NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The long-term strategy of Varian Medical Systems, Inc. (“VMS”) and subsidiaries (collectively, the “Company”) is to become a global leader in multi-disciplinary, integrated cancer care solutions that enable and accelerate access to innovative, life-saving technology worldwide. The Company offers solutions in radiation therapy and medical oncology, which fall within the traditional pillars of cancer care, as well as the new pillar of interventional oncology. 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 minimally invasive interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolic beads. Software solutions include informatics software for information management, clinical knowledge exchange, patient care management, practice management and decision-making 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.
In addition to providing the products and services for oncology care described above, the Company offers treatment planning as a service and quality assurance as a service, which allows remote support and delivery of care in understaffed locations to utilize technology on a per patient basis. Further, the Company operates
11
healthcare facilities in India; comprised of
one
specialty hospital and
ten
cancer centers.
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. 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 year ended
September 28, 2018
(the “
2018
Annual Report”). 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
June 28, 2019
, and
September 28, 2018
, results of operations and statements of comprehensive earnings for the
three and nine
months ended
June 28, 2019
, and
June 29, 2018
, statements of cash flows for the
nine months ended June 28, 2019
, and
June 29, 2018
, and statements of equity for the three and
nine months ended June 28, 2019
, and
June 29, 2018
. The results of operations for the
nine months ended June 28, 2019
, 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
2019
is the 52-week period ending
September 27, 2019
. Fiscal year
2018
was the 52-week period that ended on
September 28, 2018
. The fiscal quarters ended
June 28, 2019
, and
June 29, 2018
, 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.
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
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Significant Accounting Policies
There have been no material changes to the Company's significant accounting policies provided in "Note 1: Summary of Significant Accounting Policies" within the Notes to the Consolidated Financial Statements of the Company's
2018
Annual Report.
Recently Adopted Accounting Pronouncements
In the first quarter of fiscal year 2019, the Company adopted the Financial Accounting Standards Board ("FASB") guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The Company adopted this amendment prospectively, and it did not have a material impact on the Company's condensed consolidated financial statements.
In the first quarter of fiscal year 2019, the Company adopted the FASB guidance on the accounting related to defined benefit plans and other post-retirement benefits. This amendment requires the service cost component of net periodic pension and post-retirement benefit cost to be presented in the same line item as other employee compensation costs, while the other components must be presented separately as other income, net. The adoption of this amendment did not have a material impact on the Company's condensed consolidated financial statements.
In the first quarter of fiscal year 2019, the Company adopted the FASB guidance on the classification and presentation of restricted cash in the statement of cash flow. The amendment requires entities to include restricted cash in cash and cash equivalents in the statement of cash flows. The Company adopted the amendment retrospectively, and prior period amounts on the Condensed Consolidated Statements of Cash Flows have been recast to conform with the current period presentation as shown in the reconciliation provided below. See
Note 3, "Other Financial Information,"
for a reconciliation of the cash balances within the Condensed Consolidated Statements of Cash Flows to the Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 29, 2018
|
(In millions)
|
As Previously Reported
|
|
Adjustments
|
|
As Adjusted
|
Cash used in investing activities
|
$
|
(109.9
|
)
|
|
$
|
6.8
|
|
|
$
|
(103.1
|
)
|
Cash, cash equivalents, and restricted cash at beginning of period
|
$
|
716.2
|
|
|
$
|
2.3
|
|
|
$
|
718.5
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
536.0
|
|
|
$
|
9.1
|
|
|
$
|
545.1
|
|
In the first quarter of fiscal year 2019, the Company adopted the FASB guidance for tax accounting for intra-entity asset transfers. The amendment removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The adoption of this amendment did not have a material impact on the Company's condensed consolidated financial statements. See
Note 10, "Income Taxes,"
for more information about the impact of the adoption.
In the first quarter of fiscal year 2019, the Company adopted the FASB guidance related to the classification of certain cash receipts and cash payments. The amendment was issued to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The Company adopted the amendment retrospectively, and it did not have an impact on the Company’s condensed consolidated financial statements.
