10-Q 1 var10qq32018.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________________
FORM 10-Q
 ____________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2018
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)
 ____________________________________________________________ 
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
x
  
Accelerated filer
 
o
Non-Accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Emerging growth company
 
o
 
 
 
 
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   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 91,547,472 shares of common stock, par value $1 per share, outstanding as of July 27, 2018.
 




VARIAN MEDICAL SYSTEMS, INC.
FORM 10-Q for the Quarter Ended June 29, 2018
INDEX
 
Part I.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Part II.
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
Item 5.
 
 
 
 
 
Item 6.
 
 
 
 
 

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
 
Nine Months Ended
 
June 29,
 
June 30,
 
June 29,
 
June 30,
(In millions, except per share amounts)
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Product
$
365.0

 
$
320.2

 
$
1,124.4

 
$
994.3

Service
344.1

 
312.6

 
993.1

 
903.2

Total revenues
709.1

 
632.8

 
2,117.5

 
1,897.5

Cost of revenues:
 
 
 
 
 
 
 
Product
242.5

 
225.6

 
730.6

 
678.7

Service
153.0

 
141.7

 
452.0

 
410.7

Total cost of revenues
395.5

 
367.3

 
1,182.6

 
1,089.4

Gross margin
313.6

 
265.5

 
934.9

 
808.1

Operating expenses:
 
 
 
 
 
 
 
Research and development
59.5

 
55.1

 
174.3

 
158.3

Selling, general and administrative
138.9

 
121.4

 
397.4

 
414.1

Impairment charges
11.0

 

 
22.1

 
38.3

Acquisition-related expenses
12.7

 
0.5

 
33.9

 
1.4

Total operating expenses
222.1

 
177.0

 
627.7

 
612.1

Operating earnings
91.5

 
88.5

 
307.2

 
196.0

Interest income
1.8

 
2.9

 
8.6

 
10.4

Interest expense
(1.3
)
 
(2.7
)
 
(5.7
)
 
(8.0
)
Earnings from continuing operations before taxes
92.0

 
88.7

 
310.1

 
198.4

Taxes on earnings
19.5

 
18.8

 
276.6

 
51.0

Net earnings from continuing operations
72.5

 
69.9

 
33.5

 
147.4

Net loss from discontinued operations

 

 

 
(6.8
)
Net earnings
72.5

 
69.9

 
33.5

 
140.6

Less: Net (loss) earnings attributable to noncontrolling interests
(0.1
)
 
0.2

 

 
0.7

Net earnings attributable to Varian
$
72.6

 
$
69.7

 
$
33.5

 
$
139.9

 
 
 
 
 
 
 
 
Net earnings (loss) per share - basic
 
 
 
 
 
 
 
Continuing operations
$
0.79

 
$
0.76

 
$
0.37

 
$
1.58

Discontinued operations

 

 

 
(0.08
)
Net earnings per share - basic
$
0.79

 
$
0.76

 
$
0.37

 
$
1.50

 
 
 
 
 
 
 
 
Net earnings (loss) per share - diluted
 
 
 
 
 
 
 
Continuing operations
$
0.79

 
$
0.75

 
$
0.36

 
$
1.57

Discontinued operations

 

 

 
(0.07
)
Net earnings per share - diluted
$
0.79

 
$
0.75

 
$
0.36

 
$
1.50

 
 
 
 
 
 
 
 
Shares used in the calculation of net earnings per share:
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
91.5

 
91.7

 
91.6

 
92.7

Weighted average shares outstanding - diluted
92.5

 
92.4

 
92.6

 
93.5

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
 
Nine Months Ended
 
June 29,
 
June 30,
 
June 29,
 
June 30,
(In millions)
2018
 
2017
 
2018
 
2017
Net earnings
$
72.5

 
$
69.9

 
$
33.5

 
$
140.6

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 $0.2 for the three and nine months ended June 29, 2018, respectively, and $0.0* and $0.1 for the corresponding periods of fiscal year 2017, respectively.
(0.1
)
 
(0.2
)
 
(0.6
)
 
(0.4
)
Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of ($0.1) and ($0.4) for three and nine months ended June 29, 2018, respectively, and ($0.2) and ($0.6) for the corresponding periods of fiscal year 2017, respectively.
0.5

 
0.9

 
1.7

 
2.7

 
0.4

 
0.7

 
1.1

 
2.3

Derivative instruments:
 
 
 
 
 
 
 
Change in unrealized loss, net of tax benefit of $0.3 for the nine months ended June 29, 2018.

 

 
(0.6
)
 

Reclassification adjustments, net of tax expense of ($0.3) for the nine months ended June 29, 2018.

 

 
0.6

 

 

 

 

 

Currency translation adjustment
(12.7
)
 
14.7

 
(3.0
)
 
4.5

Other comprehensive (loss) earnings
(12.3
)
 
15.4

 
(1.9
)
 
6.8

Comprehensive earnings
60.2

 
85.3

 
31.6

 
147.4

Less: Comprehensive (loss) earnings attributable to noncontrolling interests
(0.1
)
 
0.2

 

 
0.7

Comprehensive earnings attributable to Varian
$
60.3

 
$
85.1

 
$
31.6

 
$
146.7

 
* 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)
 
June 29,
 
September 29,
(In millions, except par values)
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
536.0

 
$
716.2

Trade and unbilled receivables, net of allowance for doubtful accounts of $40.3 at June 29, 2018 and $45.9 at September 29, 2017
933.6

 
961.5

Inventories
469.2

 
417.7

Prepaid expenses and other current assets
249.8

 
190.3

Current assets of discontinued operations
4.4

 
11.1

Total current assets
2,193.0

 
2,296.8

Property, plant and equipment, net
265.9

 
255.3

Goodwill
239.9

 
222.6

Intangible assets
79.4

 
71.6

Deferred tax assets
106.4

 
147.3

Other assets
287.2

 
300.8

Total assets
$
3,171.8

 
$
3,294.4

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
189.2

 
$
162.3

Accrued liabilities
379.0

 
374.9

Deferred revenues
790.2

 
755.4

Short-term borrowings
18.2

 
350.0

Current liabilities of discontinued operations
2.5

 
2.5

Total current liabilities
1,379.1

 
1,645.1

Other long-term liabilities
291.2

 
127.4

Total liabilities
1,670.3

 
1,772.5

Commitments and contingencies (Note 10)

 

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; 91.5 and 91.7 shares issued and outstanding at June 29, 2018, and at September 29, 2017, respectively
91.5

 
91.7

Capital in excess of par value
771.8

 
716.1

Retained earnings
704.6

 
778.6

Accumulated other comprehensive loss
(70.7
)
 
(68.8
)
Total Varian stockholders' equity
1,497.2

 
1,517.6

Noncontrolling interests
4.3

 
4.3

Total equity
1,501.5

 
1,521.9

Total liabilities and equity
$
3,171.8

 
$
3,294.4


See accompanying notes to the condensed consolidated financial statements.

5



VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
June 29,
 
June 30,
(In millions)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
33.5

 
$
140.6

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Share-based compensation expense
34.0

 
32.7

Depreciation
38.3

 
45.2

Amortization of intangible assets
15.2

 
13.3

Deferred taxes
50.1

 
(15.9
)
Impairment charges
22.1

 
38.3

Loss on hedges related to acquisition-related activities
5.5

 

Provision for doubtful accounts receivable
2.7

 
38.5

Other, net
1.3

 
(0.7
)
Changes in assets and liabilities:
 

 
 
Trade and unbilled receivables
10.8

 
25.8

Inventories
(48.5
)
 
(20.2
)
Prepaid expenses and other assets
(29.8
)
 
(49.0
)
Accounts payable
27.8

 
(0.6
)
Accrued liabilities and other long-term liabilities
150.0

 
(28.1
)
Deferred revenues
33.7

 
49.5

Net cash provided by operating activities
346.7

 
269.4

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(30.8
)
 
(40.4
)
Acquisitions, net of cash acquired
(58.7
)
 
(0.4
)
Issuance of notes receivable

 
(18.2
)
Principal payments on notes receivable
6.3

 

Investment in available-for-sale securities
(6.0
)
 
(9.1
)
Sale of available-for-sale securities
8.0

 

Loans to CPTC
(5.3
)
 

Purchase of foreign currency option related to acquisition-related activities
(5.5
)
 

Investment in privately-held companies
(10.1
)
 
(7.2
)
(Increase) decrease in restricted cash
(6.7
)
 
0.1

Other, net
(1.1
)
 
(3.7
)
Net cash used in investing activities
(109.9
)
 
(78.9
)
Cash flows from financing activities:
 

 
 

Repurchases of common stock
(131.9
)
 
(269.1
)
Proceeds from issuance of common stock to employees
57.1

 
56.7

Employees' taxes withheld and paid for restricted stock, restricted stock units and performance units
(11.5
)
 
(10.6
)
Cash received from Varex Imaging Corporation

 
200.0

Cash and cash equivalents contributed to Varex Imaging Corporation

 
(54.2
)
Borrowings under credit facility agreement
503.3

 
148.0

Repayments under credit facility agreement
(503.3
)
 
(185.5
)
Net repayments under the credit facility agreements with maturities less than 90 days
(331.7
)
 
(262.0
)
Other
(3.6
)
 
1.0

Net cash used in financing activities
(421.6
)
 
(375.7
)
Effects of exchange rate changes on cash and cash equivalents
4.6

 
1.7

Net decrease in cash and cash equivalents
(180.2
)
 
(183.5
)
Cash and cash equivalents at beginning of period
716.2

 
843.5

Cash and cash equivalents at end of period
$
536.0

 
$
660.0


See accompanying notes to the condensed consolidated financial statements.

