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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________
FORM 10-Q
 ____________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-7598
  _________________________________________________ 
VARIAN MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 ____________________________________________________________ 
Delaware 94-2359345
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
3100 Hansen Way, Palo Alto, California
94304-1038
(Address of principal executive offices) (Zip Code)
(650) 493-4000
(Registrant’s telephone number, including area code)
___________________________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $1 par value VAR New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ý    No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large Accelerated Filer      Accelerated filer
Non-Accelerated filer      Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 
As of May 1, 2020, the registrant had 90,814,945 shares of common stock, par value $1 per share, outstanding.

1


VARIAN MEDICAL SYSTEMS, INC.
FORM 10-Q for the Quarter Ended April 3, 2020
INDEX
 
Part I.
3
Item 1.
3
 
3
 
4
 
5
 
6
7
 
9
Item 2.
36
Item 3.
54
Item 4.
55
Part II.
55
Item 1.
55
Item 1A.
55
Item 2.
57
Item 3.
57
Item 4.
57
Item 5.
57
Item 6.
58
59

2


PART I
FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

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

  Three Months Ended Six Months Ended
  April 3, March 29, April 3, March 29,
(In millions, except per share amounts) 2020 2019 2020 2019
Revenues:    
Product $ 407.3    $ 430.5    $ 828.3    $ 830.7   
Service 387.2    348.9    795.1    689.7   
Total revenues 794.5    779.4    1,623.4    1,520.4   
Cost of revenues:          
Product 263.1    294.4    535.0    561.0   
Service 194.2    166.8    384.4    325.1   
Total cost of revenues 457.3    461.2    919.4    886.1   
Gross margin 337.2    318.2    704.0    634.3   
Operating expenses:          
Research and development 71.0    59.4    138.1    120.3   
Selling, general and administrative 175.3    146.8    352.3    287.9   
Impairment charges 40.5    —    40.5    —   
Acquisition-related expenses (benefits) (4.5)   2.2    8.2    4.6   
Total operating expenses 282.3    208.4    539.1    412.8   
Operating earnings 54.9    109.8    164.9    221.5   
Interest income 3.1    4.0    6.1    7.9   
Interest expense (4.3)   (1.0)   (9.0)   (2.2)  
Other income (expense), net (0.9)   0.2    3.5    23.2   
Earnings before taxes 52.8    113.0    165.5    250.4   
Taxes on earnings 9.7    24.6    33.5    58.1   
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   
Net earnings per share - basic $ 0.48    $ 0.97    $ 1.45    $ 2.11   
Net earnings per share - diluted $ 0.47    $ 0.96    $ 1.43    $ 2.09   
Shares used in the calculation of net earnings per share:
Weighted average shares outstanding - basic 90.7    91.0    90.8    91.0   
Weighted average shares outstanding - diluted 91.4    91.9    91.6    92.0   

See accompanying notes to the condensed consolidated financial statements.
3


VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
 
  Three Months Ended Six Months Ended
  April 3, March 29, April 3, March 29,
(In millions) 2020 2019 2020 2019
Net earnings $ 43.1    $ 88.4    $ 132.0    $ 192.3   
Other comprehensive earnings (loss), net of tax:
Defined benefit pension and post-retirement benefit plans:
Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.1 and $0.1, for three and six months ended April 3, 2020, respectively, and $0.1 and $0.1, for the corresponding periods of fiscal year 2019, respectively
(0.1)   (0.1)   (0.3)   (0.3)  
Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of $(0.1) and $(0.3), for three and six months ended April 3, 2020, respectively, and $(0.1) and $(0.2), for the corresponding periods of fiscal year 2019, respectively
0.9    0.4    1.8    0.9   
  0.8    0.3    1.5    0.6   
Derivative instruments:                    
Change in unrealized loss, net of tax expense of $(0.6) and $(0.6), respectively
2.1    —    2.0    —   
Reclassification adjustments, net of tax benefit of $0.2 and $0.4, respectively
(0.9)   —    (1.5)   —   
1.2    —    0.5    —   
Currency translation adjustment (6.8)   (3.1)   (1.7)   (7.1)  
Other comprehensive earnings (loss) (4.8)   (2.8)   0.3    (6.5)  
Comprehensive earnings 38.3    85.6    132.3    185.8   
Less: Comprehensive earnings (loss) attributable to noncontrolling interests (0.1)   (0.2)   0.6    0.5   
Comprehensive earnings attributable to Varian $ 38.4    $ 85.8    $ 131.7    $ 185.3   
 
* Tax expense or benefit related to the periods presented are not material.