In the first quarter of fiscal year 2019, the Company adopted the FASB guidance related to recognition and measurement of financial assets and financial liabilities. The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes is the requirement for changes in the fair value of the Company's equity investments to be recognized through net earnings rather than other comprehensive income. Under the amendment, equity investments that do not have a readily determinable fair value are eligible for the measurement alternative, which will require the Company to measure these investments at cost, with adjustments for changes in price or impairments reflected through net earnings. The Company adopted the amendment prospectively for its privately-held investments for which the measurement alternative was elected, and adopted the amendment on a modified retrospective basis for all other financial instruments. The adoption did not have an impact on the Company's condensed consolidated financial statements.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Recent Accounting Standards or Updates Not Yet Effective
In November 2018, the FASB amended its guidance to clarify revenue accounting for collaborative arrangements. The standard is effective for the Company beginning in the first quarter of fiscal year 2020 and will be applied retrospectively to the date of the initial application of ASC 606. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
In October 2018, the FASB amended its guidance which will add the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a benchmark interest rate for hedge accounting purposes. The standard is effective for the Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
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 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 February 2018, the FASB amended its guidance that will allow companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act to retained earnings. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2020. The Company is evaluating the impact of adopting this amendment 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.
In February 2016, the FASB issued a new standard on accounting for leases. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new standard will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of earnings. The Company intends to adopt this standard beginning in its first quarter of fiscal year 2020, using a modified retrospective method and anticipates applying the optional practical expedients related to the transition. While the Company continues to assess the impact of this standard, the Company anticipates a material impact related to the recognition of right-of-use assets and liabilities for previously unrecognized leases on its Condensed Consolidated Balance Sheets. The Company will continue to monitor and evaluate the effect the standard will have on its consolidated financial statements, including disclosures. The Company's preliminary assessments are subject to change.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
2. BUSINESS COMBINATIONS
Business Combinations in Fiscal Year 2019
Cancer Treatment Services International
In June 2019, the Company acquired Cancer Treatment Services International ("CTSI"), a privately-held company that provides cancer care professional services to health care providers worldwide and, through its oncology care brand, American Oncology Institute, focuses on the operation of comprehensive cancer treatment facilities in international markets. CTSI operates AmPath, a full-service reference laboratory and pathology provider, and CTSI Oncology Solutions, an oncology services company that provides solutions such as remote treatment planning services and multi-disciplinary oncology consulting. This acquisition will increase the Company's expertise in cancer center operations.
The Company acquired CTSI for a purchase price of
$279.3 million
, consisting of
$262.8 million
of cash consideration,
$8.2 million
of contingent consideration, and
$8.3 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. The acquisition was financed with a combination of cash on hand and proceeds from borrowings. The Company has included this acquisition in its Oncology Systems business. The purchase accounting from this transaction is not yet finalized; however, the goodwill is not expected to be deductible for income tax purposes.
Endocare and Alicon
In June 2019, the Company acquired Austin, Texas-based Endocare and Hangzhou, China-based, Alicon, to expand its portfolio of multidisciplinary integrated cancer solutions. Endocare is a leading provider of hardware and software solutions for cryoablation, and has a microwave ablation product line; and Alicon is a leader in embolic therapy for treating liver cancer in China. These acquisitions enable the Company to develop innovations in interventional oncology and allow it to provide patients and customers with a wider range of cancer care solutions.
The Company acquired Endocare and Alicon for a combined purchase price of
$209.4 million
consisting of
$196.8 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. The acquisitions were financed with a combination of cash on hand and proceeds from borrowings. These acquisitions comprise the Company's Interventional Oncology business, which is reflected in the "Other" category because the operating segment does not meet the criteria for a reportable operating segment. The purchase accounting from this transaction is not yet finalized; however, the goodwill is not expected to be deductible for income tax purposes.
The results of operations and the provisional fair values of the assets acquired and liabilities assumed have been included in the condensed consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair value of assets acquired and liabilities assumed as a result of the CTSI, Endocare and Alicon acquisitions:
|
|
|
|
|
|
|
|
|
(In millions)
|
CTSI
|
|
Endocare and Alicon
|
Assets acquired
(1)
|
$
|
54.0
|
|
|
$
|
32.9
|
|
Liabilities assumed
(2)
|
(65.0
|
)
|
|
(17.7
|
)
|
Goodwill
|
182.1
|
|
|
122.7
|
|
Intangible assets
|
117.0
|
|
|
71.5
|
|
Fair value of net assets
|
288.1
|
|
|
209.4
|
|
Less: Non-controlling interest
(3)
|
8.8
|
|
|
—
|
|
Total purchase consideration
|
$
|
279.3
|
|
|
$
|
209.4
|
|
(1)
Includes
$5.4 million
and
$11.5 million
of cash and cash equivalents for CTSI and Endocare / Alicon, respectively.
(2)
Includes
$33.9 million
and
$14.8 million
of deferred tax liabilities for CTSI and Endocare / Alicon, respectively.