6



VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Varian Medical Systems, Inc. (“VMS”) and subsidiaries (collectively, the “Company”) designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. Software solutions also 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.
Distribution
On January 28, 2017 (the "Distribution Date"), the Company completed the separation and distribution (the "Distribution") of Varex Imaging Corporation ("Varex"), the Company's former Imaging Components business segment. On the Distribution Date, each of Varian's stockholder of record as of the close of business on January 20, 2017 (the "Record Date") received 0.4 of a share of Varex common stock for every one share of Varian common stock as of the Record Date. Varex is now an independent publicly traded company and is listed on The NASDAQ Global Select Market under the ticker “VREX.” Varian continues to trade on the New York Stock Exchange under the ticker “VAR.” See Note 2, "Discontinued Operations" for additional information.
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 29, 2017 (the “2017 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 29, 2018 and September 29, 2017, results of operations and statements of comprehensive earnings for the three and nine months ended June 29, 2018 and June 30, 2017, and cash flows for the nine months ended June 29, 2018 and June 30, 2017. The results of operations for the nine months ended June 29, 2018 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.
At the beginning of the Company's fiscal year 2018, the Company early adopted the new revenue recognition Accounting Standard Codification 606 "Revenues from Contracts with Customers" ("ASC 606") by using the full retrospective method. All financial statements and disclosures have been recast to comply with ASC 606. See "Recently Adopted Accounting Pronouncements" below for further information.
The historical financial position and results of operations of the Imaging Components business and costs relating to the Distribution are reported in the condensed consolidated financial statements as discontinued operations for all the periods presented. Information in the accompanying notes to the condensed consolidated financial statements have been recast to reflect the effect of the Distribution. The Condensed Consolidated Statements of Comprehensive Earnings and Cash Flows have not been recast to reflect the effect of the Distribution.
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 2018 is the 52-week period ending September 28, 2018. Fiscal year 2017 was the 52-week period that ended on September 29, 2017. The fiscal quarters ended June 29, 2018 and June 30, 2017 were both 13-week periods.

7

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


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 statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Significant Accounting Policies
The Company's significant accounting policies are detailed 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 29, 2017. Significant changes to these accounting policies as a result of adoption of ASC 606 are discussed below:
Revenue Recognition
The Company's revenues are derived primarily from the sale of radiotherapy and proton therapy hardware and software products, support, training and maintenance of all those products, installation services and the sale of parts. The Company accounts for a contract with a customer when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
The Company's revenues are measured based on consideration specified in the contract with each customer, net of any sales incentives and amounts collected on behalf of third parties such as sales taxes. The Company recognizes revenues as the performance obligations are satisfied by transferring control of the product or service to a customer.
The majority of the Company's revenue arrangements consist of multiple performance obligations including hardware, software, and services. Determining the stand-alone selling price ("SSP") and allocation of consideration from an arrangement to the individual performance obligations, and the appropriate timing of revenue recognition are significant judgments with respect to these arrangements.
The Company's products are generally not sold with a right of return, and the Company does not provide credits or incentives, which may be required to be accounted for as variable consideration when estimating the amount of revenue to be recognized.
The Company recognizes an asset for the incremental costs of obtaining a contract with a customer if the Company expects the benefit of those costs to be longer than one year. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less. These costs mainly include the Company's internal sales force compensation program; under the terms of these programs, compensation is generally earned and the costs are recognized at the time the revenue is recognized.
The majority of the Company’s products and services are sold in bundled arrangements (e.g., hardware, software, and services). For bundled arrangements, the Company accounts for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their individual SSP. The SSP is determined based on observable prices at which the Company separately sells the products and services. If an SSP is not directly observable, then the Company will estimate the SSP considering marketing conditions, entity-specific factors, and information about the customer or class of customer that is reasonably available.

8

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The following is a description of the principal activities, separated by reportable segment, from which the Company generates its revenues.
Oncology Systems
The Company's Oncology Systems linear accelerators are generally sold in a bundled arrangement with hardware and software accessory products that enhance efficiency and enable delivery of advanced radiotherapy and radiosurgery treatments; however, certain products are occasionally sold on a stand-alone basis. The majority of machine and software sales include installation services and training. Delivery of different elements in a revenue arrangement often span more than one reporting period. For example, a linear accelerator and software may be delivered in one reporting period, but the related installation of those products may be completed in a later period. Hardware and software extended maintenance and service contracts are occasionally sold during the initial product sale, but the majority are sold separately near or at the end of the initial warranty period. Revenues related to extended warranty and service contracts are earned after the expiration of the initial warranty period.
Payment terms and conditions vary by contract type, although terms are generally commensurate with a significant milestone, such as contract signing, shipment, delivery, acceptance or service commencement. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined its contracts generally do not include a significant financing component. The primary purpose of the Company's invoicing terms is to provide customers with simplified and predictable ways of purchasing the Company's products and services, rather than to receive financing from the Company's customers, such as invoicing at the beginning of a contract term with revenue recognized ratably over the contract period for a service contract. Payment terms can also vary based on the type of customer, such as government purchases. There are occasions where the Company provides extended payment terms in which case a portion of the transaction price is allocated to imputed interest income.
From time to time, the Company's contracts are modified to account for additional, or to change existing, performance obligations. The Company's contract modifications are generally accounted for prospectively.
Hardware Products and Installation
Hardware products may include software that the hardware is dependent on and highly interrelated with and cannot operate without. The Company typically has a standard base configuration for its hardware products, but there are typically multiple options and configuration choices. Revenues from the sale of hardware are recognized when the Company transfers control to the customer.
Product installation includes uncrating, moving the machine to the treatment room, connection and validating configuration. In addition, a number of testing protocols are completed to confirm the equipment is performing to the contracted specifications. The Company recognizes revenues for hardware installation over time as the customer receives and consumes benefits provided as the Company performs the installation services.
Software Products and Installation
Software products include information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software. Software installation includes transferring software to the customer’s computers, configuration of the software and potentially data migration. The Company recognizes revenues for software and software installation upon the customer's acceptance of the software and installation services.
Service
Service revenues include revenues from initial and extended software support agreements, extended hardware warranty agreements, training, paid service arrangements when a customer does not have an extended warranty and parts that are sold by the service department.
Revenues from hardware and software support agreements are accounted for ratably over the term of the agreement. Services and training revenues are recognized in the period the services and training are performed. Revenues for sales of parts are recognized when the parts are delivered to the customer and control is transferred.

