|
|
|
(0.2)
|
|
|
Tax expense
|
(0.2)
|
|
|
(0.2)
|
|
|
|
|
—
|
|
|
(0.4)
|
|
|
Balance at April 3, 2020
|
$
|
(60.2)
|
|
|
$
|
2.6
|
|
|
|
|
$
|
(44.2)
|
|
|
$
|
(101.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net Unrealized Gains
(Losses) Defined
Benefit Pension and
Post-Retirement
Benefit Plans
|
|
|
|
|
|
Cumulative
Translation
Adjustment
|
|
Accumulated
Other
Comprehensive Loss
|
|
Balance at September 28, 2018
|
$
|
(35.2)
|
|
|
|
|
|
|
$
|
(30.1)
|
|
|
$
|
(65.3)
|
|
|
Other comprehensive earnings (loss) before reclassifications
|
—
|
|
|
|
|
|
|
(7.1)
|
|
|
(7.1)
|
|
|
Amounts reclassified out of other comprehensive earnings (loss)
|
0.7
|
|
|
|
|
|
|
—
|
|
|
0.7
|
|
|
Tax expense
|
(0.1)
|
|
|
|
|
|
|
—
|
|
|
(0.1)
|
|
|
Balance at March 29, 2019
|
$
|
(34.6)
|
|
|
|
|
|
|
$
|
(37.2)
|
|
|
$
|
(71.8)
|
|
The amounts reclassified, before taxes, out of other comprehensive earnings (loss) into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
Other Comprehensive Earnings (Loss) Components
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Line Item in Statements of Earnings
|
|
Unrealized loss on defined benefit pension and post-retirement benefit plans
|
$
|
(0.8)
|
|
|
$
|
(0.3)
|
|
|
$
|
(1.7)
|
|
|
$
|
(0.7)
|
|
|
Other income (expense), net
|
|
Unrealized earnings on cash flow hedging instruments
|
1.1
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
Revenues
|
|
Total amounts reclassified out of other comprehensive earnings (loss)
|
$
|
0.3
|
|
|
$
|
(0.3)
|
|
|
$
|
0.2
|
|
|
$
|
(0.7)
|
|
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
12. EMPLOYEE STOCK PLANS
The table below summarizes the share-based compensation expense recognized for employee stock awards and employee stock purchase plan shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Cost of revenues - Product
|
$
|
0.9
|
|
|
$
|
0.8
|
|
|
$
|
1.7
|
|
|
$
|
1.5
|
|
|
Cost of revenues - Service
|
1.2
|
|
|
1.0
|
|
|
2.5
|
|
|
2.1
|
|
|
Research and development
|
1.5
|
|
|
1.1
|
|
|
2.7
|
|
|
2.2
|
|
|
Selling, general and administrative
|
7.7
|
|
|
9.6
|
|
|
19.3
|
|
|
17.2
|
|
|
Total share-based compensation expense
|
$
|
11.3
|
|
|
$
|
12.5
|
|
|
$
|
26.2
|
|
|
$
|
23.0
|
|
|
Income tax benefit for share-based compensation
|
$
|
(2.1)
|
|
|
$
|
(2.2)
|
|
|
$
|
(5.0)
|
|
|
$
|
(4.5)
|
|
The fair value of stock options and performance stock options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Employee Stock Option Plans
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
3.73
|
|
3.76
|
|
3.74
|
|
3.76
|
|
Risk-free interest rate
|
1.4
|
%
|
|
2.5
|
%
|
|
1.5
|
%
|
|
2.6
|
%
|
|
Expected volatility
|
23.5
|
%
|
|
23.6
|
%
|
|
24.6
|
%
|
|
23.1
|
%
|
|
Expected dividend
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Weighted average fair value at grant date (1)
|
$
|
29.74
|
|
|
$
|
29.16
|
|
|
$
|
29.60
|
|
|
$
|
27.85
|
|
(1)Excludes the fair value of the market condition based on relative total shareholder return for the performance stock options granted during the period.
The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
|
|
0.50
|
|
0.50
|
|
Risk-free interest rate
|
|
|
|
|
1.6
|
%
|
|
2.5
|
%
|
|
Expected volatility
|
|
|
|
|
26.4
|
%
|
|
18.6
|
%
|
|
Expected dividend
|
|
|
|
|
—
|
%
|
|
—
|
%
|
|
Weighted average fair value at grant date
|
|
|
|
|
$
|
27.58
|
|
|
$
|
22.82
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The activity for stock options and performance stock options is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Number of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Term (in years)
|
|
Aggregate
Intrinsic
Value (1)
|
|
Balance at September 27, 2019
|
2.2
|
|
|
$
|
97.66
|
|
|
|
|
|
|
Granted
|
0.4
|
|
|
140.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
—
|
|
|
116.25
|
|
|
|
|
|
|
Exercised
|
(0.3)
|
|
|
80.34
|
|
|
|
|
|
|
Balance at April 3, 2020
|
2.3
|
|
|
$
|
106.81
|
|
|
4.6
|
|
$
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 3, 2020
|
1.1
|
|
|
$
|
88.41
|
|
|
3.4
|
|
$
|
15.9
|
|
(1)The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of VMS common stock of $96.35 as of April 3, 2020, the last trading date of the second quarter of fiscal year 2020, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date.
As of April 3, 2020, there was $23.3 million of total unrecognized compensation expense related to stock options and performance stock options granted under the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.1 years.
As of April 3, 2020, there was $0.3 million of total unrecognized compensation expense related to cash-settled stock appreciation rights granted outside the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.5 years.
The activity for restricted stock units, deferred stock units and performance units is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Number of
Shares
|
|
Weighted Average
Grant-Date Fair
Value
|
|
Balance at September 27, 2019
|
0.7
|
|
|
$
|
108.35
|
|
|
Granted
|
0.3
|
|
|
145.08
|
|
|
|
|
|
|
|
Vested
|
(0.3)
|
|
|
100.04
|
|
|
Cancelled or expired
|
—
|
|
|
120.64
|
|
|
Balance at April 3, 2020
|
0.7
|
|
|
$
|
130.83
|
|
As of April 3, 2020, unrecognized compensation expense totaling $64.9 million was related to awards of restricted stock units, deferred stock units and performance units granted under the Company's employee stock plans. This unrecognized share-based compensation expense is expected to be recognized over a weighted average period of 2.1 years.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions, except per share amounts)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Net earnings
|
$
|
43.1
|
|
|
$
|
88.4
|
|
|
$
|
132.0
|
|
|
$
|
192.3
|
|
|
Less: Net earnings (loss) attributable to noncontrolling interests
|
(0.1)
|
|
|
(0.2)
|
|
|
0.6
|
|
|
0.5
|
|
|
Net earnings attributable to Varian
|
$
|
43.2
|
|
|
$
|
88.6
|
|
|
$
|
131.4
|
|
|
$
|
191.8
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
90.7
|
|
|
91.0
|
|
|
90.8
|
|
|
91.0
|
|
|
Dilutive effect of potential common shares
|
0.7
|
|
|
0.9
|
|
|
0.8
|
|
|
1.0
|
|
|
Weighted average shares outstanding - diluted
|
91.4
|
|
|
91.9
|
|
|
91.6
|
|
|
92.0
|
|
|
Net earnings per share attributable to Varian - basic
|
$
|
0.48
|
|
|
$
|
0.97
|
|
|
$
|
1.45
|
|
|
$
|
2.11
|
|
|
Net earnings per share attributable to Varian - diluted
|
$
|
0.47
|
|
|
$
|
0.96
|
|
|
$
|
1.43
|
|
|
$
|
2.09
|
|
|
Anti-dilutive employee share-based awards, excluded
|
1.1
|
|
|
0.5
|
|
|
1.1
|
|
|
1.0
|
|
14. PROTON SOLUTIONS LOANS AND INVESTMENTS
In limited cases, the Company participates, along with other investors and at market terms, in the financing of proton therapy centers. Over time, the Company has divested some of its investments, including investments in CPTC, the New York Proton Center ("NYPC"), the Georgia Proton Treatment Center and the Delray Radiation Therapy Center.
The following table lists the Company's notes receivable, including accrued interest, senior secured debt, available-for-sale securities, loans outstanding and future commitments for funding the development, construction and operation of various proton therapy centers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2020
|
|
|
|
September 27, 2019
|
|
|
|
(In millions)
|
|
Balance
|
|
Commitment
|
|
Balance
|
|
Commitment
|
|
Notes Receivable and Secured Debt: (1)
|
|
|
|
|
|
|
|
|
|
NYPC loan
|
|
$
|
33.1
|
|
|
$
|
—
|
|
|
$
|
31.8
|
|
|
$
|
—
|
|
|
RPTC senior secured debt
|
|
23.2
|
|
|
—
|
|
|
23.5
|
|
|
—
|
|
|
Proton International LLC loan
|
|
1.8
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
|
|
$
|
58.1
|
|
|
$
|
—
|
|
|
$
|
57.1
|
|
|
$
|
—
|
|
|
Available-For-Sale Securities: (1)
|
|
|
|
|
|
|
|
|
|
MPTC Series B-1 Bonds
|
|
|
$
|
28.1
|
|
|
$
|
—
|
|
|
$
|
27.1
|
|
|
$
|
—
|
|
|
MPTC Series B-2 Bonds
|
|
|
26.2
|
|
|
—
|
|
|
25.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
APTC securities
|
|
|
6.1
|
|
|
—
|
|
|
6.6
|
|
|
—
|
|
|
|
|
$
|
60.4
|
|
|
$
|
—
|
|
|
$
|
58.8
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
CPTC Loans:
|
|
|
|
|
|
|
|
|
|
Short-term revolving loan (2)
|
|
$
|
5.3
|
|
|
$
|
1.9
|
|
|
$
|
5.3
|
|
|
$
|
1.9
|
|
|
Term loan (3)
|
|
4.7
|
|
|
—
|
|
|
45.2
|
|
|
—
|
|
|
|
|
$
|
10.0
|
|
|
$
|
1.9
|
|
|
$
|
50.5
|
|
|
$
|
1.9
|
|
(1)Included in other assets at April 3, 2020 and September 27, 2019 on the Company's Condensed Consolidated Balance Sheets, except for amounts related to short-term interest receivable.
(2)Included in prepaid and other current assets on the Company's Condensed Consolidated Balance Sheets.
(3)Included in prepaid and other current assets at April 3, 2020 and other assets at September 27, 2019 on the Company's Condensed Consolidated Balance Sheets.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Alabama Proton Therapy Center ("APTC") Securities
In December 2017, the Company purchased $6.0 million in Subordinate Revenue Bonds, which financed the APTC. The Subordinate Revenue Bonds carry an interest rate of 8.5% and pay interest semi-annually. The Company is scheduled to start receiving annual principal payments on the Subordinate Revenue Bonds beginning on November 1, 2022. The Subordinate Revenue Bonds will mature on October 1, 2047.
At April 3, 2020 and September 27, 2019, the Company had $6.4 and $2.1 million in trade and unbilled receivables, respectively, which included $5.8 million and $2.1 million, in long-term unbilled receivables, respectively, from APTC.
Rinecker Proton Therapy Center ("RPTC") Senior Secured Debt
In July 2017, the Company purchased the outstanding senior secured debt related to the RPTC in Munich, Germany for €21.5 million or $24.5 million. By purchasing the senior secured debt, the Company has a right to approximately 77 million Euros in claims against all of RPTC's assets. In September 2017, the management of RPTC filed for bankruptcy in Germany. In January 2018, the final insolvency proceedings commenced, and in December 2019 the center closed for clinical operations and decommissioning began. Upon finalization of bankruptcy proceedings, the Company believes it is probable it will recover the outstanding senior secured debt balance and trade accounts receivable, net. The Company classified its senior secured debt as long-term other assets because it expects the bankruptcy proceedings to be complete in greater than one year.
At April 3, 2020 and September 27, 2019, the Company had $4.2 million and $4.6 million, respectively, in long-term trade receivables, net, from RPTC, which does not include any unbilled receivables.
New York Proton Center ("NYPC") Loan
In July 2015, the Company committed to loan up to $91.5 million to MM Proton I, LLC, the project developer of the NYPC. In June 2016, the Company assigned $73.0 million of this loan to Deutsche Bank AG. The remaining balance is comprised of an $18.5 million “Subordinate Loan” with a six-and-a-half-year term at up to 13.5% interest. In December 2019, the interest rate on the loan was reduced to 10%, effective May 1, 2019. As of April 3, 2020, the Subordinate Loan is $33.1 million, including accrued interest. The principal balance and accrued interest on the Subordinate Loan are due in full at maturity in January 2022.
At April 3, 2020 and September 27, 2019, the Company had $19.1 million and $16.6 million, respectively, in trade and unbilled receivables, which included $6.5 million and $6.0 million in unbilled receivables, respectively, from NYPC.
Maryland Proton Treatment Center ("MPTC") Securities
The Company has Subordinate Revenue Bonds ("MPTC Series B-2 Bonds") that carry an interest rate of 8.5% per annum with interest accruing up to the MPTC Series B-2 Bonds face amount of $33.9 million until January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-2 Bonds will mature on January 1, 2049. The Company also has Subordinate Revenue Bonds ("MPTC Series B-1 Bonds") that carry an interest rate of 7.5% with interest accruing up to the MPTC Series B-1 Bonds face amount of $32.0 million on January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-1 Bonds will mature on January 1, 2048. The MPTC Series B-1 Bonds are senior in right and time to the MPTC Series B-2 Bonds.
At April 3, 2020 and September 27, 2019, the Company had zero net trade and unbilled receivables from MPTC.
Variable Interest Entities
The Company has determined that MM Proton I, LLC and RPTC are variable interest entities and that the Company holds a significant variable interest of each of the entities through its participation in the loan facilities and its agreements to supply and service the proton therapy equipment. The Company has concluded that it is not the primary beneficiary of any of these entities. The Company has no voting rights, has no approval authority or veto rights for these centers' budget, and does not have the power to direct patient recruitment, clinical operations and management of these Centers, which the Company believes are the matters that most significantly affect their economic performance. The Company’s exposure to loss as a result of its
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
involvement with MM Proton I, LLC and RPTC is limited to the carrying amounts of the above-mentioned assets on its Condensed Consolidated Balance Sheets.
California Proton Therapy Center ("CPTC") Loans
Between September 2011 and November 2015, the Company, ORIX and J.P. Morgan (the "Lenders”) funded loans (“Original CPTC Loans”) to the Scripps Proton Therapy Center in San Diego, California. ORIX is the loan agent.
In March 2017, California Proton Treatment Center, LLC ("Original CPTC") filed for bankruptcy and concurrently entered into a Debtor-in-Possession Facility (the "DIP Facility") with the Lenders where the Company's pro-rata share of the DIP Facility was $7.3 million. In September 2017, the Lenders and Scripps signed a Transition Agreement to transition the operations of the center from Scripps to Proton Doctors Professional Corporation. As a result of these events, the Company recorded an impairment charge of $51.4 million to its Original CPTC Loans in fiscal year 2017.
Pursuant to an order of the Bankruptcy Court, the California Proton Treatment Center ("Original CPTC") conducted an auction of the Scripps Proton Therapy Center. On December 6, 2017 (“Closing Date”), the Bankruptcy Court approved the sale of Scripps Proton Therapy Center to California Proton Therapy Center, LLC (“CPTC”), an entity owned by the Lenders. The Lenders purchased all assets and assumed $112.0 million of Original CPTC’s outstanding liabilities. On December 13, 2017, the Bankruptcy Court dismissed the bankruptcy filing of Original CPTC.
On the Closing Date, the Lenders entered into a Credit Agreement with Original CPTC of which the terms of the Original CPTC Loans, DIP Facility and accrued interest (collectively “Former Loans”) have been modified. In addition to the partially satisfied Original CPTC Loans reinstated by the Bankruptcy Court, the Company received a 47.08% equity ownership in CPTC, which it sold for a nominal amount in March 2019. Original CPTC has assigned all its Former Loans to CPTC at an amount of $112.0 million, the partially satisfied loan balance. Per the terms of the Credit Agreement, the Company's portion of the $112.0 million is $53.5 million; the remainder is allocated between ORIX and J.P. Morgan. The $53.5 million is composed of four tranches: Tranche A of $2.0 million, Tranche B of $7.2 million, Tranche C of $15.6 million, and Tranche D of $28.7 million (collectively, the "Term Loan"). The maturity date of the Term Loan is three years from the Closing Date. The Term Loan is secured by the assets of CPTC.
In addition, the Lenders have committed to lend up to $15.0 million in a Revolving Loan with a maturity date of one year from the Closing Date. In the first quarters of fiscal 2019, fiscal 2020 and subsequent to the end of the first quarter of fiscal 2020, as provided in the initial agreement, the Lenders have granted extensions to the term of the Revolving Loan with a current maturity of June 30, 2020. The Company's share of the funding commitment from the Revolving Loan is $7.2 million, and as of April 3, 2020, the Company has funded $5.3 million. Subsequent to quarter end, the balance of the Revolving Loan was funded.
All of the tranches accrue paid-in-kind interest at 7.5% per annum, except the Tranche B and the Revolving Loan, which accrue paid-in-kind interest at 10% per annum. The seniority of these loans is as follows: Revolving Loan, Tranche A, Tranche B, Tranche C and Tranche D. If CPTC is in default, the interest rate of the Tranche A, C and D will increase to 9.5% and the interest rate on the Tranche B and the Revolving Loan will increase to 12.0%.
Primarily as a result of the COVID-19 pandemic, during March and April 2020, CPTC suffered material negative impacts to its operating plan, including declines in current and projected patient volume and delays in partnership with a significant clinical partner. Therefore, the Company concluded it was no longer probable that it will collect the amounts owed under the Term Loan and Revolving Loan (collectively "CPTC Loans") when due and recorded a $40.5 million impairment charge to its CPTC Loans using the probability weighted expected return model, utilizing management's assumptions of different outcomes, in the Condensed Consolidated Statements of Earnings in the second quarter of fiscal year 2020. As a result of this impairment charge, the CPTC Loans were written down to their estimated fair value of $10.0 million.
At April 3, 2020, and September 27, 2019, the Company had $2.9 million and $2.6 million, respectively, in trade receivables, net, from CPTC.
Further, the Company has determined that CPTC is a variable interest entity because of the Company's participation in the loan facilities, and its operations and maintenance agreement. The Company has no special approval authority or veto rights for CPTC’s budget and does not have the power to direct patient recruitment, clinical operations and management of CPTC, which the Company believes are the matters that most significantly affect their economic performance. Therefore, the Company does not have majority voting rights and no power to direct activities at CPTC, and as a result it is not the primary beneficiary of CPTC.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
15. SEGMENT INFORMATION
The Company has two reportable operating segments: Oncology Systems and Proton Solutions. The Company's Interventional Solutions business is reflected in the "Other" category because it does not meet the criteria for a reportable operating segment. The operating segments were determined based on how the Company’s Chief Executive Officer, its Chief Operating Decision Maker (“CODM”), views and evaluates the Company’s operations. The CODM allocates resources to, and evaluates the financial performance of each operating segment primarily based on operating earnings.
Description of Segments
The Oncology Systems segment designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiation therapy, and advanced treatments such as fixed field intensity-modulated radiation therapy (“IMRT”), image-guided radiation therapy (“IGRT”), volumetric modulated arc therapy ("VMAT"), stereotactic radiosurgery (“SRS”), stereotactic body radiotherapy (“SBRT”) and brachytherapy as well as associated quality assurance equipment.
The Oncology Systems’ hardware products include linear accelerators, brachytherapy afterloaders, treatment accessories, artificial intelligence-powered adaptive delivery systems and quality assurance software. The Oncology Systems’ software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices.
Oncology Systems’ products enable radiation oncology departments in hospitals and clinics to perform conventional radiotherapy treatments and offer advanced treatments such as IMRT, IGRT, VMAT, SRS and SBRT, and treat patients using brachytherapy techniques, which involve the introduction or temporary insertion of radioactive sources. The Oncology Systems' products are also used by surgeons and radiation oncologists to perform stereotactic radiosurgery and by medical oncology departments to manage patient treatments. Oncology Systems’ customers worldwide include university research and community hospitals, private and governmental institutions, healthcare agencies, physicians’ offices, medical oncology practices, radiotherapy centers and cancer care clinics.
The Oncology Systems segment offers services ranging from hardware phone support, break/fix repair of linear accelerators, obsolescence protection of hardware, software support, software upgrades, hosting as a service, as well as clinical consulting services.
The Oncology Systems segment also provides clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed at facilitating improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, the Company operates 12 multi-disciplinary cancer centers and one specialty hospital in India and one multi-disciplinary cancer center in Sri Lanka.
The Proton Solutions segment develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams, for the treatment of cancer.
The Other category primarily includes the Interventional Solutions business, which offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolization. Interventional Solutions also provides software and remote services for post treatment dose calculation for Yttrium-90 microspheres used in selective internal radiation therapy. The Other category also includes assets related to the use of radiation in the heart and other forms of radiosurgery for cardiovascular disease.
The following information is provided for the purpose 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.
The Company allocates corporate costs to its operating segments based on the relative revenues of Oncology Systems, Proton Solutions and Interventional Solutions. The Company allocates these costs, excluding certain corporate related costs, transactions or adjustments that the Company's CODM considers to be non-operational, such as restructuring and impairment charges, significant litigation charges or benefits and legal costs, and acquisition-related expenses and in process research and development. Although the Company excludes these amounts from segment operating earnings, they are included in the condensed consolidated operating earnings and included in the reconciliation below.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
The following table summarizes select financial results for each reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
(In millions)
|
April 3,
2020
|
|
March 29,
2019
|
|
April 3,
2020
|
|
March 29,
2019
|
|
Revenues
|
|
|
|
|
|
|
|
|
Oncology Systems
|
$
|
760.5
|
|
|
$
|
746.8
|
|
|
$
|
1,542.9
|
|
|
$
|
1,449.3
|
|
|
Proton Solutions
|
22.3
|
|
|
32.6
|
|
|
49.9
|
|
|
71.1
|
|
|
Total reportable segments
|
782.8
|
|
|
779.4
|
|
|
1,592.8
|
|
|
1,520.4
|
|
|
Other
|
11.7
|
|
|
—
|
|
|
30.6
|
|
|
—
|
|
|
Total Company
|
$
|
794.5
|
|
|
$
|
779.4
|
|
|
$
|
1,623.4
|
|
|
$
|
1,520.4
|
|
|
Earnings before taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
$
|
110.9
|
|
|
$
|
131.7
|
|
|
$
|
247.3
|
|
|
$
|
255.8
|
|
|
Proton Solutions
|
(14.3)
|
|
|
(20.0)
|
|
|
(28.6)
|
|
|
(28.8)
|
|
|
Total reportable segments
|
96.6
|
|
|
111.7
|
|
|
218.7
|
|
|
227.0
|
|
|
Other
|
(2.3)
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
Unallocated corporate
|
(39.4)
|
|
|
(1.9)
|
|
|
(54.3)
|
|
|
(5.5)
|
|
|
Operating earnings
|
54.9
|
|
|
109.8
|
|
|
164.9
|
|
|
221.5
|
|
|
Interest income (expense), net
|
(1.2)
|
|
|
3.0
|
|
|
(2.9)
|
|
|
5.7
|
|
|
Other income (expense), net
|
(0.9)
|
|
|
0.2
|
|
|
3.5
|
|
|
23.2
|
|
|
Total Company
|
$
|
52.8
|
|
|
$
|
113.0
|
|
|
$
|
165.5
|
|
|
$
|
250.4
|
|
Disaggregation of Revenues
The Company disaggregates its revenues from contracts by major product categories, geographic region, and by timing of revenue recognition for each of its reportable operating segments, as the Company believes this best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. See details in the tables below.
Revenues by Product Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
Total Revenues by Product Type
|
April 3,
|
|
March 29,
|
|
April 3,
|
March 29,
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2020
|
2019
|
|
|
Hardware
|
|
|
|
|
|
|
|
|
Oncology Systems
|
$
|
316.1
|
|
|
$
|
339.1
|
|
|
$
|
636.1
|
|
$
|
652.7
|
|
|
|
Proton Solutions
|
13.1
|
|
|
27.9
|
|
|
33.2
|
|
61.5
|
|
|
|
Other
|
11.7
|
|
|
—
|
|
|
30.6
|
|
—
|
|
|
|
Total Hardware
|
340.9
|
|
|
367.0
|
|
|
699.9
|
|
714.2
|
|
|
|
Software (1)
|
|
|
|
|
|
|
|
|
Oncology Systems
|
153.2
|
|
|
144.2
|
|
|
302.0
|
|
275.4
|
|
|
|
Proton Solutions
|
1.5
|
|
|
—
|
|
|
1.5
|
|
—
|
|
|
|
Total Software
|
154.7
|
|
|
144.2
|
|
|
303.5
|
|
275.4
|
|
|
|
Service
|
|
|
|
|
|
|
|
|
Oncology Systems
|
291.2
|
|
|
263.5
|
|
|
604.8
|
|
521.2
|
|
|
|
Proton Solutions
|
7.7
|
|
|
4.7
|
|
|
15.2
|
|
9.6
|
|
|
|
Total Service
|
298.9
|
|
|
268.2
|
|
|
620.0
|
|
530.8
|
|
|
|
Total Revenues
|
$
|
794.5
|
|
|
$
|
779.4
|
|
|
$
|
1,623.4
|
|
$
|
1,520.4
|
|
|
(1) Includes software support agreements that are recorded in revenues from service, and software licenses that are recorded in revenues from product in the Condensed Consolidated Statements of Earnings.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Revenues by Geographical Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
Total Revenues by Geographical Region
|
|
April 3,
|
|
March 29,
|
|
April 3,
|
|
March 29,
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Americas
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
$
|
369.7
|
|
|
$
|
357.1
|
|
|
$
|
748.6
|
|
|
$
|
687.9
|
|
|
Proton Solutions
|
|
11.4
|
|
|
14.2
|
|
|
28.3
|
|
|
33.8
|
|
|
Other
|
|
6.8
|
|
|
—
|
|
|
13.2
|
|
|
—
|
|
|
Total Americas
|
|
387.9
|
|
|
371.3
|
|
|
790.1
|
|
|
721.7
|
|
|
EMEA
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
240.9
|
|
|
245.3
|
|
|
500.7
|
|
|
479.8
|
|
|
Proton Solutions
|
|
9.8
|
|
|
16.2
|
|
|
20.1
|
|
|
32.7
|
|
|
Other
|
|
0.2
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
|
Total EMEA
|
|
250.9
|
|
|
261.5
|
|
|
523.8
|
|
|
512.5
|
|
|
APAC
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
149.9
|
|
|
144.4
|
|
|
293.6
|
|
|
281.6
|
|
|
Proton Solutions
|
|
1.1
|
|
|
2.2
|
|
|
1.5
|
|
|
4.6
|
|
|
Other
|
|
4.7
|
|
|
—
|
|
|
14.4
|
|
|
—
|
|
|
Total APAC
|
|
155.7
|
|
|
146.6
|
|
|
309.5
|
|
|
286.2
|
|
|
Total Revenues
|
|
$
|
794.5
|
|
|
$
|
779.4
|
|
|
$
|
1,623.4
|
|
|
$
|
1,520.4
|
|
|
North America (1)
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
$
|
343.9
|
|
|
$
|
329.2
|
|
|
$
|
699.2
|
|
|
$
|
638.3
|
|
|
Proton Solutions
|
|
11.5
|
|
|
14.2
|
|
|
28.3
|
|
|
33.8
|
|
|
Other
|
|
6.8
|
|
|
—
|
|
|
13.2
|
|
|
—
|
|
|
Total North America
|
|
362.2
|
|
|
343.4
|
|
|
740.7
|
|
|
672.1
|
|
|
International
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
416.6
|
|
|
417.6
|
|
|
843.7
|
|
|
811.0
|
|
|
Proton Solutions
|
|
10.8
|
|
|
18.4
|
|
|
21.6
|
|
|
37.3
|
|
|
Other
|
|
4.9
|
|
|
—
|
|
|
17.4
|
|
|
—
|
|
|
Total International
|
|
432.3
|
|
|
436.0
|
|
|
882.7
|
|
|
848.3
|
|
|
Total Revenues
|
|
$
|
794.5
|
|
|
$
|
779.4
|
|
|
$
|
1,623.4
|
|
|
$
|
1,520.4
|
|
(1)North America primarily includes the United States and Canada.
Revenues by Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
Timing of revenue recognition
|
|
April 3,
|
|
March 29,
|
|
April 3,
|
|
March 29,
|
|
(In millions)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Products transferred at a point in time
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
$
|
381.0
|
|
|
$
|
402.6
|
|
|
$
|
763.0
|
|
|
$
|
769.2
|
|
|
Proton Solutions
|
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
Other
|
|
11.7
|
|
|
—
|
|
|
30.6
|
|
|
—
|
|
|
Total products transferred at a point in time
|
|
394.2
|
|
|
402.6
|
|
|
795.1
|
|
|
769.2
|
|
|
Products and services transferred over time
|
|
|
|
|
|
|
|
|
|
Oncology Systems
|
|
379.5
|
|
|
344.2
|
|
|
779.9
|
|
|
680.1
|
|
|
Proton Solutions
|
|
20.8
|
|
|
32.6
|
|
|
48.4
|
|
|
71.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total products and services transferred over time
|
|
400.3
|
|
|
376.8
|
|
|
828.3
|
|
|
751.2
|
|
|
Total Revenues
|
|
$
|
794.5
|
|
|
$
|
779.4
|
|
|
$
|
1,623.4
|
|
|
$
|
1,520.4
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
16. BUSINESS COMBINATIONS
Business Combinations in Fiscal Year 2020
The Company completed three acquisitions in its Oncology Systems business that were not material in the first six months of fiscal year 2020. The acquisitions were comprised of goodwill and assets acquired. The purchase accounting from these transactions is not yet finalized.
Business Combinations in Fiscal Year 2019
Assets acquired from Boston Scientific
In August 2019, the Company acquired Boston Scientific's embolics microspheres business, for treating arteriovenous malformations and hypervascular tumors, for a purchase price of $90.0 million in cash consideration. The assets from this purchase are included in the Company's Interventional Solutions business, which is included in the Other category. The purchase accounting from this transaction has been finalized.
Cancer Treatment Services International
In June 2019, the Company acquired CTSI, a privately-held company for a purchase price of $277.0 million, consisting of $262.8 million of cash consideration, $8.2 million of contingent consideration, and $6.0 million of other consideration. The undiscounted range of the contingent consideration payments is zero to $58 million and is based on actual revenues over the 18 months following the acquisition date. In March 2020, the Company released the $8.2 million of contingent consideration to earnings due to CTSI having lower projected financial performance during the earnout period. The Company has included this acquisition in its Oncology Systems business. The purchase accounting from this transaction is not yet finalized. The Company recorded a measurement period adjustment in the first quarter of fiscal year 2020 that was not material.
Endocare and Alicon
In June 2019, the Company acquired Endocare and Alicon for a combined purchase price of $210.0 million consisting of $197.4 million of cash consideration and $12.6 million of contingent consideration. The undiscounted range of the contingent consideration payments is zero to $40 million and is based on actual revenues through March 2020. Due to better than expected actual and projected financial performance for Endocare and Alicon, as well as a change in the expected mix of products, the Company recorded an $8.8 million increase in the fair value of contingent consideration in the first quarter of fiscal year 2020, in addition to a $18.6 million increase in the fair value of the contingent consideration recorded in the fourth quarter of fiscal year 2019. The Company has recorded a total of $40.0 million in contingent consideration related to the Endocare and Alicon acquisitions, which is expected to be paid in fiscal year 2020. These acquisitions are included in the Company's Interventional Solutions business, which is included in the Other category. The purchase accounting from this transaction is not yet finalized. The Company has not recorded any measurement period adjustments this quarter.
Other Acquisitions in Fiscal Year 2019
In the third quarter of fiscal year 2019, the Company purchased a privately-held company for a cash purchase price of $15.2 million, including a holdback of $3.6 million and contingent consideration. At the closing date, the value of the contingent consideration was zero because none of the milestones were probable to be achieved; however, the Company could potentially pay up to approximately $9 million by 2023 if certain milestones were met plus additional payments for achieving revenue targets through 2035. The acquisition was classified as an asset acquisition. This acquisition is included in the Other category.
In the first quarter of fiscal year 2019, the Company acquired a privately-held software company for a purchase price of $28.5 million. The acquisition primarily consisted of $21.9 million in goodwill and $6.5 million in finite-lived intangible assets. The Company integrated this acquisition into its Oncology Systems reporting unit.
Other Information
The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount. The Company believes the factors that contributed to goodwill in its completed acquisitions include synergies not available to market participants, as well as the acquisition of a talented workforce.
The fair value of assets acquired and liabilities assumed, has been determined on a preliminary basis for acquisitions completed in the current year and certain acquisitions in the previous fiscal year. The Company will finalize these amounts as it obtains the
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of a business combination may result in certain adjustments. The Company expects to finalize these amounts no later than one year from the date of each business combination.
The condensed consolidated financial statements include the operating results from the date the above businesses were acquired. Pro forma results of operations for the completed acquisitions have not been presented because the effects were not material to the Company's condensed consolidated financial statements.
The Company incurred acquisition transaction costs of $4.4 million and $2.2 million during the three months ended April 3, 2020 and March 29, 2019, respectively, and $8.3 million and $4.6 million during the six months ended April 3, 2020 and March 29, 2019, respectively.