(3)
The Company's non-controlling interest is a joint venture that was determined to be a variable interest entity. The Company has concluded that it is the primary beneficiary of the joint venture because it has the ability to control the significant activities of the joint venture, has the right to significant residual returns and is exposed to significant expected losses. The Company will consolidate the joint venture into its operations.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Identifiable Intangible Assets
The following table provides the valuation of the intangible assets acquired from CTSI, Endocare and Alicon, along with their estimated useful lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
CTSI
|
|
Endocare and Alicon
|
Type
|
|
Fair Value
|
|
Weighted Average Estimated Useful Life (In Years)
|
|
Fair Value
|
|
Weighted Average Estimated Useful Life (In Years)
|
Technologies and trade names
|
|
$
|
47.9
|
|
|
10.7
|
|
$
|
56.3
|
|
|
7.7
|
Customer contracts, supplier relationships, and partner relationships
(1)
|
|
69.1
|
|
|
26.4
|
|
4.8
|
|
|
3.0
|
Total intangible assets with finite lives
|
|
117.0
|
|
|
|
|
61.1
|
|
|
|
In-process research and development with indefinite lives
|
|
—
|
|
|
|
|
10.4
|
|
|
|
Total intangible assets
|
|
$
|
117.0
|
|
|
|
|
$
|
71.5
|
|
|
|
|
|
(1)
|
CTSI has certain partner relationships with hospitals with useful lives that range from approximately
27
to
29
years.
|
Other Acquisitions
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. As of the closing date, the value of the contingent consideration is
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, a
nd the purchase consideration was allocated primarily to the intellectual property that covers the use of radiation in the heart and other forms of radiosurgery for cardiovascular disease, resulting in a
$20.8 million
of in-process research and development ("in-process R&D") expense because of no future alternative use, and was recorded in acquisition-related expenses and in-process R&D in the Condensed Consolidated Statements of Earnings.
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
$22.0 million
in goodwill and
$6.5 million
in finite-lived intangible assets. The Company has integrated this acquisition into its Oncology Systems reporting unit. The goodwill for this acquisition is not deductible for income tax.
Measurement Period Adjustments
In the first quarter of fiscal year 2019, the Company recorded a measurement period adjustment of
$9.6 million
to the fair value of the purchase consideration of a business combination that occurred in the fourth quarter of fiscal year 2018. The adjustment primarily included a
$11.9 million
decrease in the fair value of the contingent consideration liability mostly offset by a decrease to the finite-lived intangible assets of
$5.4 million
, and a decrease of
$4.7 million
to goodwill.
In the third quarter of fiscal year 2019, the Company recorded a measurement period adjustment of
$2.6 million
to the fair value of the purchase consideration of a business combination that occurred in the third quarter of fiscal year 2018. The adjustment consisted of an additional cash payment to sellers and a corresponding increase to goodwill.
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, and the Company will finalize these amounts as it obtains the 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.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Management applied significant judgment in determining the fair value of intangible assets, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, the economic lives, and the discount rates. The fair value of the contingent consideration has been estimated based on the likelihood of the performance metrics being achieved.
The condensed consolidated financial statements include the operating results from the date the business was acquired. The impact of the completed business combinations to the periods presented was not material. Pro forma results of operations for the completed business combination have not been presented because the effects were not material to the Company's condensed consolidated financial statements.
The Company incurred acquisition-related expenses of
$10.4 million
and
$12.7 million
during the three months ended
June 28, 2019
and
June 29, 2018
, respectively, and
$15.0 million
and
$33.9 million
during the
nine
months ended
June 28, 2019
and
June 29, 2018
, respectively.
3. OTHER FINANCIAL INFORMATION
Contracts with Customers
The following table provides the Company's unbilled receivables and deferred revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 28,
2019
|
|
September 28,
2018
|
Unbilled receivables - current
|
$
|
324.8
|
|
|
$
|
362.8
|
|
Unbilled receivables - long-term
(1)
|
63.2
|
|
|
36.3
|
|
Deferred revenues - current
|
(749.7
|
)
|
|
(729.7
|
)
|
Deferred revenues - long-term
(2)
|
(73.5
|
)
|
|
(38.6
|
)
|
Total net unbilled receivables (deferred revenues)
|
$
|
(435.2
|
)
|
|
$
|
(369.2
|
)
|
|
|
(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
nine
months ended
June 28, 2019
, unbilled receivables remained flat, and deferred revenues,
decreased
primarily due to the contractual timing of billings occurring before the revenues were recognized.
During the three and
nine
months ended
June 28, 2019
, the Company recognized revenues of
$207.2 million
and
$545.0 million
, respectively, which were included in the deferred revenues balance at
September 28, 2018
. During the three and
nine
months ended
June 29, 2018
, the Company recognized revenues of
$66.5 million
and
$367.0 million
, which were included in the deferred revenues balance at
September 29, 2017
.
Unfulfilled Performance Obligations
The following table represents the Company's unfulfilled performance obligations as of
June 28, 2019
, and the estimated revenue expected to be recognized in the future related to these unfulfilled performance obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years of Revenue Recognition
|
(In millions)
|
Remainder of 2019
|
|
2020
|
|
2021
|
|
Thereafter
|
Unfulfilled Performance Obligations
|
$
|
824.6
|
|
|
$
|
2,575.5
|
|
|
$
|
1,037.0
|
|
|
$
|
2,118.7
|
|
The table above includes both product and service unfulfilled performance obligations, which includes a component of service performance obligations which have 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.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Cash, Cash Equivalents, and Restricted Cash
The following table summarizes the Company's cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 28,
2019
|
|
September 28,
2018
|
Cash and cash equivalents
|
$
|
520.7
|
|
|
$
|
504.8
|
|
Restricted cash - current
(1)
|
13.7
|
|
|
3.1
|
|
Restricted cash - long-term
(2)
|
8.5
|
|
|
8.5
|
|
Total cash, cash equivalents, and restricted cash
|
$
|
542.9
|
|
|
$
|
516.4
|
|
|
|
(1)
|
Included in prepaid 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)
|
June 28,
2019
|
|
September 28,
2018
|
Raw materials and parts
|
$
|
368.8
|
|
|
$
|
304.1
|
|
Work-in-process
|
72.8
|
|
|
50.6
|
|
Finished goods
|
87.7
|
|
|
83.4
|
|
Total inventories
|
$
|
529.3
|
|
|
$
|
438.1
|
|
Short-term Borrowings
The following table summarizes the Company's short-term borrowings:
|
|
|
|
|
|
|
|
(Dollars in millions)
|
June 28, 2019
|
2018 Revolving Credit Facility
|
$
|
400.0
|
|
|
3.40
|
%
|
Total short-term borrowings
|
$
|
400.0
|
|
|
|
Other Long-Term Liabilities
The following table summarizes the Company's other long-term liabilities:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 28,
2019
|
|
September 28,
2018
|
Long-term income taxes payable
|
$
|
183.0
|
|
|
$
|
189.1
|
|
Deferred income taxes
|
78.2
|
|
|
31.4
|
|
Long-term deferred revenues
|
73.5
|
|
|
38.6
|
|
Other
|
65.4
|
|
|
65.2
|
|
Total other long-term liabilities
|
$
|
400.1
|
|
|
$
|
324.3
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
Other Income, Net
The following table summarizes the Company's other income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(In millions)
|
June 28,
2019
|
|
June 29,
2018
|
|
June 28,
2019
|
|
June 29,
2018
|
Gain on equity investments
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
23.8
|
|
|
$
|
—
|
|
Net foreign currency exchange gain
|
1.8
|
|
|
0.8
|
|
|
2.6
|
|
|
1.0
|
|
Other
|
0.4
|
|
|
0.7
|
|
|
1.0
|
|
|
1.9
|
|
Total other income, net
|
$
|
4.2
|
|
|
$
|
1.5
|
|
|
$
|
27.4
|
|
|
$
|
2.9
|
|
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
4. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Fair Value Measurement Using
|
|
|
Quoted Prices in
Active Markets
for Identical
Instruments
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
Type of Instruments
|
|
(Level 1)
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|
(Level 2)
|
|
(Level 3)
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|
Balance
|
(In millions)
|
|
|
|
|
|
|
|
|
Assets at June 28, 2019:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
16.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16.7
|
|
Available-for-sale securities:
(1)
|
|
|
|
|
|
|
|
|
MPTC Series B-1 Bonds
|
|
—
|
|
|
26.6
|
|
|
—
|
|
|
26.6
|
|
MPTC Series B-2 Bonds
|
|
—
|
|
|
24.5
|
|
|
—
|
|
|
24.5
|
|
APTC securities
|
|
—
|
|
|
6.4
|
|
|
—
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|
|
6.4
|
|
Total assets measured at fair value
|
|
$
|
16.7
|
|
|
$
|
57.5
|
|
|
$
|
—
|
|
|
$
|
74.2
|
|
|
|
|
|
|
|
|
|
|
Liabilities at June 28, 2019:
|
|
|
|
|
|
|
|
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Derivative liabilities
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|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
Contingent consideration
|
|
—
|
|
|
—
|
|
|
(38.2
|
)
|
|
(38.2
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)
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
(38.2
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)
|
|
$
|
(38.5
|
)
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|
|
|
|
|
|
|
|
|
Assets at September 28, 2018:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
44.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44.1
|
|
Available-for- sale securities:
|
|
|
|
|
|
|
|
|
MPTC Series B-1 Bonds
(2)
|
|
—
|
|
|
25.1
|
|
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—
|
|
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25.1
|
|
MPTC Series B-2 Bonds
(1)
|
|
—
|
|
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23.1
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|
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—
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|
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23.1
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APTC securities
(2)
|
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—
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|
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6.4
|
|
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—
|
|
|
6.4
|
|
GPTC securities
(2)
|
|
—
|
|
|
7.9
|
|
|
—
|
|
|
7.9
|
|
Total assets measured at fair value
|
|
$
|
44.1
|
|
|
$
|
62.5
|
|
|
$
|
—
|
|
|
$
|
106.6
|
|
|
|
|
|
|
|
|
|
|
Liabilities at September 28, 2018:
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(24.4
|
)
|
|
$
|
(24.4
|
)
|
Total liabilities measured at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(24.4
|
)
|
|
$
|
(24.4
|
)
|
|
|
(1)
|
Included in other assets on the Company's Condensed Consolidated Balance Sheets.
|
|
|
(2)
|
Included in prepaid and other current assets on the Company's Condensed Consolidated Balance Sheets because the Company had the ability and intent to sell this security in the next twelve months.
|
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"), Alabama Proton Therapy Center (“APTC”), and Georgia Proton Treatment Center ("GPTC"). 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. As of
June 28, 2019
, and
September 28, 2018
, the carrying amount of the Company's Level 1 money market funds and Level 2 available-for-sale securities approximated their respective fair values.
See
Note 14, "Proton Solutions Loans and Investments,"
for further information about the available-for-sale securities.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
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
thirteen months
in duration.
The Company generally measures the fair value of its Level 3 contingent consideration liabilities based on option pricing models through Black-Scholes or Monte Carlo models with key assumptions that include estimated revenues of the acquired business, the probability of completing certain milestone targets during the earn-out period, 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 volatility 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 all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
(In millions)
|
|
Contingent
Consideration
|
Balance at September 28, 2018
|
|
$
|
(24.4
|
)
|
Business combinations
|
|
(26.2
|
)
|
Measurement period adjustment to a business combination in prior year
|
|
11.9
|
|
Settlements
|
|
0.5
|
|
Balance at June 28, 2019
|
|
$
|
(38.2
|
)
|
There were
no
transfers of assets or liabilities between fair value measurement levels during either the
three and nine
months ended
June 28, 2019
, or the
three and nine
months ended
June 29, 2018
. 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, revolving loan to California Proton Therapy Center ("CPTC"), Rinecker Proton Therapy Center ("RPTC") senior secured debt, accounts payable, and short-term borrowings approximate their carrying amounts due to their short maturities.
As of
June 28, 2019
, the fair value of the Term Loan with CPTC approximated its carrying value of
$44.0 million
. 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 Term Loan is 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
$61.2 million
and
$37.2 million
at
June 28, 2019
and
September 28, 2018
, respectively. Equity investments without readily determinable fair value are measured at cost and will be adjusted through net earnings when they are deemed to be impaired or when there is an adjustment from observable price changes. At
June 28, 2019
, the Company increased the fair value for an equity investment in a privately-held company by
$2.0 million
due to observable price changes for equity investments without readily determinable fair value.
The fair value of the outstanding long-term notes receivable, including accrued interest, approximated their carrying value of
$32.6 million
and
$29.7 million
at
June 28, 2019
and
September 28, 2018
, 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.
VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
5. RECEIVABLES
The following table summarizes the Company's trade and unbilled receivables, net and notes receivable:
|
|
|
|
|
|
|
|
|
(In millions)
|
June 28,
2019
|
|
September 28,
2018
|
Trade and unbilled receivables, gross
|
$
|
1,169.9
|
|
|
$
|
1,093.0
|
|
Allowance for doubtful accounts
|
(47.0
|
)
|
|
(41.1
|
)
|
Trade and unbilled receivables, net
|
$
|
1,122.9
|
|
|
$
|
1,051.9
|
|
Short-term
|
$
|
|