9

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


Warranties
The Company's sale of hardware includes a one-year warranty. The Company uses the cost accrual method to account for assurance-type warranties. The standard warranty provision further includes services in addition to an assurance-type warranty (for example, preventative maintenance inspections, help desk support, and when and if available operating system upgrades). These service-type warranty features are recorded as a separate performance obligation and recognized ratably over the one-year warranty period.
Varian Particle Therapy ("VPT")
The manufacturing of the major components of a proton therapy system, installation, and commissioning typically lasts 18 to 24 months. The Company's proton therapy system is highly customized. A proton therapy system typically includes hardware, software that the hardware is dependent upon and highly interrelated with, and without which the hardware cannot operate, and installation. The Company also sells software products that include information management, treatment planning, image processing, clinical knowledge exchange, patient care management, decision-making support, and practice management software, and software installation.
The Company provides operations and maintenance services related to the proton therapy system under a separate arrangement. These contracts are typically executed at or about the same time as the proton therapy system contracts; however, the pricing and performance of the proton therapy system contracts are not typically related to the pricing or performance of the operations and maintenance contracts. Therefore, the Company recognizes operations and maintenance services as a separate performance obligation.
Under the typical payment terms of the Company's fixed-price contracts, the customer pays the Company an up-front advance payment and then performance-based payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Customers do not typically receive discounts in their overall selling price based on the amount and timing of milestone payments. As the revenue is recognized over time relative to the costs incurred and the customer billing milestones are typically event driven, this may result in revenue recognized in excess of billings at some point during the contract which the Company presents as unbilled receivables on the Condensed Consolidated Balance Sheets. Amounts billed and due from the Company's customers are classified as trade accounts receivable on the Condensed Consolidated Balance Sheets. In most contracts, the Company is entitled to receive an advance payment at the beginning of the contract. The Company recognizes a liability for these advance payments in excess of revenue recognized and presents it as deferred revenues on the Condensed Consolidated Balance Sheets. The advance payment typically is not considered a significant financing component because it is used to ensure the customer's commitment to the project and to provide assurance that the customer will perform its obligations under the contract.
The Company recognizes revenue for its proton therapy systems over time because the customer controls the work in process, the Company's performance does not create an asset with an alternative use to the Company, and the Company has an enforceable right to payment for performance completed to date.
Due to the nature of the work required to be performed on many of the Company's performance obligations, the estimation of total revenues and costs at completion is complex, subject to many variables and requires significant judgment. The Company's contracts generally do not include award fees, incentive fees or other provisions that may be considered variable consideration.
The Company has a standard quarterly progress review process in which management reviews the progress and execution of the Company's performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and the related changes in estimates of revenues and costs. The risks and opportunities include management's judgment about the ability and costs to achieve the schedule (e.g., the number and type of milestone events), technical and other contract requirements. Management must make assumptions and estimates regarding the complexity of the work to be performed, the availability of materials and outside services, the length of time to complete the performance obligation and labor and overhead cost rates, among other significant judgments. Based on this analysis, any quarterly adjustments to revenues, cost of revenues, and the related impact to operating earnings are recognized as necessary in the period they become known on a cumulative catch-up basis. When estimates of total costs to be incurred on a performance obligation exceed total estimates of revenues to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is determined.
Similar to the Oncology Systems segment, the Company recognizes VPT revenues for software and installation upon completion and acceptance of the software and installation services.

10

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


Unfulfilled Performance Obligations for Oncology Systems and VPT
The following table represents the Company's unfulfilled performance obligations as of June 29, 2018 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 2018
 
2019
 
2020
 
Thereafter
Unfulfilled Performance Obligations
$
465.3

 
$
2,447.9

 
$
1,022.9

 
$
1,807.7

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.
As part of the Company's adoption of ASC 606, the Company elected to use the following practical expedients (i) to exclude disclosures of transaction prices allocated to remaining performance obligations when the Company expects to recognize such revenue for all periods prior to the date of initial application of ASC 606 (ii) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less (iii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less, which mainly includes the Company's internal sales force compensation program and certain partner sales incentive programs (iv) not to recast revenue for contracts that begin and end in the same fiscal period, and (v) not to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
Contract Balances
The timing of revenue recognition, billings and cash collections results in trade and unbilled receivables, and deferred revenues on the Condensed Consolidated Balance Sheets. In Oncology Systems, the Company often collects an advance payment and the balance is typically billed on a combination of delivery and/or acceptance. In VPT, the Company usually collects an advance payment and additional amounts are billed as work progresses in accordance with agreed-upon contractual terms upon achievement of contractual milestones. Service contracts are usually billed at the beginning of the contract period or at periodic intervals (e.g. monthly or quarterly) during the contract which could result in a contract asset and contract liability. At times, billing occurs subsequent to revenue recognition, resulting in an unbilled receivable which represents a contract asset. However, when the Company receives advances or deposits from customers, which can be higher in the initial stages of the contract, particularly international contracts in the case of Oncology Systems, before revenue is recognized, this results in deferred revenues which represents a contract liability. These contract assets and liabilities are reported as unbilled receivables and deferred revenues, respectively, on the Condensed Consolidated Balance Sheet on a contract-by-contract basis at the end of each reporting period.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC 606. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Effective September 30, 2017, the Company elected to early adopt the requirements of ASC 606 using the full retrospective method, which required the Company to recast the prior reporting periods presented.
The most significant impacts on adoption were in the Oncology Systems segment and are primarily due to the removal of the contingent revenue cap which limited revenue recognition to the amount of cash received from the customer, the elimination of the mandatory revenue deferral for software sold with extended payment terms and the removal of the vendor-specific objective evidence requirement for the separation of bundled software products. The Company also identified additional performance obligations for training and certain elements of warranty that are recognized as separate performance obligations, and identified that certain new performance obligations were previously accounted for as part of hardware products and will result in a change in classification of revenues from product to service. In preparation for adoption of the standard, the Company implemented internal controls and key system functionalities to enable the preparation of financial information.

11

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The Company has recast its condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Select Condensed Consolidated Statements of Earnings line items, which reflect the adoption of ASC 606 are as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
June 30, 2017
(In millions, except per share amounts)
As Previously Reported
 
Adjustments
 
As Adjusted
 
As Previously Reported
 
Adjustments
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Product
$
383.4

 
$
(63.2
)
 
$
320.2

 
$
1,113.1

 
$
(118.8
)
 
$
994.3

Service
279.0

 
33.6

 
312.6

 
816.1

 
87.1

 
903.2

Total revenues
662.4

 
(29.6
)
 
632.8

 
1,929.2

 
(31.7
)
 
1,897.5

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
Product
248.4

 
(22.8
)
 
225.6

 
727.0

 
(48.3
)
 
678.7

Service
120.7

 
21.0

 
141.7

 
357.9

 
52.8

 
410.7

Total cost of revenues
369.1

 
(1.8
)
 
367.3

 
1,084.9

 
4.5

 
1,089.4

Gross margin
293.3

 
(27.8
)
 
265.5

 
844.3

 
(36.2
)
 
808.1

Earnings from continuing operations before taxes
116.5

 
(27.8
)
 
88.7

 
234.6

 
(36.2
)
 
198.4

Taxes on earnings
25.9

 
(7.1
)
 
18.8

 
60.2

 
(9.2
)
 
51.0

Net earnings from continuing operations
90.6

 
(20.7
)
 
69.9

 
174.4

 
(27.0
)
 
147.4

Net loss from discontinued operations

 

 

 
(6.8
)
 

 
(6.8
)
Net earnings
$
90.6

 
$
(20.7
)
 
$
69.9

 
$
167.6

 
$
(27.0
)
 
$
140.6

Net earnings attributable to Varian
$
90.4

 
$
(20.7
)
 
$
69.7

 
$
166.9

 
$
(27.0
)
 
$
139.9

 
 
 
 
 
 
 
 
 
 
 
 
Diluted net earnings per share from continuing operations attributable to Varian
$
0.98

 
$
(0.23
)
 
$
0.75

 
$
1.86

 
$
(0.29
)
 
$
1.57

Select Condensed Consolidated Statements of Balance Sheet line items, which reflect the adoption of ASC 606 are as follows:
 
September 29, 2017
(In millions)
As Previously Reported
 
Adjustments
 
As Adjusted
Assets:
 
 
 
 
 
Trade and unbilled receivables, net
$
823.5

 
$
138.0

 
$
961.5

Inventories
439.7

 
(22.0
)
 
417.7

Prepaid expenses and other current assets
199.8

 
(9.5
)
 
190.3

Deferred tax assets
138.8

 
8.5

 
147.3

 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
Accrued liabilities
394.7

 
(19.8
)
 
374.9

Deferred revenues
640.6

 
114.8

 
755.4

Other long-term liabilities
130.0

 
(2.6
)
 
127.4

Retained earnings
756.0

 
22.6

 
778.6


12

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


In addition, the cumulative effect of ASC 606 to the Company's retained earnings at October 2, 2015 was $56.7 million. Adoption of ASC 606 had no impact to net cash from or used in operating, investing or financing activities in the Company's Condensed Consolidated Statements of Cash Flows.
In the first quarter of fiscal year 2018, the Company elected to early adopt the FASB guidance which targeted improvements to the accounting for hedging activities. The guidance allows companies to more accurately present the economic effects of risk management activities in the financial statements. This amendment is required to be applied prospectively. The primary impact of the adoption is the required disclosure changes. The adoption of the new guidance did not have a material impact on the Company's condensed consolidated financial statements.
In the first quarter of fiscal year 2018, the Company adopted the FASB guidance related to employee share-based payments. The amendment simplifies several aspects of the accounting for employee share-based payments including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company elected to use the prospective transition method for the presentation of excess tax benefits on the statement of cash flows. Under the new standard, excess tax benefits are now included in taxes on earnings in the Consolidated Statements of Earnings. The Company elected to recognize forfeitures as they occur, and the impact of this change in accounting policy was recorded as a $0.4 million reduction, net, to its beginning retained earnings balance as of September 30, 2017. See Note 12, "Income Taxes" for more information on the impact of this accounting guidance. The remaining provisions of this amendment did not have a material impact on the Company's condensed consolidated financial statements.
In the first quarter of fiscal year 2018, the Company adopted the FASB accounting guidance related to inventory measurement. The amendment requires inventory measured using first-in, first-out (FIFO) or average cost to be subsequently measured at the lower of cost and net realizable value, thereby simplifying the current guidance that requires an entity to measure inventory at the lower of cost or market. This amendment is required to be applied prospectively. The adoption of this new guidance did not have a material impact to the Company’s condensed consolidated financial statements.
In the first quarter of fiscal year 2018, the Company elected to early adopt the FASB guidance on the definition of a business in accounting for transactions when determining whether they represent acquisitions or disposals of assets or of a business. The Company adopted this amendment prospectively. The adoption of this new guidance did not have an impact to the Company’s condensed consolidated financial statements.
In the first quarter of fiscal year 2018, the Company elected to early adopt the FASB guidance simplifying the measurement of goodwill by eliminating the Step 2 impairment test. The new guidance requires companies to perform the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company adopted this amendment prospectively. The adoption of this new guidance did not have an impact to the Company’s condensed consolidated financial statements.
Recent Accounting Standards or Updates Not Yet Effective
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. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
In May 2017, the FASB provided guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted. The Company does not expect that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.
In March 2017, the FASB amended its 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 be presented in the same line item as other employee compensation costs, while the other components be presented separately as non-operating income (expense). The amendment will be effective for the Company beginning in its first quarter of fiscal year 2019. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
In November 2016, the FASB amended its guidance on the classification and presentation of restricted cash in the statement of cash flow. The amendment requires entities to include restricted cash and restricted cash equivalents in its cash and cash

13

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


equivalents in the statement of cash flows. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2019 with early adoption permitted. The amendment is required to be adopted retrospectively. The amendment is not expected to have a material impact to the Company’s condensed consolidated financial statements.
In October 2016, the FASB amended its 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 amendment will be effective for the Company beginning in its first quarter of fiscal year 2019. Early adoption is permitted. The amendment is required to be adopted on a modified retrospective basis. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
In August 2016, the FASB issued an amendment to its accounting 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 amendment will be effective for the Company beginning in its first quarter of fiscal year 2019 with early adoption permitted. The amendment is required to be adopted retrospectively unless it is impracticable. 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 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 new standard is required to be adopted using a modified retrospective method to each prior reporting period presented with various optional practical expedients. The new standard will be effective for the Company beginning in its first quarter of fiscal year 2020 with early adoption permitted. The Company is evaluating the impact of adopting this new standard to its condensed consolidated financial statements.
In January 2016, the FASB issued an amendment to its accounting 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. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2019. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.
2. DISCONTINUED OPERATIONS
On January 28, 2017, the Company completed the Distribution of Varex. In connection with the Distribution, the Company and Varex entered into a separation and distribution agreement as well as various other agreements that governs the relationships between the parties, including a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, a trademark license agreement and supply/distribution agreements. The separation and distribution agreement and other agreements related to the separation were entered into on January 27, 2017. Services under the transition services agreement were for 60 days to 24 months following the Distribution Date, depending on the service provided.
On January 25, 2017, the Company entered into a term facility ("Varex Term Facility"), and on the same day drew down $203.0 million under the facility. In conjunction with the Distribution, the Company used $200.0 million of those proceeds to repay a portion of its outstanding 2013 Revolving Credit Facility. At the Distribution Date, the Company contributed $81.3 million in cash and cash equivalents to Varex as part of the distribution and transfer of certain legal entities. In fiscal year 2017, the Company received $38.7 million from Varex for excess cash and cash equivalents contributed at the Distribution Date. In fiscal year 2017, the Company recorded a $334.1 million reduction to retained earnings as a result of the Distribution of Varex, which included assets and liabilities transferred to Varex on the Distribution Date, including $203.0 million of debt outstanding under the Varex Term Facility.
Following the Distribution, Varex retained a specified amount of cash that would enable Varex to pay the Company consideration for certain net assets outside of the United States that were required to be transferred to Varex but which did not occur on the Distribution Date due to not having received regulatory approvals for such transfers. Once those regulatory

14

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


approvals are received, the Company will receive a cash payment from Varex in consideration for such net asset transfers. At June 29, 2018, the Company had $1.9 million in assets (net of liabilities) on its Condensed Consolidated Balance Sheet related to Varex net assets to be transferred. The Company expects the remainder of Varex's net assets will be transferred in fiscal year 2018. If the Company does not receive the necessary regulatory approvals during a specified time period, Varex will be required to transfer such cash amounts to Varian.
The financial results of Varex are presented as net earnings from discontinued operations on the Condensed Consolidated Statements of Earnings, and primarily include the financial results of the Company's former Imaging Components operating segment and costs relating to the Distribution. Corporate costs previously allocated to the Company's Imaging Components operating segment are not included in discontinued operations. See Note 17, "Segment Information" for more information related to corporate allocated costs.
The following table summarizes the key components of net loss from discontinued operations:
 
Nine Months Ended (1)
(In millions)
June 30,
2017
Revenues
$
194.0

Cost of revenues
117.3

Gross margin
76.7

Operating expenses (2)
76.1

Operating earnings
0.6

Taxes on earnings
7.4

Net loss from discontinued operations
(6.8
)
Less: Net earnings from discontinued operations attributable to noncontrolling interests
0.1

Net loss from discontinued operations attributable to Varian
$
(6.9
)
(1) 
There was no activity in net loss from discontinued operations during the three and nine months ended June 29, 2018 or the three months ended June 30, 2017.
(2) 
Operating expenses include separation costs of $34.2 million during the nine months ended June 30, 2017. Separation costs include expenses for transaction advisory services, consulting services, restructuring, and other expenses.
The following table summarizes the major classes of assets and liabilities of discontinued operations that were included in the Company's Condensed Consolidated Balance Sheets:
(In millions)
June 29,
2018
 
September 29,
2017
Assets:
 
 
 
Trade accounts receivable, net
$
3.5

 
$
8.1

Inventories
0.5

 
2.9

Prepaid expenses and other current assets
0.4

 
0.1

Current assets of discontinued operations
4.4

 
11.1

Total assets of discontinued operations
$
4.4

 
$
11.1

Liabilities:
 
 
 
Accounts payable
$
0.7

 
$
2.0

Accrued liabilities
1.8

 
0.5

Current liabilities of discontinued operations
2.5

 
2.5

Total liabilities of discontinued operations
$
2.5

 
$
2.5


15

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The following table presents supplemental cash flow information of discontinued operations:
 
Nine Months Ended (1)
(In millions)
June 30,
2017
Operating activities:
 
Share-based compensation expense
$
2.0

Depreciation expense
4.8

Amortization expense
1.8

Investing activities:
 
Purchases of property, plant and equipment
$
(6.4
)
(1) 
There was no significant cash flow activity from discontinued operations during the nine months ended June 29, 2018.
3. BUSINESS COMBINATIONS
Sirtex
On January 30, 2018, the Company signed an agreement to acquire Sirtex Medical Limited ("Sirtex"), an Australian company that is listed on the Australian Securities Exchange, for A$28 per share or approximately A$1.6 billion. On May 4, 2018, Sirtex received an unsolicited non-binding, indicative and conditional proposal from CDH Investments ("CDH"), a China-based alternative asset manager, for the acquisition of all of the issued shares in Sirtex for A$33.60 per share. On June 14, 2018, the Company received notification from Sirtex that it had accepted the proposal from CDH and consequently, Sirtex terminated its agreement with the Company and the Company received a net $9.0 million breakup fee from Sirtex.
Acquisitions
During the first nine months of fiscal year 2018, the Company acquired two privately-held software companies and a distributor of radiotherapy equipment, for an aggregate purchase price of $58.7 million. The purchase price of all three acquisitions primarily consisted of $22.8 million in finite-lived intangible assets and $17.9 million in goodwill. The Company has integrated these three acquisitions 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 resulting from the acquisitions completed above. The Company believes the factors that contributed to goodwill include synergies that are specific to the Company's acquisitions completed and not available to market participants and the acquisition of a talented workforce. The goodwill for the recent acquisitions mentioned above is deductible for income tax purposes.

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 the acquisitions may result in adjustments to the amounts of goodwill, intangible assets and deferred revenue balances recorded. The Company expects to finalize these amounts no later than one year from the date of each acquisition.
The condensed consolidated financial statements include the operating results from the date of acquisition. The impact of the acquisitions completed to the periods presented was not material. Pro forma results of operations for the acquisitions completed have not been presented because the effects of the acquisitions, individually and in the aggregate, were not material to the Company's condensed consolidated financial statements.
During the three and nine months ended June 29, 2018, the Company incurred acquisition-related expenses of $12.7 million and $33.9 million, respectively, which includes losses of $13.3 million and $29.7 million, respectively, related to hedging the anticipated Australian dollar purchase price for Sirtex; as well as acquisition costs of $8.4 million and $13.2 million,

16

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


respectively; partially offset by a net $9.0 million breakup fee received from Sirtex in connection with the termination of the acquisition. See Note 9, "Derivative Instruments and Hedging Activities" for further information on the hedging losses.
4. BALANCE SHEET COMPONENTS 
The following table provides the Company's unbilled receivables and deferred revenues from contracts with customers:
(In millions)
June 29,
2018
 
September 29,
2017
Unbilled receivables - current
$
343.0

 
$
259.1

Unbilled receivables - long-term (1)
27.4

 
10.9

Deferred revenues - current
(790.2
)
 
(755.4
)
Deferred revenues - long-term (2)
(9.6
)
 
(7.2
)
Total net unbilled receivables (deferred revenues)
$
(429.4
)
 
$
(492.6
)
(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 29, 2018, unbilled receivables net of deferred revenues increased by $63.2 million primarily due to the contractual timing of billings occurring after the revenues were recognized, as well as the timing of milestone payments.
During the three and nine months ended June 29, 2018, the Company recognized revenues of $214.3 million and $519.5 million, respectively, which was included in the deferred revenues balance at September 29, 2017. During the three and nine months ended June 30, 2017, the Company recognized revenues of $109.0 million and $455.0 million, respectively, which was included in the deferred revenues balance at September 30, 2016.
The Company did not have any impairment losses on its unbilled receivables during the nine months ended June 29, 2018. The Company recognized an impairment loss of $17.2 million from long-term unbilled receivables during the nine months ended June 30, 2017. See Note 16, "VPT Loans and Investment" for further information.
The following table summarizes the Company's inventories:
(In millions)
June 29,
2018
 
September 29,
2017
Raw materials and parts
$
334.4

 
$
296.5

Work-in-process
54.2

 
47.7

Finished goods
80.6

 
73.5

Total inventories
$
469.2

 
$
417.7


17

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The following tables summarize the Company's cash equivalents and available-for-sale securities:
 
June 29, 2018
(In millions)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
Money market funds
$
155.8

 
$

 
$

 
$
155.8

   Total cash equivalents
$
155.8

 
$

 
$

 
$
155.8

 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
APTC securities (1)
$
6.3

 
$

 
$

 
$
6.3

GPTC securities (2)
4.6

 

 

 
4.6

   Total available-for-sale securities
$
10.9

 
$

 
$

 
$
10.9

 
September 29, 2017
(In millions)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available-for-sale securities:
 
 
 
 
 
 
 
Original CPTC loans (2)
$
47.4

 
$

 
$

 
$
47.4

DRTC securities (2)
8.3

 

 

 
8.3

GPTC securities (2)
4.4

 

 

 
4.4

   Total available-for-sale securities
$
60.1

 
$

 
$

 
$
60.1

(1) 
Included in prepaid and other current assets on the Company's Condensed Consolidated Balance Sheets because the Company has the ability and intent to sell this security in the next twelve months.
(2) 
Included in other assets on the Company's Condensed Consolidated Balance Sheets because the maturity dates are greater than one year and the Company does not have the intent and ability to collect or sell all or a portion of its loans or securities in the next twelve months.
See Note 5, "Fair Value" and Note 16, "VPT Loans and Investment" for more information on the Original California Proton Treatment Center, LLC (“Original CPTC”) Loans, Alabama Proton Therapy Center (“APTC”), Delray Radiation Therapy Center (“DRTC”), and Georgia Proton Treatment Center ("GPTC") Securities.
The following table summarizes the Company's other long-term liabilities:
(In millions)
June 29,
2018
 
September 29,
2017
Long-term income taxes payable
$
201.1

 
$
48.6

Deferred income taxes
28.1

 
17.1

Other
62.0

 
61.7

Total other long-term liabilities
$
291.2

 
$
127.4



18

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


5. 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 Measurement Using
 
 
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 at June 29, 2018:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market funds
 
$
155.8

 
$

 
$

 
$
155.8

Available-for-sale securities:
 
 
 
 
 
 
 
 
APTC securities
 

 
6.3

 

 
6.3

GPTC securities
 

 
4.6

 

 
4.6

Total assets measured at fair value
 
$
155.8

 
$
10.9

 
$

 
$
166.7

 
 
 
 
 
 
 
 
 
Liabilities at June 29, 2018:
 
 
 
 
 
 
 
 
Contingent consideration
 
$

 
$

 
$
(3.0
)
 
$
(3.0
)
Total liabilities measured at fair value
 
$

 
$

 
$
(3.0
)
 
$
(3.0
)
 
 
 
 
 
 
 
 
 
Assets at September 29, 2017:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Original CPTC loans
 
$

 
$

 
$
47.4

 
$
47.4

DRTC securities
 

 
8.3

 

 
8.3

GPTC securities
 

 
4.4

 

 
4.4

Total assets measured at fair value
 
$

 
$
12.7

 
$
47.4

 
$
60.1

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 APTC, GPTC, and DRTC. 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 29, 2018 and September 29, 2017, the carrying amount of the Level 2 available-for-sale securities approximated their fair value. See Note 16, "VPT Loans and Investment" for further information about these bonds.
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. See Note 9, "Derivative Instruments and Hedging Activities" for more information about the Company's derivative instruments.
The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using a discounted cash flow model with key assumptions that include estimated sales units or revenues of the acquired business or completion of certain milestone targets during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. If the estimated sales units, 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 are from its business combinations in fiscal year 2018 and is included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.

19

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


In December 2017, the Original CPTC loans were modified and partially satisfied resulting in a Term Loan of $53.5 million, as defined in Note 16, "VPT Loans and Investment". One of the modifications was that the loan agent no longer has the option to purchase these loans from the Company; therefore, the Original CPTC loans are no longer classified as an available-for-sale security. The Company had no unrealized gains or unrealized losses associated with the Original CPTC loans recorded in its other comprehensive earnings. The modification to the Original CPTC Loans had no impact on the Company's Condensed Consolidated Statements of Earnings for the three months ended December 29, 2017. As of September 29, 2017, the Company classified the Original CPTC loans as available-for-sale securities, the fair value of which was 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 associated with the loans as well as underlying cash flow assumptions. However, the Company did not increase the fair value of the Original CPTC loans above their par values as ORIX Capital Markets, LLC (“ORIX”), the loan agent, had the option to purchase these loans from the Company under the original terms and conditions at par value.
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)
Available-for-sale Securities
 
Contingent
Consideration
Balance at September 29, 2017
$
47.4

 
$

Additions from business combinations

 
(3.0
)
Reclassification of Original CPTC Loans to Term Loan
(47.4
)
 

Balance at June 29, 2018
$

 
$
(3.0
)
There were no transfers of assets or liabilities between fair value measurement levels during either the three and nine months ended June 29, 2018, or the three and nine months ended June 30, 2017. 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 and cash equivalents, trade and unbilled receivables, net of allowance for doubtful accounts, short-term notes receivable, revolving loan to CPTC, RPTC senior secured debt, accounts payable, and short-term borrowings approximate their carrying amounts due to their short maturities.
As of June 29, 2018, the fair value of the Term Loan with CPTC approximated its carrying value of $44.0 million. See Note 16, "VPT Loans and Investment" for further information. 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.
The fair value of the outstanding long-term notes receivable, including accrued interest, approximated their carrying value of $51.6 million and $100.2 million at June 29, 2018 and September 29, 2017, 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 16, "VPT Loans and Investment" for information on the long-term notes receivable.


20

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


6. RECEIVABLES
The following table summarizes the Company's trade and unbilled receivables, net and notes receivable:
(In millions)
June 29,
2018
 
September 29,
2017
Trade and unbilled receivables, gross
$
1,004.5

 
$
1,039.2

Allowance for doubtful accounts
(40.3
)
 
(63.1
)
Trade and unbilled receivables, net
$
964.2

 
$
976.1

Short-term
$
933.6

 
$
961.5

Long-term (1) 
$
30.6

 
$
14.6

 
 
 
 
Notes receivable
$
76.7

 
$
105.2

Short-term (2) 
$
25.1

 
$
5.0

Long-term (1) (3)
$
51.6

 
$
100.2

(1) 
Balances are included in other assets on the Company's Condensed Consolidated Balance Sheets.
(2) 
Balances are included in prepaid expenses and other current assets on the Company's Condensed Consolidated Balance Sheets.
(3) 
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 June 29, 2018, the allowance for doubtful accounts is entirely related to short-term trade and unbilled receivables. As of September 29, 2017, the allowance for doubtful accounts included $45.9 million related to short-term trade and unbilled receivables and $17.2 million related to long-term unbilled receivables, which was written off in the first quarter of fiscal year 2018.
See Note 16, "VPT Loans and Investment" for more information on the Company's short-term and long-term notes receivable balances.
7. GOODWILL AND INTANGIBLE ASSETS
The following table reflects the activity of goodwill by reportable operating segment: 
(In millions)
Oncology
Systems
 
Varian Particle Therapy
 
Total
Balance at September 29, 2017
$
170.2

 
$
52.4

 
$
222.6

Business combinations
17.9

 

 
17.9

Foreign currency translation adjustments

 
(0.6
)
 
(0.6
)
Balance at June 29, 2018
$
188.1

 
$
51.8

 
$
239.9

See Note 3, "Business Combinations" for more information on the Company's acquisitions in fiscal year 2018.

21

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The following table reflects the gross carrying amount and accumulated amortization of the Company's intangible assets: 
 
June 29, 2018
 
September 29, 2017
(In millions)
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Technologies and patents
$
115.5

 
$
(70.6
)
 
$
44.9

 
$
102.0

 
$
(60.9
)
 
$
41.1

Customer contracts and supplier relationship
42.8

 
(17.6
)
 
25.2

 
33.9

 
(14.3
)
 
19.6

Other
5.7

 
(5.2
)
 
0.5

 
5.5

 
(3.4
)
 
2.1

Total intangible with finite lives
164.0

 
(93.4
)
 
70.6

 
141.4

 
(78.6
)
 
62.8

In-process research and development with indefinite lives
8.8

 

 
8.8

 
8.8

 

 
8.8

Total intangible assets
$
172.8

 
$
(93.4
)
 
$
79.4

 
$
150.2

 
$
(78.6
)
 
$
71.6

Amortization expense for intangible assets was $4.8 million and $4.2 million during the three months ended June 29, 2018 and June 30, 2017, respectively, and $15.2 million and $11.5 million during the nine months ended June 29, 2018 and June 30, 2017, respectively.
As of June 29, 2018, 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 2018
$
4.7

2019
16.3

2020
14.0

2021
10.6

2022
9.2

Thereafter
15.8

Total remaining amortization for intangible assets
$
70.6

8. BORROWINGS
The following table summarizes the Company's total short-term borrowings:
 
June 29, 2018
 
September 29, 2017
(In millions, except for percentages)
Amount
 
Weighted-Average Interest Rate
 
Amount
 
Weighted-Average Interest Rate
Short-term borrowings:
 
 
 
 
 
 
 
Sumitomo Credit Facility
$
18.2

 
0.53
%
 
$

 
%
2017 Revolving Credit Facility

 
%
 
350.0

 
2.36
%
Total short-term borrowings
$
18.2

 
 
 
$
350.0

 
 

On April 3, 2018, the Company entered into a credit agreement (the "2018 Credit Agreement") with certain lenders and Bank of America, N.A. ("BofA"), as the administrative agent. The 2018 Credit Agreement provides for a five-year revolving credit facility (the "2018 Revolving Credit Facility") in an aggregate principal amount of up to $1.8 billion. The 2018 Revolving Credit Facility also includes a $50.0 million sub-facility for the issuance of letters of credit and permits swing line loans of up to $25 million. Under the 2018 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

22

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


increased commitments and certain other conditions are met. The proceeds of the 2018 Revolving Credit Facility may be used for working capital, capital expenditures, Company share repurchases, permitted acquisitions and other corporate purposes, as well as to satisfy the prior outstanding obligation under the 2017 Revolving Credit Facility.
The 2018 Revolving Credit Facility replaced the 2017 Revolving Credit Facility of $600 million. As of June 29, 2018, the Company did not have an outstanding principal balance on its 2018 Revolving Credit Facility.
Borrowings under the 2018 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 2018 Revolving Credit Facility have a contract repayment date of twelve months, or less, and a final maturity of five years if based on the Eurodollar Rate and all overnight borrowings on the base rate would also have a final maturity of five years.
The Company must pay a commitment fee on the unused portion of the 2018 Revolving Credit Facility at a rate from 0.125% to 0.25% based on a net leverage ratio. The Company may prepay, reduce or terminate the commitments without penalty. Swing line loans under the 2018 Revolving Credit Facility will bear interest at the base rate plus the then applicable margin for base rate loans.
The 2018 Credit Agreement provides that certain material domestic subsidiaries must guarantee the 2018 Revolving Credit Facility, subject to certain limitations on the amount secured. As of June 29, 2018, no subsidiary guaranties were required to be executed under the 2018 Credit Agreement.
The 2018 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 2018 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 2018 Credit Agreement for all periods within these condensed consolidated financial statements.
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 2018, the Sumitomo Credit Facility was extended and will expire in February 2019. 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%.
9. 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.
At June 29, 2018, and September 29, 2017, the Company did not have any outstanding derivatives designated as hedging instruments. Derivatives not designated as hedging instruments were not material for any of the periods presented. See Note 5, "Fair Value" for the valuation of the Company’s derivative instruments. Also, see Note 1, "Summary of Significant Accounting Policies" in the Consolidated Financial Statements in the Company’s 2017 Annual Report for the credit risk associated with the Company’s derivative instruments.
Offsetting of Derivatives
The Company presents its derivative assets and derivative liabilities on a gross basis on the Condensed Consolidated Balance Sheets. However, under agreements containing provisions on netting with certain counterparties of foreign exchange contracts, subject to applicable requirements, the Company is allowed to net-settle transactions in the same currency, with a single net amount payable by one party to the other. As of June 29, 2018, and September 29, 2017, there were no potential effects of rights

23

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


of setoff associated with derivative instruments. The Company is neither required to pledge nor entitled to receive cash collateral related to these derivative transactions.
Cash Flow Hedging Activities
The Company has many transactions denominated in foreign currencies and addresses certain of those financial exposures through a risk management program that includes the use of derivative financial instruments. The Company sells products throughout the world, often in the currency of the customer’s country, and may hedge certain of the larger foreign currency transactions when they are either not denominated in the relevant subsidiary’s functional currency or the U.S. Dollar. These foreign currency sales transactions are hedged using foreign currency forward contracts. The Company may use other derivative instruments in the future. The Company does not enter into foreign currency forward contracts for speculative or trading purposes. Foreign currency forward contracts are entered into up to several times a quarter and range from one to thirteen months in maturity.
The hedges of foreign currency denominated forecasted revenues are designated and accounted for as cash flow hedges. The designated cash flow hedges de-designate when the anticipated revenues associated with the transactions are recognized and the change in fair value of the derivatives in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets is reclassified to revenues in the Condensed Consolidated Statements of Earnings. Subsequent changes in fair value of the derivative instrument are recorded in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings to offset changes in fair value of the resulting non-functional currency receivables. For derivative instruments that are designated and qualified as cash flow hedges, the Company formally documents for each derivative instrument at the hedge’s inception, the relationship between the hedging instrument (foreign currency forward contract) and hedged item (forecasted foreign currency revenues), the nature of the risk being hedged and its risk management objective and strategy for undertaking the hedge. The Company records the gain or loss on the derivative instruments that are designated and qualified as cash flow hedges in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets and reclassifies these amounts into revenues in the Condensed Consolidated Statements of Earnings in the period in which the hedged transaction is recognized in earnings. The Company assesses hedge effectiveness both at the onset of the hedge and on an ongoing basis using regression analysis. The time value of the derivative and hedged item is included in the assessment of hedge effectiveness.
At the inception of the hedge relationship and quarterly thereafter, the Company assesses whether the likelihood of meeting the forecasted cash flow is highly probable. As of June 29, 2018 and September 29, 2017, the Company did not have any outstanding foreign currency forward contracts designated as cash flow hedges.
During the nine months ended June 29, 2018, the Company recognized an unrealized loss of $0.9 million, in other comprehensive earnings on foreign currency forward contracts designated as cash flow hedges. The Company did not have any foreign currency forward contracts designated as cash flow hedges during the three months ended June 29, 2018 and the three and nine months ended June 30, 2017.
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
 
 
Nine Months Ended
 
 
June 29, 2018
(In millions)
 
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
 
$
2,117.5

 
 
 
Loss on cash flow hedge relationships:
 
 
Foreign currency forward contracts:
 
 
Amount of loss reclassified from accumulated other comprehensive loss into earnings
 
$
(0.9
)

24

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


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. The Company enters into foreign currency forward contracts to minimize the short-term impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the U.S. Dollar functional currency. The foreign currency forward contracts are short term in nature, typically with a maturity of approximately one month, and are based on the net forecasted balance sheet exposure. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in selling, general and administrative expenses 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. Variations from the forecasted foreign currency assets or liabilities, coupled with a significant currency rate movement, may result in a material gain or loss if the hedges are not effectively offsetting the change in value of the foreign currency asset or liability. Other than foreign exchange hedging activities, the Company has no other free-standing or embedded derivative instruments.
The Company had the following outstanding foreign currency forward contracts relating to balance sheet hedging activities:
 
June 29, 2018
(In millions)
Notional
Value Sold
 
Notional
Value Purchased
Australian Dollar
$
26.9

 
$

Brazilian Real
11.2

 

British Pound
31.4

 
0.7

Danish Krone
7.8

 
0.6

Euro
253.5

 
8.3

Hungarian Forint
2.7

 

Indian Rupee
17.7

 

Japanese Yen
43.0

 

Norwegian Krone
0.5

 

Polish Zloty
12.4

 

Singapore Dollar

 
0.3

South African Rand
8.2

 

Swedish Krona
4.9

 

Swiss Franc

 
38.7

Taiwan Dollar
5.4

 

Thai Baht
6.1

 

Totals
$
431.7

 
$
48.6

The following table presents the gains (losses) 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 (Loss) Recognized in Net Earnings on Derivative Instruments
 
Amount of Gain (Loss) Recognized in Net Earnings on Derivative Instruments
 
 
Three Months Ended
 
Nine Months Ended
(In millions)
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Selling, general and administrative expenses
 
$
25.5

 
$
(9.9
)
 
$
13.3

 
$
(2.5
)
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.

25

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


Foreign Currency Forward and Option Contracts related to Sirtex
In February 2018, the Company entered into foreign currency forward contracts and a foreign currency option contract to economically hedge its foreign currency exchange rate risk on the consideration to be paid for the anticipated Sirtex acquisition. The foreign currency forward contracts allowed the Company to purchase a notional amount of A$793.0 million for $621.0 million on May 25, 2018. On May 25, 2018, the Company purchased the off-setting foreign currency forward contracts for a notional amount of $596.8 million. Also in February 2018, the Company paid a premium of $5.5 million for a foreign currency option that allowed the Company the right to purchase a notional amount of A$792.0 million for $641.5 million, which expired on May 23, 2018. Since the Company did not acquire Sirtex, the foreign currency option was not exercised.
The foreign currency forward contracts and option contract did not qualify for hedge accounting. As such, changes in the fair value were recognized in acquisition-related expenses on the Condensed Consolidated Statements of Earnings. In the three and nine months ended June 29, 2018, the Company recorded losses of $12.8 million and $24.2 million on the foreign currency forward contracts and $0.5 million and $5.5 million on the foreign currency option contract.
Contingent Features
Certain of the Company’s derivative instruments are subject to master agreements which contain provisions that require the Company, in the event of a default, to settle the outstanding contracts in net liability positions by making settlement payments in cash or by setting off amounts owed to the counterparty against any credit support or collateral held by the counterparty. As of June 29, 2018, and September 29, 2017, the Company did not have any outstanding derivative instruments with credit-risk-related contingent features that were in a net liability position in the Company’s outstanding balance sheet hedges.
10. COMMITMENTS AND CONTINGENCIES
Product Warranty
The following table reflects the changes in the Company’s accrued product warranty:
 
Nine Months Ended
(In millions)
June 29,
2018
 
June 30,
2017
Accrued product warranty, at beginning of period
$
41.3

 
$
41.9

Charged to cost of revenues
41.8

 
29.4

Actual product warranty expenditures
(41.6
)
 
(32.8
)
Accrued product warranty, at end of period
$
41.5

 
$
38.5

Accrued product warranty was included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.
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.
The Company also reimburses certain third parties for cleanup activities. The Company spent $0.2 million and $0.2 million (net of amounts borne by third parties) in the three months ended June 29, 2018 and June 30, 2017, respectively, on environmental cleanup costs, third-party claim costs, project management costs and legal costs. The Company spent $0.6 million and $0.5 million (net of amounts borne by third parties) in the nine months ended June 29, 2018 and June 30, 2017, respectively, on such costs.

26

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


With respect to some of these facilities, inherent uncertainties make it difficult to estimate the likelihood of the cost of future cleanup, third-party claims, project management and legal services for the cleanup sites (“Group A Sites”). Nonetheless, as of June 29, 2018, the Company estimated that, net of third parties’ indemnification obligations, future costs associated with the environmental remediation liabilities for the Group A Sites would range in total from $0.8 million to $5.3 million. The time frames over which these cleanup project costs are estimated vary, ranging from one year to thirty years as of June 29, 2018. Management believes that no amount in that range is more probable of being incurred than any other amount and therefore accrued $0.8 million for these cleanup projects as of June 29, 2018. The accrued amount has not been discounted to present value due to the uncertainties that make it difficult to develop a single best estimate.
In addition to the Group A Sites, there are other past and present facilities (“Group B Sites”) where the Company believes it has gained sufficient knowledge to better estimate the scope and cost of monitoring, cleanup and management activities. This, in part, is based on agreements with other parties and also cleanup plans approved by or completed in accordance with the requirements of, the governmental agencies having jurisdiction. As of June 29, 2018, the Company estimated that the Company’s future exposure on the Group B Sites, net of third parties’ indemnification obligations, for the costs at these facilities, and reimbursements of third-party’s claims for these facilities, ranged in total from $3.9 million to $18.1 million. The time frames over which these costs are estimated to be incurred vary, ranging from one year to thirty years as of June 29, 2018. As to each of these facilities, management determined that a particular amount within the range of estimated costs was a better estimate than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. The best estimate within that range was $5.3 million at June 29, 2018. Accordingly, the Company had accrued $4.7 million as of June 29, 2018 for these costs, which represented the best estimate discounted at 4%, net of inflation. This accrual is in addition to the $0.8 million accrued for the Group A Sites.
These amounts are only estimates of anticipated future costs. The amounts the Company will actually spend may be greater than the estimates. 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 evaluates its liability for investigation and cleanup costs in light of the obligations and financial strength of potential third parties and insurance companies the Company believes it has rights to indemnity or reimbursement. The Company has an agreement with an insurance company under which that insurer has agreed to pay a portion of the Company’s past and future environmental-related expenditures. Receivables, net of the portion due to third parties who reimburse the Company, from that insurer amounted to $1.5 million and $1.6 million at June 29, 2018 and September 29, 2017, respectively, with the respective current portion included in prepaid expenses and other current assets and the respective noncurrent portion included in other assets. The payable portion to that insurer is included in other long-term liabilities on the Condensed Consolidated Balance Sheets. The Company believes that this receivable is recoverable because it is based on a binding, written settlement agreement with an insurance company who appears to be financially viable and who has paid the Company’s claims in the past.
Other Matters
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.

27

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


Restructuring Charges
In the first quarter of fiscal year 2017, the Company offered an enhanced retirement program to its qualifying employees and implemented a workforce reduction (collectively, the "2017 Restructuring Plan"), primarily in its Oncology Systems and VPT segments, to improve operational performance. The Company did not incur any restructuring charges during the three and nine months ended June 29, 2018, respectively, and incurred $3.1 million and $9.4 million in restructuring charges during the three and nine months ended June 30, 2017, respectively. As of June 29, 2018, the Company completed this plan.
The following table provides a summary of changes in the restructuring liability related to the Company's restructuring plans:
(In millions)
September 29,
2017
 
Restructuring Charges
 
Cash Payments
 
June 29,
2018
2017 Restructuring Plan
$
3.9

 
$

 
$
(3.9
)
 
$

Total
$
3.9

 
$

 
$
(3.9
)
 
$

The restructuring charges are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings.
11. RETIREMENT PLANS
The Company sponsors five 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.
The components of net defined benefit costs were as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions)
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Defined Benefit Plans
 
 
 
 
 
 
 
Service cost
$
1.6

 
$
1.7

 
$
4.9

 
$
5.2

Interest cost
0.8

 
0.6

 
2.4

 
1.8

Expected return on plan assets
(2.0
)
 
(1.7
)
 
(6.0
)
 
(5.2
)
Amortization of prior service cost
(0.1
)
 
(0.1
)
 
(0.4
)
 
(0.2
)
Recognized actuarial loss
0.7

 
1.1

 
2.1

 
3.3

Net periodic benefit cost
$
1.0

 
$
1.6

 
$
3.0

 
$
4.9

12. INCOME TAXES
The Company’s effective tax rate was 21.2% and 21.1% for the three months ended June 29, 2018 and June 30, 2017, respectively, and 89.2% and 25.7% for the nine months ended June 29, 2018 and June 30, 2017, respectively. The increase in the Company’s effective tax rate for the nine months ended June 29, 2018, compared to the year-ago period, was primarily due to the tax effect of the Tax Cuts and Jobs Act (the "Act"), which was signed into law on December 22, 2017. The Company’s effective tax rate for the nine months ended June 30, 2017 was also high due to the impairment of the CPTC loans in December 2016, which were made by one of the Company's Swiss subsidiaries, which has a low tax rate, and a significant portion of the expense associated with the allowance for doubtful accounts recorded in the period being attributable to one of the Company's German subsidiaries which has a full valuation allowance.
The Act was signed into law on December 22, 2017. Among other changes, the Act reduces the U.S. corporate tax rate from 35% to 21%, and imposes a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. U.S. GAAP generally requires that the tax effect of a change in tax laws or rates be accounted for in the period of enactment.
The reduction in the U.S. corporate tax rate was effective January 1, 2018. As the Company has a September fiscal year end, the lower corporate tax rate will be phased in, resulting in a U.S. corporate rate of approximately 24.6% for the Company's fiscal year ending September 28, 2018, and 21% for subsequent fiscal years. The reduction in the rate requires the Company to re-

28

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


measure its net deferred tax assets that were originally recorded assuming a future tax benefit at the 35% rate. Because the rate change is phased in, a portion of the tax impact was included in the period of enactment and a portion is included gradually during the year of enactment. During the three and nine months ended June 29, 2018, the Company recorded a provisional tax expense of $1.6 million and $41.8 million, respectively, related to re-measuring its net deferred tax assets as a result of the rate reduction.
As part of the transition to a modified territorial system, the Act imposes a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company recorded a provisional discrete tax expense related to the one-time transition tax of $173.1 million during the nine months ended June 29, 2018 and none in the three months ended June 29, 2018. The Company intends to elect to pay this tax over the eight-year period allowed for in the Act. The transition to a modified territorial regime and the one-time transition tax on unremitted earnings has also caused the Company to re-evaluate its intentions with respect to the unremitted earnings of foreign subsidiaries. In the past, the Company did not accrue U.S. taxes on certain undistributed profits of certain foreign subsidiaries because the earnings were considered to be indefinitely reinvested. In light of the changes to the taxation of foreign earnings in the Act, the Company no longer considers the earnings of its foreign subsidiaries to be indefinitely reinvested.
Other provisions of the Act include a new minimum tax on certain foreign earnings (the Global Intangibles Low-taxed Income, or "GILTI"), a new tax on certain payments to foreign related parties (the Base Erosion Anti-avoidance Tax, or "BEAT"), a new incentive for Foreign-derived Intangibles Income ("FDII"), changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. Generally, these other provisions take effect for the Company in the fiscal year ending September 27, 2019.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). This guidance allows registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Act. SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates of the tax effects of the Act should include those amounts in their financial statements as “provisional” amounts. Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Act. The amounts of the tax effects related to the Act described in the paragraphs above represent the Company’s current reasonable estimates and are provisional amounts within the meaning of SAB 118. Also, it is expected that the U.S. Treasury will issue regulations and other guidance on the application of certain provisions of the Act. In subsequent periods, but within the measurement period, the Company will analyze that guidance and other necessary information, including the amount of foreign earnings and profits, pools of foreign tax, and the Company's foreign cash position, to refine its estimates and complete its accounting for the tax effects of the Act.
The Company adopted the FASB guidance related to employee share-based payments in the first quarter of fiscal year 2018. Among other changes, this standard changes the treatment of the tax effect of the excess stock deduction. For a share-based compensation instrument, the excess stock deduction is the difference between the amount of the deduction for taxable income and the amount of expense in the financial statements related to that instrument. Under the prior standard, the tax effect of the excess stock deduction related to share-based compensation was recorded to additional paid-in capital in the equity section on the Condensed Consolidated Balance Sheets. Under the new standard, the tax effect of the excess stock deduction related to share-based compensation is recorded as a discrete item to Taxes on Earnings in the Condensed Consolidated Statements of Earnings. For the three and nine months ended June 29, 2018, the Company recorded a discrete tax benefit of $0.3 million and $6.5 million, respectively, related to excess stock deduction activity. The Company expects that the new standard may cause its effective tax rate to be less predictable and more volatile going forward.
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 increased by $5.6 million during the nine months ended June 29, 2018, primarily due to the impact of the Act on the Company's unrecognized tax benefits. The impact of this increase in tax expense is included in the amount of the provisional discrete expense related to the one-time transition tax above. In addition, 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 statute of limitations in various jurisdictions.


29

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


13. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
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 (“ASR”) 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 June 29, 2018, approximately 4.1 million shares of VMS common stock remained available for repurchase under the November 2016 authorization.
The Company repurchased shares of VMS common stock under various authorizations during the periods presented as follows:
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Number of shares
0.3

 
0.5

 
1.1

 
3.0

Average repurchase price per share
$
120.59

 
$
93.45

 
$
112.25

 
$
89.68

Total cost
$
39.2

 
$
46.8

 
$
131.9

 
$
269.1

Other Comprehensive Earnings
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 29, 2017
$
(44.1
)
 
$

 
$
(24.7
)
 
$
(68.8
)
Other comprehensive earnings (loss) before reclassifications

 
(0.9
)
 
(3.0
)
 
(3.9
)
Amounts reclassified out of other comprehensive earnings (loss)
1.3

 
0.9

 

 
2.2

Tax expense
(0.2
)
 

 

 
(0.2
)
Balance at June 29, 2018
$
(43.0
)
 
$

 
$
(27.7
)
 
$
(70.7
)
(In millions)
Net Unrealized Gains
(Losses) Defined
Benefit Pension and
Post-Retirement
Benefit Plans
 
Cumulative
Translation
Adjustment
 
Accumulated
Other
Comprehensive Loss
Balance at September 30, 2016
$
(63.3
)
 
$
(37.5
)
 
$
(100.8
)
Other comprehensive loss before reclassifications

 
4.5

 
4.5

Amounts reclassified out of other comprehensive earnings (loss)
2.8

 

 
2.8

Tax expense
(0.5
)
 

 
(0.5
)
Balance at June 30, 2017
$
(61.0
)
 
$
(33.0
)
 
$
(94.0
)

30

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)


The amounts reclassified out of other comprehensive earnings (loss) into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows: 
 
Three Months Ended
 
Nine Months Ended
 
 
 (In millions)
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
 
 
Comprehensive Earnings Components
Loss Before Taxes
 
Loss Before Taxes
 
Line Item in Statements of Earnings
Unrealized loss on defined benefit pension and post-retirement benefit plans
$
(0.4
)
 
$
(0.9
)
 
$
(1.3
)
 
$
(2.8
)
 
Cost of revenues & Operating expenses
Unrealized loss on cash flow hedging instruments

 

 
(0.9
)
 

 
Revenues
Total amounts reclassified out of other comprehensive earnings (loss)
$
(0.4
)
 
$
(0.9
)
 
$
(2.2
)
 
$
(2.8
)
 
 
 
Noncontrolling Interests
In connection with the Distribution of Varex in January 2017, the Company's redeemable noncontrolling interests relating to MeVis Medical Solutions AG ("MeVis") were transferred to Varex.
Changes in noncontrolling interests and redeemable noncontrolling interests relating to MeVis and other subsidiaries of the Company were as follows:
 
Nine Months Ended
 
June 29, 2018
 
June 30, 2017
 (In millions)
Noncontrolling Interests
 
Noncontrolling Interests
 
Redeemable Noncontrolling Interests
Beginning of Period
$
4.3

 
$
3.7

 
$
10.3

Net earnings attributable to noncontrolling interests

 
0.6

 
0.1

Transfer of redeemable noncontrolling interests in MeVis to Varex

 

 
(10.3
)
Other

 

 
(0.1
)
End of Period
$
4.3

 
$
4.3

 
$

14. 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