See accompanying notes to the condensed consolidated financial statements.
4


VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  April 3, September 27,
(In millions, except par values) 2020 2019
Assets    
Current assets:    
Cash and cash equivalents $ 667.8    $ 531.4   
Trade and unbilled receivables, net of allowance for doubtful accounts of $48.9 and $46.5 at April 3, 2020 and September 27, 2019, respectively
1,004.8    1,106.3   
Inventories 604.0    551.5   
Prepaid expenses and other current assets 224.3    206.2   
Total current assets 2,500.9    2,395.4   
Property, plant and equipment, net 341.9    311.5   
Operating lease right-of-use assets 123.8    —   
Goodwill 614.7    612.2   
Intangible assets 281.6    300.7   
Deferred tax assets 93.6    84.7   
Other assets 387.4    397.2   
Total assets $ 4,343.9    $ 4,101.7   
Liabilities and Equity
Current liabilities:
Accounts payable $ 198.4    $ 248.5   
Accrued liabilities 433.2    459.5   
Deferred revenues 798.1    766.0   
Short-term borrowings 520.0    410.0   
Total current liabilities 1,949.7    1,884.0   
Long-term lease liabilities 100.4    —   
Other long-term liabilities 423.1    440.1   
Total liabilities 2,473.2    2,324.1   
Commitments and contingencies (Note 8)
Equity:          
Varian stockholders' equity:
Preferred stock of $1 par value: 1.0 shares authorized; none issued and outstanding
—    —   
Common stock of $1 par value: 189.0 shares authorized; 90.7 and 90.8 shares issued and outstanding at April 3, 2020 and September 27, 2019, respectively
90.7    90.8   
Capital in excess of par value 878.2    845.6   
Retained earnings 993.7    934.0   
Accumulated other comprehensive loss (101.8)   (102.1)  
Total Varian stockholders' equity 1,860.8    1,768.3   
Noncontrolling interest 9.9    9.3   
Total equity 1,870.7    1,777.6   
Total liabilities and equity $ 4,343.9    $ 4,101.7   

See accompanying notes to the condensed consolidated financial statements.
5



VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  Six Months Ended
  April 3, March 29,
(In millions) 2020 2019
Cash flows from operating activities:    
Net earnings $ 132.0    $ 192.3   
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Share-based compensation expense 26.2    23.0   
Depreciation 29.9    25.8   
Amortization of intangible assets and inventory step-up 19.7    11.4   
Deferred taxes (8.7)   7.4   
Provision to allowance for doubtful accounts 3.7    4.0   
Gain on sale of equity investments (1.4)   (21.8)  
Impairment charges 40.5    —   
Other, net (1.1)   0.3   
Changes in assets and liabilities, net of effects of acquisitions:     
Trade and unbilled receivables 49.9    (58.6)  
Inventories (53.7)   (41.9)  
Prepaid expenses and other assets (18.6)   (19.3)  
Accounts payable (54.7)   23.7   
Accrued liabilities and other long-term liabilities (62.6)   (74.2)  
Deferred revenues 33.4    55.4   
Net cash provided by operating activities 134.5    127.5   
Cash flows from investing activities:          
Purchases of property, plant and equipment (37.0)   (25.2)  
Acquisitions, net of cash acquired (8.4)   (25.0)  
Purchase of equity investments —    (11.8)  
Sale of equity investments 9.2    29.9   
Other, net —    (2.5)  
Net cash used in investing activities (36.2)   (34.6)  
Cash flows from financing activities:          
Repurchases of common stock (86.2)   (85.6)  
Proceeds from issuance of common stock to employees 32.1    38.6   
Tax withholdings on vesting of equity awards (11.5)   (13.9)  
Borrowings under credit facility agreement 105.0    —   
Repayments under credit facility agreement (105.0)   —   
Net borrowings under the credit facility agreements with maturities less than 90 days 110.0    —   
Other (0.9)   4.0   
Net cash provided by (used in) financing activities 43.5    (56.9)  
Effects of exchange rate changes on cash, cash equivalents, and restricted cash 3.1    6.5   
Net increase in cash, cash equivalents, and restricted cash 144.9    42.5   
Cash, cash equivalents, and restricted cash at beginning of period 544.1    516.4   
Cash, cash equivalents, and restricted cash at end of period $ 689.0    $ 558.9   

See accompanying notes to the condensed consolidated financial statements.
6


VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
  Common Stock        
(In millions) Shares Amount Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Varian Stockholders' Equity Noncontrolling Interests Total Equity
Balance at September 27, 2019 90.8    $ 90.8    $ 845.6    $ 934.0    $ (102.1)   $ 1,768.3    $ 9.3    $ 1,777.6   
Net earnings —    —    —    88.2    —    88.2    0.7    88.9   
Other comprehensive earnings —    —    —    —    5.1    5.1    —    5.1   
Issuance of common stock 0.3    0.3    20.7    —    —    21.0    —    21.0   
Tax withholdings on vesting of equity awards —    —    (3.6)   —    —    (3.6)   —    (3.6)  
Share-based compensation expense —    —    14.7    —    —    14.7    —    14.7   
Repurchases of common stock (0.4)   (0.4)   (7.0)   (39.0)   —    (46.4)   —    (46.4)  
Balances at January 3, 2020 90.7    $ 90.7    $ 870.4    $ 983.2    $ (97.0)   $ 1,847.3    $ 10.0    $ 1,857.3   
Net earnings (loss) —    —    —    43.2    —    43.2    (0.1)   43.1   
Other comprehensive loss —    —    —    —    (4.8)   (4.8)   —    (4.8)  
Issuance of common stock 0.3    0.3    11.0    —    —    11.3    —    11.3   
Tax withholdings on vesting of equity awards —    —    (7.9)   —    —    (7.9)   —    (7.9)  
Share-based compensation expense —    —    11.5    —    —    11.5    —    11.5   
Repurchases of common stock (0.3)   (0.3)   (6.8)   (32.7)   —    (39.8)   —    (39.8)  
Balances at April 3, 2020 90.7    $ 90.7    $ 878.2    $ 993.7    $ (101.8)   $ 1,860.8    $ 9.9    $ 1,870.7   

7


  Common Stock        
(In millions) Shares Amount Capital in Excess of Par Value Retained Earnings Accumulated  Other Comprehensive Loss Total Varian Stockholders' Equity Noncontrolling Interests Total Equity
Balances at September 28, 2018 91.2    $ 91.2    $ 778.1    $ 780.4    $ (65.3)   $ 1,584.4    $ 4.3    $ 1,588.7   
Net earnings —    —    —    103.2    —    103.2    0.7    103.9   
Other comprehensive loss —    —    —    —    (3.7)   (3.7)   —    (3.7)  
Issuance of common stock 0.3    0.3    21.7    —    —    22.0    —    22.0   
Tax withholdings on vesting of equity awards —    —    (4.4)   —    —    (4.4)   —    (4.4)  
Share-based compensation expense —    —    10.5    —    —    10.5    —    10.5   
Repurchases of common stock (0.3)   (0.3)   (6.6)   (27.9)   —    (34.8)   —    (34.8)  
Other —    —    —    (0.2)   —    (0.2)   —    (0.2)  
Balances at December 28, 2018 91.2    $ 91.2    $ 799.3    $ 855.5    $ (69.0)   $ 1,677.0    $ 5.0    $ 1,682.0   
Net earnings —    —    —    88.6    —    88.6    (0.2)   88.4   
Other comprehensive loss —    —    —    —    (2.8)   (2.8)   —    (2.8)  
Issuance of common stock 0.5    0.5    19.8    —    —    20.3    —    20.3   
Tax withholdings on vesting of equity awards (0.1)   (0.1)   (9.4)   —    —    (9.5)   —    (9.5)  
Share-based compensation expense —    —    12.5    —    —    12.5    —    12.5   
Repurchases of common stock (0.4)   (0.4)   (8.6)   (41.8)   —    (50.8)   —    (50.8)  
Balances at March 29, 2019 91.2    $ 91.2    $ 813.6    $ 902.3    $ (71.8)   $ 1,735.3    $ 4.8    $ 1,740.1   

See accompanying notes to the condensed consolidated financial statements.

8


VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
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
9

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
10

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.
11

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.
12

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   
13

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)  


14

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)  
15

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.
16

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.
17

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: