UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January ~~3, 2020~~1, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-7598

_________________________________________________

VARIAN MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

____________________________________________________________

Delaware

94-2359345

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

3100 Hansen Way,

Palo Alto,

California

94304-1038

(Address of principal executive offices)

(Zip Code)

(650) 493-4000

(Registrant’s telephone number, including area code)

___________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1 par value	VAR	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated filer

☐

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January ~~31, 2020,~~29, 2021, the registrant had ~~90,665,845~~91,838,813 shares of common stock, par value $1 per share, outstanding.

VARIAN MEDICAL SYSTEMS, INC.

FORM 10-Q for the Quarter Ended January ~~3, 2020~~1, 2021

INDEX

Part I.

Financial Information

Item 1.

Unaudited Financial Statements

Condensed Consolidated Statements of Earnings

Condensed Consolidated Statements of Comprehensive Earnings

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Cash Flows

Condensed Consolidated Statements of Equity

Notes to the Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3433

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

~~Item 4.~~

~~Controls and Procedures~~

~~Part II.~~

~~Other Information~~

~~Item 1.~~

~~Legal Proceedings~~

~~Item 1A.~~

~~Risk Factors~~

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Item 3.~~

~~Defaults Upon Senior Securities~~

Item 4.

~~Mine Safety Disclosures~~Controls and Procedures

~~Item 5.~~Part II.

Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

PART I

FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)


		Three Months Ended							Three Months Ended
		January 3,		December 28,			January 1,		January 3,
(In millions, except per share amounts)	(In millions, except per share amounts)	2020		2018		(In millions, except per share amounts)	2021		2020
Revenues:	Revenues:					Revenues:
Product	Product	$	421.0	$	400.2	Product	$	364.2	$	421.0
Service	Service	407.9		340.8		Service	414.6		407.9
Total revenues	Total revenues	828.9		741.0		Total revenues	778.8		828.9
Cost of revenues:	Cost of revenues:					Cost of revenues:
Product	Product	271.9		266.6		Product	245.1		271.9
Service	Service	190.2		158.3		Service	174.7		190.2
Total cost of revenues	Total cost of revenues	462.1		424.9		Total cost of revenues	419.8		462.1
Gross margin	Gross margin	366.8		316.1		Gross margin	359.0		366.8
Operating expenses:	Operating expenses:					Operating expenses:
Research and development	Research and development	67.1		60.9		Research and development	72.2		67.1
Selling, general and administrative	Selling, general and administrative	177.0		141.1		Selling, general and administrative	161.9		177.0

Acquisition-related expenses	Acquisition-related expenses	12.7		2.4		Acquisition-related expenses	7.7		12.7
Total operating expenses	Total operating expenses	256.8		204.4		Total operating expenses	241.8		256.8
Operating earnings	Operating earnings	110.0		111.7		Operating earnings	117.2		110.0
Interest income	Interest income	3.0		3.9		Interest income	2.8		3.0
Interest expense	Interest expense	(4.7)		(1.2)		Interest expense	(1.3)		(4.7)
Other income, net	Other income, net	4.4		23.0		Other income, net	5.7		4.4
Earnings before taxes	Earnings before taxes	112.7		137.4		Earnings before taxes	124.4		112.7
Taxes on earnings	Taxes on earnings	23.8		33.5		Taxes on earnings	27.6		23.8

Net earnings	Net earnings	88.9		103.9		Net earnings	96.8		88.9
Less: Net earnings attributable to noncontrolling interests	Less: Net earnings attributable to noncontrolling interests	0.7		0.7		Less: Net earnings attributable to noncontrolling interests	0.3		0.7
Net earnings attributable to Varian	Net earnings attributable to Varian	$	88.2	$	103.2	Net earnings attributable to Varian	$	96.5	$	88.2

Net earnings per share - basic	Net earnings per share - basic	$	0.97	$	1.13	Net earnings per share - basic	$	1.06	$	0.97

Net earnings per share - diluted	Net earnings per share - diluted	$	0.96	$	1.12	Net earnings per share - diluted	$	1.05	$	0.96

Shares used in the calculation of net earnings per share:	Shares used in the calculation of net earnings per share:					Shares used in the calculation of net earnings per share:
Weighted average shares outstanding - basic	Weighted average shares outstanding - basic	90.9		91.0		Weighted average shares outstanding - basic	91.4		90.9
Weighted average shares outstanding - diluted	Weighted average shares outstanding - diluted	91.7		92.0		Weighted average shares outstanding - diluted	92.2		91.7

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(Unaudited)


		Three Months Ended							Three Months Ended
		January 3,		December 28,			January 1,		January 3,
(In millions)	(In millions)	2020		2018		(In millions)	2021		2020
Net earnings	Net earnings	$	88.9	$	103.9	Net earnings	$	96.8	$	88.9
Other comprehensive earnings (loss), net of tax:	Other comprehensive earnings (loss), net of tax:					Other comprehensive earnings (loss), net of tax:
Defined benefit pension and post-retirement benefit plans:	Defined benefit pension and post-retirement benefit plans:					Defined benefit pension and post-retirement benefit plans:
Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.0* and $0.0*, respectively		(0.2)		(0.2)
Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of $(0.2) and $(0.1), respectively		0.9		0.5
Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.1* and $0.0*, respectively						Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.1* and $0.0*, respectively	(0.4)		(0.2)
Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of $(0.1) and $(0.2), respectively						Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of $(0.1) and $(0.2), respectively	0.8		0.9
		0.7		0.3			0.4		0.7
Derivative instruments:	Derivative instruments:					Derivative instruments:
Change in unrealized loss, net of tax benefit of $0.0* and $0.0, respectively		(0.1)		—
Reclassification adjustments, net of tax benefit of $0.2 and $0.0, respectively		(0.6)		—
Change in unrealized loss, net of tax benefit of $1.5 and $0.0*, respectively						Change in unrealized loss, net of tax benefit of $1.5 and $0.0*, respectively	(4.8)		(0.1)
Reclassification adjustments, net of tax (expense) benefit of $(0.1) and $0.2, respectively						Reclassification adjustments, net of tax (expense) benefit of $(0.1) and $0.2, respectively	0.3		(0.6)
		(0.7)		—			(4.5)		(0.7)

Currency translation adjustment	Currency translation adjustment	5.1		(4.0)		Currency translation adjustment	13.0		5.1
Other comprehensive earnings (loss)		5.1		(3.7)
Other comprehensive earnings						Other comprehensive earnings	8.9		5.1
Comprehensive earnings	Comprehensive earnings	94.0		100.2		Comprehensive earnings	105.7		94.0
Less: Comprehensive earnings attributable to noncontrolling interests	Less: Comprehensive earnings attributable to noncontrolling interests	0.7		0.7		Less: Comprehensive earnings attributable to noncontrolling interests	0.3		0.7
Comprehensive earnings attributable to Varian	Comprehensive earnings attributable to Varian	$	93.3	$	99.5	Comprehensive earnings attributable to Varian	$	105.4	$	93.3

* Tax expense or benefit related to the periods presented are not material.

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


		January 3,		September 27,			January 1,		October 2,
(In millions, except par values)	(In millions, except par values)	2020		2019		(In millions, except par values)	2021		2020
Assets	Assets					Assets
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	721.9	$	531.4	Cash and cash equivalents	$	773.3	$	766.1
Trade and unbilled receivables, net of allowance for doubtful accounts of $47.0 and $46.5 at January 3, 2020 and September 27, 2019, respectively		1,079.2		1,106.3
Trade and unbilled receivables, less allowance for credit losses of $55.2 and $52.3 at January 1, 2021 and October 2, 2020, respectively						Trade and unbilled receivables, less allowance for credit losses of $55.2 and $52.3 at January 1, 2021 and October 2, 2020, respectively	1,029.3		1,066.1
Inventories	Inventories	597.4		551.5		Inventories	571.7		516.3
Prepaid expenses and other current assets	Prepaid expenses and other current assets	248.5		206.2		Prepaid expenses and other current assets	267.0		254.8

Total current assets	Total current assets	2,647.0		2,395.4		Total current assets	2,641.3		2,603.3
Property, plant and equipment, net	Property, plant and equipment, net	330.3		311.5		Property, plant and equipment, net	346.5		344.9
Operating lease right-of-use assets	Operating lease right-of-use assets	114.1		—		Operating lease right-of-use assets	119.5		121.0
Goodwill	Goodwill	612.4		612.2		Goodwill	627.7		623.9
Intangible assets	Intangible assets	290.9		300.7		Intangible assets	265.0		271.3
Deferred tax assets	Deferred tax assets	85.7		84.7		Deferred tax assets	65.4		81.5
Other assets	Other assets	370.3		397.2		Other assets	460.7		416.3
Total assets	Total assets	$	4,450.7	$	4,101.7	Total assets	$	4,526.1	$	4,462.2
Liabilities and Equity	Liabilities and Equity					Liabilities and Equity
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	215.3	$	248.5	Accounts payable	$	206.5	$	194.9
Accrued liabilities	Accrued liabilities	471.2		459.5		Accrued liabilities	482.7		522.4
Deferred revenues	Deferred revenues	817.9		766.0		Deferred revenues	845.7		782.2
Short-term borrowings	Short-term borrowings	542.0		410.0		Short-term borrowings	210.0		355.0

Total current liabilities	Total current liabilities	2,046.4		1,884.0		Total current liabilities	1,744.9		1,854.5

Long-term lease liabilities	Long-term lease liabilities	93.7		—		Long-term lease liabilities	101.7		101.1
Other long-term liabilities	Other long-term liabilities	453.3		440.1		Other long-term liabilities	431.7		421.8
Total liabilities	Total liabilities	2,593.4		2,324.1		Total liabilities	2,278.3		2,377.4
Commitments and contingencies (Note 8)	Commitments and contingencies (Note 8)					Commitments and contingencies (Note 8)	0		0
Equity:	Equity:					Equity:
Varian stockholders' equity:	Varian stockholders' equity:					Varian stockholders' equity:
Preferred stock of $1 par value: 1.0 shares authorized; NaN issued and outstanding	Preferred stock of $1 par value: 1.0 shares authorized; NaN issued and outstanding	—		—		Preferred stock of $1 par value: 1.0 shares authorized; NaN issued and outstanding	0		0
Common stock of $1 par value: 189.0 shares authorized; 90.7 and 90.8 shares issued and outstanding at January 3, 2020 and September 27, 2019, respectively		90.7		90.8
Common stock of $1 par value: 189.0 shares authorized; 91.8 and 91.2 shares issued and outstanding at January 1, 2021 and October 2, 2020, respectively						Common stock of $1 par value: 189.0 shares authorized; 91.8 and 91.2 shares issued and outstanding at January 1, 2021 and October 2, 2020, respectively	91.8		91.2
Capital in excess of par value	Capital in excess of par value	870.4		845.6		Capital in excess of par value	997.7		937.0
Retained earnings	Retained earnings	983.2		934.0		Retained earnings	1,225.6		1,133.0
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(97.0)		(102.1)		Accumulated other comprehensive loss	(76.8)		(85.7)
Total Varian stockholders' equity	Total Varian stockholders' equity	1,847.3		1,768.3		Total Varian stockholders' equity	2,238.3		2,075.5
Noncontrolling interest	Noncontrolling interest	10.0		9.3		Noncontrolling interest	9.5		9.3
Total equity	Total equity	1,857.3		1,777.6		Total equity	2,247.8		2,084.8
Total liabilities and equity	Total liabilities and equity	$	4,450.7	$	4,101.7	Total liabilities and equity	$	4,526.1	$	4,462.2

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Three Months Ended
January 3, December 28,
(In millions) 2020 2018
Cash flows from operating activities:
Net earnings $ 88.9 $ 103.9
Adjustments to reconcile net earnings to net cash provided by operating activities:
Share-based compensation expense 14.9 10.5
Depreciation 15.0 12.8
Amortization of intangible assets and inventory step-up 10.2 4.7
Gain on sale of equity investments (1.4) (22.0)
Change in fair value of contingent consideration 8.8 —
Other, net 2.7 3.7
Changes in assets and liabilities, net of effects of acquisitions:
Trade and unbilled receivables 29.5 2.9
Inventories (44.9) (32.4)
Prepaid expenses and other assets 6.3 8.6
Accounts payable (32.7) 13.5
Accrued liabilities and other long-term liabilities (42.1) (12.5)
Deferred revenues 57.4 47.2
Net cash provided by operating activities 112.6 140.9
Cash flows from investing activities:
Purchases of property, plant and equipment (22.6) (14.0)
Acquisitions, net of cash acquired (1.7) (25.5)
Sale of equity investments 9.2 29.9
Other, net — (3.5)
Net cash used in investing activities (15.1) (13.1)
Cash flows from financing activities:
Repurchases of common stock (43.8) (34.8)
Proceeds from issuance of common stock to employees 19.7 22.0
Tax withholdings on vesting of equity awards (3.6) (4.4)
Borrowings under credit facility agreement 11.0 —
Repayments under credit facility agreement (11.0) —
Net borrowings under the credit facility agreements with maturities less than 90 days 132.0 —
Other (0.9) —
Net cash provided by (used in) financing activities 103.4 (17.2)
Effects of exchange rate changes on cash, cash equivalents, and restricted cash (2.8) 1.7
Net increase in cash, cash equivalents, and restricted cash 198.1 112.3
Cash, cash equivalents, and restricted cash at beginning of period 544.1 516.4
Cash, cash equivalents, and restricted cash at end of period $ 742.2 $ 628.7


	Three Months Ended
	January 1,		January 3,
(In millions)	2021		2020
Cash flows from operating activities:
Net earnings	$	96.8	$	88.9
Adjustments to reconcile net earnings to net cash provided by operating activities:
Share-based compensation expense	16.7		14.9
Depreciation	16.0		15.0
Amortization of intangible assets and inventory step-up	9.8		10.2
Deferred taxes	14.9		1.8

Gain on equity investments	(9.2)		(1.4)


Change in fair value of contingent consideration	0.2		8.8


Other, net	1.3		0.9
Changes in assets and liabilities, net of effects of acquisitions:
Trade and unbilled receivables	29.1		29.5
Inventories	(52.5)		(44.9)
Prepaid expenses and other assets	3.6		6.3
Accounts payable	8.0		(32.7)
Accrued liabilities and other long-term liabilities	(64.2)		(42.1)
Deferred revenues	70.9		57.4
Net cash provided by operating activities	141.4		112.6
Cash flows from investing activities:
Purchases of property, plant and equipment	(16.8)		(22.6)

Acquisitions, net of cash acquired	(0.5)		(1.7)


Purchase of equity and notes receivable in privately-held companies	(10.3)		0
Sale of equity investments	—		9.2




Net cash used in investing activities	(27.6)		(15.1)
Cash flows from financing activities:
Repurchases of common stock	0		(43.8)
Proceeds from issuance of common stock to employees	52.4		19.7
Tax withholdings on vesting of equity awards	(7.6)		(3.6)

Borrowings under credit facility agreement	0		11.0
Repayments under credit facility agreement	0		(11.0)
Net (repayments) borrowings under the credit facility agreements with maturities less than 90 days	(145.0)		132.0



Other	0		(0.9)
Net cash (used in) provided by financing activities	(100.2)		103.4
Effects of exchange rate changes on cash, cash equivalents, and restricted cash	(6.3)		(2.8)
Net increase in cash, cash equivalents, and restricted cash	7.3		198.1
Cash, cash equivalents, and restricted cash at beginning of period	785.8		544.1
Cash, cash equivalents, and restricted cash at end of period	$	793.1	$	742.2

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


		Common Stock																	Common Stock
(In millions)	(In millions)	Shares	Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total Varian Stockholders' Equity		Noncontrolling Interests		Total Equity		(In millions)	Shares	Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total Varian Stockholders' Equity		Noncontrolling Interests		Total Equity
Balance at September 27, 2019		90.8	$	90.8	$	845.6	$	934.0	$	(102.1)	$	1,768.3	$	9.3	$	1,777.6
Balance at October 2, 2020																	Balance at October 2, 2020	91.2	$	91.2	$	937.0	$	1,133.0	$	(85.7)	$	2,075.5	$	9.3	$	2,084.8
Impact of adopting ASU 2016-13 (see Note 1)																	Impact of adopting ASU 2016-13 (see Note 1)	—	—		—		(3.9)		—		(3.9)		—		(3.9)
Net earnings	Net earnings	—	—		—		88.2		—		88.2		0.7		88.9		Net earnings	—	—		—		96.5		—		96.5		0.3		96.8
Other comprehensive earnings	Other comprehensive earnings	—	—		—		—		5.1		5.1		—		5.1		Other comprehensive earnings	—	—		—		—		8.9		8.9		—		8.9
Issuance of common stock	Issuance of common stock	0.3	0.3		20.7		—		—		21.0		—		21.0		Issuance of common stock	0.6	0.6		51.8		—		—		52.4		—		52.4
Tax withholdings on vesting of equity awards	Tax withholdings on vesting of equity awards	—	—		(3.6)		—		—		(3.6)		—		(3.6)		Tax withholdings on vesting of equity awards	—	—		(7.6)		—		—		(7.6)		—		(7.6)
Share-based compensation expense	Share-based compensation expense	—	—		14.7		—		—		14.7		—		14.7		Share-based compensation expense	—	—		16.5		—		—		16.5		—		16.5
Repurchases of common stock		(0.4)	(0.4)		(7.0)		(39.0)		—		(46.4)		—		(46.4)

Balances at January 3, 2020		90.7	$	90.7	$	870.4	$	983.2	$	(97.0)	$	1,847.3	$	10.0	$	1,857.3
Other																	Other	—	—		—		—		—		—		(0.1)		(0.1)
Balances at January 1, 2021																	Balances at January 1, 2021	91.8	$	91.8	$	997.7	$	1,225.6	$	(76.8)	$	2,238.3	$	9.5	$	2,247.8


Balances at September 28, 2018		91.2	$	91.2	$	778.1	$	780.4	$	(65.3)	$	1,584.4	$	4.3	$	1,588.7
Balances at September 27, 2019																	Balances at September 27, 2019	90.8	$	90.8	$	845.6	$	934.0	$	(102.1)	$	1,768.3	$	9.3	$	1,777.6
Net earnings	Net earnings	—	—		—		103.2		—		103.2		0.7		103.9		Net earnings	—	—		—		88.2		—		88.2		0.7		88.9
Other comprehensive loss		—	—		—		—		(3.7)		(3.7)		—		(3.7)
Other comprehensive earnings																	Other comprehensive earnings	—	—		—		—		5.1		5.1		—		5.1
Issuance of common stock	Issuance of common stock	0.3	0.3		21.7		—		—		22.0		—		22.0		Issuance of common stock	0.3	0.3		20.7		—		—		21.0		—		21.0
Tax withholdings on vesting of equity awards	Tax withholdings on vesting of equity awards	—	—		(4.4)		—		—		(4.4)		—		(4.4)		Tax withholdings on vesting of equity awards	—	—		(3.6)		—		—		(3.6)		—		(3.6)
Share-based compensation expense	Share-based compensation expense	—	—		10.5		—		—		10.5		—		10.5		Share-based compensation expense	—	—		14.7		—		—		14.7		—		14.7
Repurchases of common stock	Repurchases of common stock	(0.3)	(0.3)		(6.6)		(27.9)		—		(34.8)		—		(34.8)		Repurchases of common stock	(0.4)	(0.4)		(7.0)		(39.0)		—		(46.4)		—		(46.4)
Other		—	—		—		(0.2)		—		(0.2)		—		(0.2)
Balances at December 28, 2018		91.2	$	91.2	$	799.3	$	855.5	$	(69.0)	$	1,677.0	$	5.0	$	1,682.0

Balances at January 3, 2020																	Balances at January 3, 2020	90.7	$	90.7	$	870.4	$	983.2	$	(97.0)	$	1,847.3	$	10.0	$	1,857.3

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

The long-term growth and value creation strategy of Varian Medical Systems, Inc. (“VMS”) and subsidiaries (collectively, the “Company”) is to transform the Company from the global leader in radiation therapy to the global leader in multi-disciplinary, integrated cancer care solutions that ~~leverages~~leverage its strengths, technology, innovation and clinical ~~experience and strengths in technology development and new product innovation.~~experience. The Company offers solutions in radiation therapy and medical oncology, as well as interventional oncology, an emerging area of cancer care. The Company designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, artificial intelligence based Adaptive Radiotherapy and brachytherapy, and offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolization. Software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices. The Company also develops, designs, manufactures, sells and services proton therapy products and systems for cancer treatment.

The Company has expanded its services offerings to include clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed ~~at facilitating~~to facilitate improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, the Company operates 1013 multi-disciplinary cancer centers and 1 specialty hospital in India and 1 multi-disciplinary cancer center in Sri Lanka.

Proposed Acquisition by Siemens Healthineers

On August 2, 2020, VMS, Siemens Healthineers Holding I GmbH, a company organized under the laws of Germany (“Siemens Healthineers”), Falcon Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of Siemens Healthineers (“Merger Sub”), and, with respect to certain provisions, Siemens Medical Solutions USA, Inc., a Delaware corporation ( the “Guarantor”), entered into a Merger Agreement and Plan of Merger, dated as of August 2, 2020 (the “Merger Agreement”), pursuant to which, on the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into VMS (the "Merger"), with VMS surviving the Merger as a wholly-owned subsidiary of Siemens Healthineers. Under the terms of the Merger Agreement, which has been unanimously approved by VMS' Board of Directors, Siemens Healthineers will acquire all outstanding shares of VMS for $177.50 per share in cash, in a transaction valued at approximately $16.4 billion on a fully diluted basis. The Merger is expected to close in the first half of calendar year 2021, subject to receipt of specified regulatory approvals and other customary closing conditions. On October 15, 2020, VMS' stockholders approved and adopted the Merger Agreement. Under the terms of the Merger Agreement, if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances, a termination fee of $450.0 million in cash may be payable by VMS to Siemens Healthineers. The Merger Agreement also provides that a reverse termination fee of $450.0 million or $925.0 million in cash may be payable by Siemens Healthineers to VMS if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances.

Basis of Presentation

The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of ~~September 27, 2019,~~October 2, 2020, was derived from audited financial statements as of that date, but does not include all disclosures required by ~~accounting principles generally accepted in the United States of America.~~GAAP. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended ~~September 27, 2019~~October 2, 2020 (the ~~“2019~~“2020 Annual Report”).

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic and the extent and duration of the future impact on the Company's business is highly uncertain and difficult to predict. The COVID-19 pandemic has adversely impacted, and may further adversely impact, nearly all aspects of the Company’s business and markets, including its workforce and operations and the operations of its customers, suppliers, distributors and business partners. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including but not limited to revenues, gross orders, expenses, manufacturing, research and development costs, reserves and allowances, fair

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

value measurements, asset impairment charges, contingent consideration obligations and the effectiveness of the Company's hedging instruments, will depend on future developments that are highly uncertain and difficult to predict.

The Company has approximately $1.7 billion in accessible liquidity, including approximately $773 million in cash and cash equivalents and approximately $972 million available under its $1.2 billion revolving credit facility. To date, the Company has not experienced a significant decline in customer credit quality or a significant increase in requests for changes or extension of payment terms as a result of COVID-19, although management will continue to closely monitor these metrics going forward. Furthermore, the Company's ability to estimate and make certain judgments may be materially impacted by the uncertainty caused by the pandemic.

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 January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ results of operations and statements of comprehensive earnings for the three months ended January 1, 2021, and January 3, 2020, ~~and December 28, 2018,~~ statements of cash flows for the three months ended January 1, 2021, and January 3, 2020, ~~and December 28, 2018,~~ and statements of equity for the three months ended January 1, 2021, and January 3, ~~2020, and December 28, 2018.~~2020. The results of operations for the three months ended January ~~3, 2020,~~1, 2021 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.

Reclassifications

Certain reclassifications have been made to the amounts in the prior year in order to conform to the current year's presentation.

Fiscal Year

The fiscal years of the Company as reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2021 is the 52-week period ending October 1, 2021. Fiscal year 2020 was the 53-week period ~~ending~~that ended on October 2, 2020. ~~Fiscal year 2019~~The fiscal quarter ended January 1, 2021 was ~~the 52-week~~a 13-week period ~~that ended on September 27, 2019. The~~and the fiscal quarter ended January 3, 2020 was a 14-week ~~period, and the fiscal quarter ended December 28, 2018, was a 13-week~~ period.

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.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

Consolidation of Variable Interest Entities

For entities in which the Company has variable interests, the Company focuses on identifying which entity has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. If the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s condensed consolidated financial statements. At January 3,1, 2021 and October 2, 2020, ~~and September 27, 2019,~~ the Company consolidated its non-controlling interest in a joint venture, included within its Oncology Systems business, related to the Cancer Treatment Services International ("CTSI") operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Due to the COVID-19 pandemic, the Company is subject to a greater degree of uncertainty than normal in making the judgments and estimates needed to apply its significant accounting policies, such as the impairment of goodwill and intangibles, and the impairment of equity investments, available-for-sale securities and loans receivables. As the COVID-19 pandemic and responsive actions continue to develop, management may make changes to these estimates and judgments, which could result in material impacts to the Company's financial statements in future periods.

Significant Accounting Policies

~~With the exception of the change for the accounting of leases as a result of the adoption of Accounting Standard Codification Topic 842, there~~There have been no material changes to the Company's significant accounting policies provided in Note 1, "Summary of Significant Accounting Policies," within Item 8 of the Company's Annual Report on Form 10-K for the year ended ~~September 27, 2019.~~

~~Leases~~

The Company determines if an arrangement is or contains a lease at the inception of an arrangement. The Company's operating lease right-of-use ("ROU") assets represents the right to use an underlying asset over the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. ROU assets may also include initial direct costs incurred and prepaid lease payments, less lease incentives. Lease liabilities and their corresponding ROU assets are recognized based on the present value of lease payments over the lease term, discounted using the Company's incremental borrowing rate ("IBR"). The Company recognizes operating leases with lease terms of more than twelve months in operating lease right-of-use assets, accrued liabilities, and long-term lease liabilities on its Condensed Consolidated Balance Sheets.

The Company’s finance leases primarily represent certain sale and leaseback-sublease arrangements. The Company has entered into sale-leaseback arrangements with a third-party finance company for certain equipment and simultaneously subleased the equipment to certain qualified customers. The Company’s leaseback arrangements have been accounted for as finance leases as they meet one or more of the finance lease classification criteria. The Company recognizes finance leases with lease terms of more than twelve months in property, plant, and equipment, net, accrued liabilities, and other long-term liabilities on its Condensed Consolidated Balance Sheets.

For purposes of calculating lease liabilities and the corresponding ROU assets, the Company's lease term may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.

The Company generally does not have adequate information to determine the implicit rate in a lease, therefore the Company uses an estimated IBR. The Company does not maintain a public credit rating and its debt arrangements are unsecured, thus requiring significant judgment to calculate the IBR. The Company uses different data sets to estimate the IBR, including: (i) an estimated indicative credit rating of the Company; (ii) yields on comparable credit rating composite curves; (iii) foreign exchange rates; and (iv) an estimated adjustment for collateral. The Company also applies adjustments to account for considerations related to (i) tenor; and (ii) country credit rating that may not be fully incorporated by the aforementioned data sets.

Certain of the Company’s lease arrangements include variable lease payments. Variable lease payments, not dependent on an index or discount rate, are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments generally include common area maintenance, utilities, maintenance charges, property taxes, insurance, and contingent rent payments. Certain of the Company's arrangements contain clauses that provide for contingent rent payments based on a percentage of revenue share and/or earnings before interest, taxes, depreciation, and amortization.

October 2, 2020.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The Company combines lease and non-lease components as a single lease component for both its operating and finance leases. In addition, the Company does not record operating and finance lease assets and liabilities for short-term leases, which have an initial term of twelve months or less.

Recently Adopted Accounting Pronouncements

In the first quarter of fiscal year ~~2020,~~2021, the Company adopted ~~the~~ Financial Accounting Standards Board ("FASB") ~~standard~~Accounting Standard Update No. 2016-13 Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on ~~accounting~~Financial Instruments ("ASU 2016-13"). ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for ~~leases, "Leases." The new standard is intended to provide enhanced transparency~~financial instruments, such as trade and ~~comparability by requiring lessees to record ROU assets~~unbilled receivables, loans and ~~corresponding~~loan commitments, and lease ~~liabilities on the balance sheet.~~receivables. The Company adopted this standard ~~under~~using the ~~optional~~modified retrospective transition ~~method, which applies~~method. Following the adoption of ASU 2016-13, credit loss reserves are recorded when financial assets are established if credit losses are expected over the asset’s contractual life. These losses were previously expensed when it became probable that a loss would be incurred. The adoption of this standard onresulted in a decrease in retained earnings as of October 3, 2020, of $3.9 million from the ~~effective date, rather than~~cumulative effect of initially applying the ~~earliest comparative period presented~~standards of that date. In addition, the adoption of this standard resulted in an increase in the ~~financial statements. The Company elected: (1)~~allowance for credit losses of trade and unbilled receivables of $3.4 million and an increase in the ~~"package~~allowance for credit losses for notes receivable of practical expedients," which does not require the Company to reassess its prior conclusions about lease identification, lease classification, and initial direct costs under the new standard; (2) not to separate non-lease components from lease components; and (3) not to recognize ROU assets and lease liabilities for short-term leases. The Company has implemented internal controls and key system functionalities to enable the preparation of financial information. The primary impact for the Company was the balance sheet recognition of ROU assets and lease liabilities for operating leases as a lessee. See Note 8, "Commitments and Contingencies," for more information on the impact of this adoption on the Company's condensed consolidated financial statements.$0.5 million.

In the first quarter of fiscal year ~~2020,~~2021, the Company adopted ~~FASB guidance~~Accounting Standards Update No. 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract ("ASU 2018-15"). The purpose of the update is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that ~~added~~is a service contract with the ~~Overnight Index Swap rate based~~requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company adopted ASU 2018-15 on a prospective basis. The impact of adopting ASU 2018-15 did not have a material impact on the Secured Overnight Financing Rate ("SOFR") as a benchmark interest rate for hedge accounting purposes. The amendment recognizes SOFR as a likely LIBOR replacement and supports the marketplace transition by adding the new reference rate as a benchmark interest rate. The Company has not executed interest rate hedges but adopted the amendment prospectively as the Company may consider interest rate hedges in the future. The Company is monitoring the LIBOR to SOFR migration and will coordinate the transition of outstanding LIBOR based debt and any related interest rate derivatives with counterparties when the market is liquid to ensure an orderly and efficient transition.Company's condensed consolidated financial statements.

In the first quarter of fiscal year ~~2020,~~2021, the Company adopted FASB ~~guidance that allows~~Accounting Standards Update No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 changes the disclosure requirements for fair value measurements, which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies ~~to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act to retained earnings.~~when preparing fair value measurement disclosures. The impact of adopting ~~this amendment on~~ASU 2018-13 did not impact the Company's condensed consolidated financial ~~statements was not material.~~statements.

Recent Accounting Standards or Updates Not Yet Effective

In December 2019, the FASB issued ~~guidance which~~Accounting Standards Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the current guidance and improving the consistent application of and simplification of other areas of the guidance. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance toon its condensed consolidated financial statements.

In August 2018, the FASB amended its guidance for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This new standard becomes effective for the Company in the first quarter of fiscal year 2021, with early adoption permitted. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.

In August 2018, the FASB ~~issued guidance~~issued Accounting Standards Update No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). ASU 2018-14 which modifies the disclosure requirements for employers that have sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance toon its condensed consolidated financial statements.

~~In August 2018, the FASB issued guidance~~which changed the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for the Company beginning in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

In June 2016, the FASB issued an amendment to its accounting guidance related to the impairment of financial instruments. The amendment adds a new impairment model that is based on expected losses, rather than incurred losses. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2021, with early adoption permitted beginning in the first quarter of fiscal year 2020. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.

2. OTHER FINANCIAL INFORMATION

Contracts with Customers

The following table provides the Company's unbilled receivables and deferred revenues from contracts with customers:


(In millions)	(In millions)	January 3, 2020		September 27, 2019		(In millions)	January 1, 2021		October 2, 2020
Unbilled receivables - current	Unbilled receivables - current	$	315.8	$	346.7	Unbilled receivables - current	$	292.7	$	306.2
Unbilled receivables - long-term ⁽¹⁾	Unbilled receivables - long-term ⁽¹⁾	42.7		35.1		Unbilled receivables - long-term (1)	94.1		68.6

Deferred revenues - current	Deferred revenues - current	(817.9)		(766.0)		Deferred revenues - current	(845.7)		(782.2)
Deferred revenues - long-term ⁽²⁾	Deferred revenues - long-term ⁽²⁾	(78.9)		(73.1)		Deferred revenues - long-term (2)	(76.3)		(68.5)
Total net unbilled receivables (deferred revenues)	Total net unbilled receivables (deferred revenues)	$	(538.3)	$	(457.3)	Total net unbilled receivables (deferred revenues)	$	(535.2)	$	(475.9)

⁽¹⁾Included in other assets on the Company's Condensed Consolidated Balance Sheets.

¹⁰

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

(2)Included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets.

During the three months ended January ~~3, 2020,~~1, 2021, unbilled receivables ~~decreased~~increased by ~~$23.3~~ $12.0 million, ~~primarily~~ primarily due to the timing of billings ~~in Oncology Systems,~~, and deferred revenues increased by ~~$57.7~~ $71.3 million, primarily due to the contractual timing of billings occurring before the revenues were recognized.

During the three months ended January 1, 2021, the Company recognized revenues of $276.4 million, which were included in the deferred revenues balances at October 2, 2020. During the three months ended January 3, 2020, ~~and December 28, 2018,~~ the Company recognized revenues of $314.5 ~~million, and $263.4~~ million, which were included in the deferred revenues balances at September 27, ~~2019 and September 28, 2018, respectively.~~2019.

Unfulfilled Performance Obligations

The following table represents the Company's unfulfilled performance obligations as of January ~~3, 2020,~~1, 2021, and the estimated revenues expected to be recognized in the future related to these unfulfilled performance obligations:


		Fiscal Years of Revenue Recognition															Fiscal Years of Revenue Recognition
(In millions)	(In millions)	Remainder of 2020		2021		2022		Thereafter		(In millions)	Remainder of 2021		2022		2023		Thereafter
Unfulfilled Performance Obligations	Unfulfilled Performance Obligations	$	1,884.1	$	2,003.2	$	787.7	$	2,122.9	Unfulfilled Performance Obligations	$	1,760.1	$	1,944.9	$	856.2	$	2,449.6

The table above includes both product and service unfulfilled performance obligations, which includes a component of service performance obligations that ~~have~~has not been invoiced. The fiscal years presented reflect management’s best estimate of when the Company will transfer control to the customer and may change based on timing of shipment, readiness of customers’ facilities for installation, installation requirements and availability of products or customer acceptance terms.

Cash, Cash Equivalents, and Restricted Cash

The following table summarizes the Company's cash, cash equivalents, and restricted cash:


(In millions)	(In millions)	January 3, 2020		September 27, 2019		(In millions)	January 1, 2021		October 2, 2020
Cash and cash equivalents	Cash and cash equivalents	$	721.9	$	531.4	Cash and cash equivalents	$	773.3	$	766.1
Restricted cash - current ⁽¹⁾	Restricted cash - current ⁽¹⁾	3.7		4.2		Restricted cash - current (1)	10.3		10.2
Restricted cash - long-term ⁽²⁾	Restricted cash - long-term ⁽²⁾	16.6		8.5		Restricted cash - long-term (2)	9.5		9.5
Total cash, cash equivalents, and restricted cash	Total cash, cash equivalents, and restricted cash	$	742.2	$	544.1	Total cash, cash equivalents, and restricted cash	$	793.1	$	785.8

⁽¹⁾Included in prepaid expenses and other current assets on the Company's Condensed Consolidated Balance Sheets.

(2)Included in other assets on the Company's Condensed Consolidated Balance Sheets.

Inventories

The following table summarizes the Company's inventories:


(In millions)	January 1, 2021		October 2, 2020

Raw materials and parts	$	355.8	$	322.9
Work-in-process	74.1		82.0
Finished goods	141.8		111.4
Total inventories	$	571.7	$	516.3

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

⁽²⁾~~Included in other assets on the Company's Condensed Consolidated Balance Sheets.~~

~~Inventories~~

~~The following table summarizes the Company's inventories:~~

(In millions) January 3,
2020 September 27,
2019
Raw materials and parts $ 399.8 $ 376.5
Work-in-process 75.6 71.8
Finished goods 122.0 103.2
Total inventories $ 597.4 $ 551.5

Other Long-Term Liabilities

The following table summarizes the Company's other long-term liabilities:


(In millions)	(In millions)	January 3, 2020		September 27, 2019		(In millions)	January 1, 2021		October 2, 2020
Income taxes payable	Income taxes payable	$	180.8	$	180.3	Income taxes payable	$	171.8	$	170.8

Deferred income taxes	Deferred income taxes	78.1		75.3		Deferred income taxes	100.5		101.2
Deferred revenues	Deferred revenues	78.9		73.1		Deferred revenues	76.3		68.5

Contingent consideration	Contingent consideration	42.5		42.3		Contingent consideration	28.1		25.7
Defined benefit pension plan	Defined benefit pension plan	30.4		31.1		Defined benefit pension plan	19.7		19.8
Other	Other	42.6		38.0		Other	35.3		35.8
Total other long-term liabilities	Total other long-term liabilities	$	453.3	$	440.1	Total other long-term liabilities	$	431.7	$	421.8

Other Income, Net

The following table summarizes the Company's other income, net:


		Three Months Ended					Three Months Ended
(In millions)	(In millions)	January 3, 2020		December 28, 2018		(In millions)	January 1, 2021		January 3, 2020
Gain on equity investments	Gain on equity investments	$	1.4	$	22.0	Gain on equity investments	$	8.6	$	1.4

Net foreign currency exchange gain		2.4		1.3
Other income (loss)		0.6		(0.3)
Net foreign currency exchange gain (loss)						Net foreign currency exchange gain (loss)	(3.8)		2.4
Other, net						Other, net	0.9		0.6
Total other income, net	Total other income, net	$	4.4	$	23.0	Total other income, net	$	5.7	$	4.4

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

3. FAIR VALUE

Assets/Liabilities Measured at Fair Value on a Recurring Basis

In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.


		Fair Value Measurements at January 3, 2020															Fair Value Measurements at January 1, 2021
		Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Total			Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
Type of Instruments	Type of Instruments	(Level 1)		(Level 2)		(Level 3)		Balance		Type of Instruments	(Level 1)		(Level 2)		(Level 3)		Balance
(In millions)	(In millions)									(In millions)
Assets:	Assets:									Assets:
Cash equivalents:	Cash equivalents:									Cash equivalents:
Money market funds	Money market funds	$	17.5	$	—	$	—	$	17.5	Money market funds	$	87.0	$	0	$	0	$	87.0
Equity investments										Equity investments	38.3		25.7		0		64.0
Available-for-sale securities:	Available-for-sale securities:									Available-for-sale securities:
MPTC Series B-1 Bonds	MPTC Series B-1 Bonds	—		27.6		—		27.6		MPTC Series B-1 Bonds	0		19.2		0		19.2
MPTC Series B-2 Bonds	MPTC Series B-2 Bonds	—		25.7		—		25.7		MPTC Series B-2 Bonds	0		21.1		0		21.1
APTC securities	APTC securities	—		6.7		—		6.7		APTC securities	0		5.5		0		5.5

Derivative assets	Derivative assets	—		2.3		—		2.3		Derivative assets	0		0.1		0		0.1
Total assets measured at fair value	Total assets measured at fair value	$	17.5	$	62.3	$	—	$	79.8	Total assets measured at fair value	$	125.3	$	71.6	$	0	$	196.9

Liabilities:	Liabilities:									Liabilities:

Derivative liabilities										Derivative liabilities	$	0	$	(8.1)	$	0	$	(8.1)
Contingent consideration	Contingent consideration	$	—	$	—	$	(84.3)	$	(84.3)	Contingent consideration	0		0		(47.9)		(47.9)
Total liabilities measured at fair value	Total liabilities measured at fair value	$	—	$	—	$	(84.3)	$	(84.3)	Total liabilities measured at fair value	$	0	$	(8.1)	$	(47.9)	$	(56.0)

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Fair Value Measurements at September 27, 2019
Quoted Prices in Active Markets for Identical Instruments Significant
Other
Observable
Inputs Significant Unobservable Inputs Total
Type of Instruments (Level 1) (Level 2) (Level 3) Balance
(In millions)
Assets:
Cash equivalents:
Money market funds $ 0.2 $ — $ — $ 0.2
Available-for-sale securities:
MPTC Series B-1 Bonds — 27.1 — 27.1
MPTC Series B-2 Bonds — 25.1 — 25.1
APTC securities — 6.6 — 6.6
Derivative assets — 2.8 — 2.8
Total assets measured at fair value $ 0.2 $ 61.6 $ — $ 61.8
Liabilities:
Contingent consideration $ — $ — $ (75.3) $ (75.3)
Total liabilities measured at fair value $ — $ — $ (75.3) $ (75.3)


	Fair Value Measurements at October 2, 2020
	Quoted Prices in Active Markets for Identical Instruments		Significant Other Observable Inputs		Significant Unobservable Inputs		Total
Type of Instruments	(Level 1)		(Level 2)		(Level 3)		Balance
(In millions)
Assets:
Cash equivalents:
Money market funds	$	148.0	$	0	$	0	$	148.0
Equity investments	0		54.6		0		54.6
Available-for-sale securities:
MPTC Series B-1 Bonds	0		18.9		0		18.9
MPTC Series B-2 Bonds	0		20.6		0		20.6
APTC securities	0		5.4		0		5.4

Total assets measured at fair value	$	148.0	$	99.5	$	0	$	247.5

Liabilities:
Derivative liabilities	$	0	$	(0.1)	$	0	$	(0.1)
Contingent consideration	0		0		(43.1)		(43.1)
Total liabilities measured at fair value	$	0	$	(0.1)	$	(43.1)	$	(43.2)

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 equity investments in publicly-traded companies are valued at quoted market prices at the end of each fiscal period and are classified as Level 1 if they are not subject to restrictions and Level 2 if they are currently subject to a lock-up period after the initial public offering.

The Company's Level 2 available-for-sale securities consist of bonds for the Maryland Proton Therapy Center ("MPTC") and the Alabama Proton Therapy Center

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

(“APTC”). The observable inputs for these securities are comparable bond issues, broker/dealer quotations for the same or similar investments in active markets, and other observable inputs such as yields, credit risks, default rates, and volatility. The Company's available-for-sale securities are included in other assets on the Company's Condensed Consolidated Balance Sheets, except for amounts related to short-term interest receivable. See Note 14, "Proton Solutions Loans and Investments," for further information about the available-for-sale securities. As of January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ the carrying amount of the Company's ~~Level 1~~ money market funds, equity investments and ~~Level 2~~ available-for-sale securities approximated their respective fair values.

The Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. The Company’s derivative instruments are generally short-term in nature, typically one month to fifteen months in duration.

The Company generally measures the fair value of its Level 3 contingent consideration liabilities based on Monte Carlo pricing models with key assumptions that include estimated revenues of the acquired business, the probability of completing certain milestone targets during the earn-out period, revenue volatility and estimated discount rates corresponding to the periods of expected payments. If the estimated revenues or probability of completing certain milestones were to increase or decrease during the respective earn-out period, the fair value of the contingent consideration would increase or decrease, respectively. If the estimated discount rates were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. Changes in key assumptions may result in an increase or decrease in the fair value of contingent consideration. The Company's contingent consideration is from its business combinations and is included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The following table presents the reconciliation for liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):


(In millions)	Contingent Consideration
Balance at ~~September 27, 2019~~October 2, 2020	$	~~(75.3)~~(43.1)
Business combinations	(1.1)
Adjustments to business combinations in prior year	(2.8)

Adjustments due to the effect of foreign exchange	~~(0.2)~~(0.7)
Change in fair value recognized in earnings	~~(8.8)~~(0.2)
Balance at January ~~3, 2020~~1, 2021	$	~~(84.3)~~(47.9)

~~There were no transfers of assets or liabilities between fair value measurement levels during either the three months ended January 3, 2020, or the three months ended December 28, 2018.~~

Transfers between fair value measurement levels are recognized at the end of the reporting period.

Fair Value of Other Financial Instruments

The fair values of certain of the Company’s financial instruments, including bank deposits included in cash equivalents, trade and unbilled receivables, net of allowance for ~~doubtful accounts, revolving loan to California Proton Therapy Center ("CPTC"),~~credit losses, accounts payable, and short-term borrowings approximate their carrying amounts due to their short maturities.

As of January ~~3, 2020,~~1, 2021, the fair value of the ~~Term Loan~~CPTC Loans (as defined ~~below) with CPTC~~in Note 14, "Proton Solutions Loans and Investments,") approximated its carrying value of ~~$44.0~~$11.8 million. The carrying value is based on the present value of expected future cash payments discounted at a rate reflecting the nature and duration of the loans, risks involved with ~~CPTC,~~the California Proton Therapy Center ("CPTC"), and its industry. As a result, the ~~Term Loan is~~CPTC Loans are categorized as Level ~~3 in the fair value hierarchy.~~3. See Note 14, "Proton Solutions Loans and Investments," for further information.

The fair value of the Company's equity investments and convertible promissory notes in privately-held companies were $78.3 million and $68.2 million at January 1, 2021 and October 2, 2020, respectively. The Company measures these investments at cost, and these investments are adjusted through net earnings when they are deemed to be impaired or when there is an adjustment from observable price changes. In the three months ended January 1, 2021, the fair value of the Company’s investments in its privately-held companies decreased by $0.8 million, which is included in other income, net, in the Condensed Consolidated Statements of Earnings.

The fair value of the Company's equity investments in ~~privately-held~~publicly-traded companies were ~~$56.4~~$64.0 million and ~~$64.2~~$54.6 million at January 3,1, 2021 and October 2, 2020, respectively, which are recorded in prepaid and ~~September 27, 2019, respectively.~~other current assets and other assets on the Company's Condensed Consolidated Balance Sheets. In the three months ended January 1, 2021, the fair value of its investments in publicly-traded companies increased by $9.4 million, which is included in other income, net, in the Condensed Consolidated Statements of Earnings.

The fair value of the outstanding long-term notes receivable, including accrued interest, approximated their carrying value of ~~$34.1~~$37.5 million and ~~$33.6~~$36.7 million at January 3,1, 2021 and October 2, 2020, ~~and September 27, 2019,~~ respectively, because they are based on the terms of recent comparable transactions and are categorized as Level ~~3 in the fair value hierarchy.~~3. The fair value is based on the income approach by using the discounted cash flow model with key assumptions that include discount rates corresponding to the terms and risks as well as underlying cash flow assumptions. See Note 14, "Proton Solutions Loans and Investments," for information on the long-term notes receivable.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

4. RECEIVABLES

The following table summarizes the Company's trade and unbilled receivables, net, and long-term notes receivable:


(In millions)	(In millions)	January 3, 2020		September 27, 2019		(In millions)	January 1, 2021		October 2, 2020
Trade and unbilled receivables, gross	Trade and unbilled receivables, gross	$	1,174.7	$	1,193.5	Trade and unbilled receivables, gross	$	1,189.4	$	1,198.1
Allowance for doubtful accounts		(47.0)		(46.5)
Allowance for credit losses						Allowance for credit losses	(61.2)		(58.3)
Trade and unbilled receivables, net	Trade and unbilled receivables, net	$	1,127.7	$	1,147.0	Trade and unbilled receivables, net	$	1,128.2	$	1,139.8
Short-term	Short-term	$	1,079.2	$	1,106.3	Short-term	$	1,029.3	$	1,066.1
Long-term ⁽¹⁾	Long-term ⁽¹⁾	$	48.5	$	40.7	Long-term (1)	$	98.9	$	73.7

Short-term notes receivable (1)						Short-term notes receivable (1)	$	11.8	$	11.8
Long-term notes receivable ^{(1) (2)}	Long-term notes receivable ^{(1) (2)}	$	34.1	$	33.6	Long-term notes receivable (1) (2)	$	37.5	$	36.7

⁽¹⁾~~Included~~Short-term notes receivables are included in prepaid and other assets and long-term receivables are included in other assets on the Company's Condensed Consolidated Balance Sheets.

⁽²⁾Balances include accrued interest and are recorded in other assets on the Company's Condensed Consolidated Balance Sheets.

A financing receivable represents a financing arrangement with a contractual right to receive money, on demand or on fixed or determinable dates, and that is recognized as an asset on the Company’s Condensed Consolidated Balance Sheets. The Company’s financing receivables consist of trade receivables with contractual maturities of more than one year and notes receivable. A small portion of the Company's financing trade receivables are included in short-term trade accounts receivable. As of January ~~3, 2020, and September 27, 2019,~~1, 2021, the allowance for ~~doubtful accounts is entirely~~credit losses included $55.2 million related to short-term trade and unbilled receivables and $6.0 million related to long-term unbilled receivables. As of October 2, 2020, the allowance for credit losses included $52.3 million related to short-term trade and unbilled receivables and $6.0 million related to long-term unbilled receivables. See Note 14, "Proton Solutions Loans and Investments," for more information on the Company's short-term and long-term notes receivable balances.

The following is a rollforward of the allowance for credit losses on the Company's trade and unbilled receivables:


	Three Months Ended
(In millions)	January 1, 2021
Balance at October 2, 2020	$	(58.3)
Cumulative effect adjustment for adoption of ASU 2016-13 (1)	(3.4)

Provision for expected credit losses	(1.5)
Recoveries (write-offs)	2.0
Balance at January 1, 2021	$	(61.2)

(1)Effective October 3, 2020, the Company adopted ASC 2016-13 using the modified retrospective method. Please see Note 1, "Summary of Significant Accounting Policies," for more information.

Upon adoption of ASC 2016-13, the Company recorded an allowance for credit losses on its short-term and long-term notes receivable balances of $0.5 million. The provision for expected credit losses on its notes receivable balances in the three months ended January 1, 2021 was not material.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

5. GOODWILL AND INTANGIBLE ASSETS

The following table summarizes the activity of goodwill by reportable operating segment:

(In millions) Oncology Systems Other
Total⁽¹⁾
Balance at September 27, 2019 $ 447.9 $ 164.3 $ 612.2
Business combination 0.3 — 0.3
Measurement period adjustments to business combinations in prior year (0.1) — (0.1)
Balance at January 3, 2020 $ 448.1 $ 164.3 $ 612.4

⁽¹⁾The total carrying value of goodwill at both January 3, 2020, and September 27, 2019 is net of $50.5 million of accumulated impairment charges related to the Company recording an impairment charge for the full value of the Proton Solutions operating segment goodwill in fiscal year 2019.


(In millions)	Oncology Systems		Other		Total
Balance at October 2, 2020	$	454.7	$	169.2	$	623.9


Measurement period adjustments to business combinations in prior year	0.5		0		0.5
Foreign currency translation adjustments	0.2		3.1		3.3
Balance at January 1, 2021	$	455.4	$	172.3	$	627.7

The following table summarizes the gross carrying amount and accumulated amortization of the Company's intangible assets:


		January 3, 2020										September 27, 2019											January 1, 2021				October 2, 2020
(In millions)	(In millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		(In millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Technologies and patents	Technologies and patents	$	226.4	$	(92.2)	$	134.2	$	226.4	$	(85.9)	$	140.5	Technologies and patents	$	229.8	$	(117.1)	$	112.7	$	228.0	$	(110.9)	$	117.1
Customer contracts, supplier relationships, and partner relationships	Customer contracts, supplier relationships, and partner relationships	121.1		(28.1)		93.0		121.1		(25.7)		95.4		Customer contracts, supplier relationships, and partner relationships	130.6		(37.6)		93.0		128.9		(34.7)		94.2
Trade names	Trade names	55.1		(4.1)		51.0		55.1		(3.0)		52.1		Trade names	53.1		(7.8)		45.3		53.0		(7.0)		46.0
Other	Other	6.1		(6.1)		—		6.1		(6.1)		—		Other	7.8		(6.3)		1.5		7.8		(6.1)		1.7
Total intangible with finite lives	Total intangible with finite lives	408.7		(130.5)		278.2		408.7		(120.7)		288.0		Total intangible with finite lives	421.3		(168.8)		252.5		417.7		(158.7)		259.0
In-process research and development with indefinite lives	In-process research and development with indefinite lives	12.7		—		12.7		12.7		—		12.7		In-process research and development with indefinite lives	12.5		—		12.5		12.3		—		12.3
Total intangible assets	Total intangible assets	$	421.4	$	(130.5)	$	290.9	$	421.4	$	(120.7)	$	300.7	Total intangible assets	$	433.8	$	(168.8)	$	265.0	$	430.0	$	(158.7)	$	271.3

Amortization expense for intangible assets was ~~$10.1~~$9.8 million and ~~$4.7~~$10.1 million during the three months ended January 1, 2021, and January 3, 2020, ~~and December 28, 2018,~~ respectively.

As of January 1, 2021, 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 2021	$	27.8
2022	36.3
2023	34.9
2024	27.7
2025	22.7
Thereafter	103.1
Total remaining amortization for intangible assets	$	252.5

6. BORROWINGS

The following table summarizes the Company's total short-term borrowings:


	January 1, 2021				October 2, 2020
(In millions, except for percentages)	Amount		Weighted-Average Interest Rate		Amount		Weighted-Average Interest Rate
Short-term borrowings:
Revolving Credit Facility	$	210.0	1.18	%	$	355.0	1.18	%

Total short-term borrowings	$	210.0			$	355.0

1516

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

~~As of January 3, 2020, the Company estimates its remaining amortization expense for intangible assets with finite lives will be as follows (in millions):~~

Fiscal Years: Remaining Amortization Expense
Remainder of 2020 $ 27.1
2021 35.6
2022 33.5
2023 32.7
2024 25.7
Thereafter 123.6
Total remaining amortization for intangible assets $ 278.2

~~6. BORROWINGS~~

~~The following table summarizes the Company's total short-term borrowings:~~

January 3, 2020 September 27, 2019
(In millions, except for percentages) Amount Weighted-Average Interest Rate Amount Weighted-Average Interest Rate
Short-term borrowings:
Revolving Credit Facility
$ 542.0 2.80 % $ 410.0 3.05 %
Total short-term borrowings $ 542.0 $ 410.0

On November 1, 2019, the Company entered into Amendment No.2 (the "Amendment") to its Credit Agreement dated April 3, 2018, (the "Credit Agreement"), by and among the Company, certain lenders party thereto, and Bank of America, N.A. (“BofA”), as administrative agent, swing line lender and letter of credit issuer. The Amendment extended the maturity date from April 2023 to November 2024. The Amendment reduced the aggregate principal amount available under the Credit Agreement's ~~five-year~~five-year revolving credit facility (the "Revolving Credit Facility") from $1.8 billion to $1.2 billion, added a ~~$500~~$500.0 million sub-limit for multi-currency borrowings, increased the letter of credit sub-limit from $50.0 million to ~~$225~~$225.0 million, and reduced the commitment fee. In addition, there is a sub-limit for swing line loans of up to ~~$25~~$25.0 million. Under the Revolving Credit Facility, the Company has the right to (i) request to increase the aggregate commitments by an aggregate amount for all such requests of up to $100.0 million and (ii) request an additional increase in the commitments or establish one or more term loans, provided that, in each case, the lenders are willing to provide such new or increased commitments and certain other conditions are met. The proceeds of the Revolving Credit Facility may be used for working capital, capital expenditures, Company share repurchases, permitted acquisitions and other corporate purposes. Completion of the Siemens Healthineers acquisition would represent a “Change of Control” as defined in the Credit Agreement, which would result in an Event of Default thereunder. Upon such Event of Default, the lenders could take any or all of the following actions: a) terminating the commitment to lend or issue letters of credit, b) declaring all outstanding principal amounts and accrued and unpaid interest immediately due and payable, c) requiring cash collateral for all issued and outstanding letters of credit and d) exercising other rights and remedies available to them under the loan documents. The Company plans to repay in full and terminate all commitments under the Credit Agreement upon closing of the Siemens Healthineers acquisition.

Borrowings under the Revolving Credit Facility accrue interest based on either (i) the Eurodollar Rate plus a margin of 1.000% to 1.375% based on a net leverage ratio involving funded indebtedness and EBITDA, or (ii) a base rate of (a) the federal funds rate plus 0.50%, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus ~~1.00%~~1.000%, whichever is highest, plus a margin of 0.000% to 0.375% based on the same leverage ratio, depending upon instructions from the Company. Borrowings under the Eurodollar Rate have a contract repayment date of ~~twelve~~12 months, or less. Borrowings under the base rate can be made on an overnight basis and have a final maturity of five years.

The Company must pay a commitment fee on the unused portion of the Revolving Credit Facility at a rate from 0.100% to 0.225% based on a net leverage ratio. The Company may prepay, reduce or terminate the commitments without penalty. Swing line loans under the Revolving Credit Facility will bear interest at the base rate plus the then applicable margin for base rate loans.

The Credit Agreement provides that certain material domestic subsidiaries must guarantee the Revolving Credit Facility, subject to certain limitations on the amount secured. As of January ~~3, 2020,~~1, 2021, no subsidiary guarantees were required to be executed under the Credit Agreement.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

The Credit Agreement contains provisions that limit the Company's ability to, among other things, incur future indebtedness, contingent obligations or liens, guarantee indebtedness, make certain investments and capital expenditures, sell stock or assets and pay dividends, and consummate certain mergers or acquisitions.

The Credit Agreement contains affirmative and negative covenants applicable to the Company and its subsidiaries that are typical for credit facilities of this type, and that are subject to materiality and other qualifications, carve-outs, baskets and exceptions. The Company agreed to maintain a financial covenant which requires a maximum consolidated net leverage ratio. The Company was in compliance with all financial covenants under the Credit Agreement for all periods within these condensed consolidated financial statements.

Other Borrowings

VMS’s Japanese subsidiary (“VMS KK”) has an unsecured uncommitted credit agreement with Sumitomo that enables VMS KK to borrow and have outstanding at any given time a maximum of 3.0 billion Japanese Yen (the “Sumitomo Credit Facility”). In February ~~2019,~~2020, the Sumitomo Credit Facility was extended and will expire ~~in February 2020.~~on March 1, 2021. Borrowings under the Sumitomo Credit Facility accrue interest based on the basic loan rate announced by the Bank of Japan plus a margin of 0.5%. As of January ~~3, 2020,~~1, 2021, the Company did ~~not~~0t have an outstanding principal balance on its Sumitomo Credit Facility.

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company measures all derivatives at fair value on the Condensed Consolidated Balance Sheets. The accounting for gains or losses resulting from changes in the fair value of those derivatives depends upon the use of the derivative and whether it qualifies for hedge accounting.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The fair value of derivative instruments reported on the Company's Condensed Consolidated Balance Sheets were as follows:

January 3,
2020 September 27, 2019
(In millions) Balance Sheet
Location Fair Value
Derivatives designated as hedging instruments:
Foreign exchange forward contracts Prepaid expenses and other current assets $ 1.9 $ 2.8
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts Prepaid expenses and other current assets 0.4 —
Total derivatives $ 2.3 $ 2.8

~~As of September 27, 2019, the fair value of the Company's derivatives not designated as hedging instruments were not material.~~


		January 1, 2021		October 2, 2020
(In millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:

Foreign exchange forward contracts	Accrued liabilities	$	(6.0)	$	(0.1)
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	0.1		0
Foreign exchange forward contracts	Accrued liabilities	(2.1)		0
Total derivatives		$	(8.0)	$	(0.1)

Cash Flow Hedging Activities

The Company had the following outstanding foreign currency forward contracts that were entered into to hedge forecasted revenues and designated as cash flow hedges:


		January 3, 2020		September 27, 2019			January 1, 2021			October 2, 2020
(In millions)	(In millions)	Notional Value Sold							(In millions)	Notional Value Sold
Australian Dollar						Australian Dollar	$	14.7		$	19.3
Euro	Euro	$	52.9	$	76.5	Euro	87.1			117.3
Japanese Yen	Japanese Yen	46.2		56.7		Japanese Yen	47.0			61.0
		$	99.1	$	133.2		$	148.8		$	197.6

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

The following table presents the amounts, before tax, recognized in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets:

~~Loss Recognized in Other Comprehensive Earnings (Loss)~~


	Loss Recognized in Other Comprehensive Earnings (Loss)
	Three Months Ended
(In millions)	January 1, 2021		January 3, 2020
Foreign currency forward contracts	$	(6.3)	$	(0.1)

~~Three Months Ended~~

~~(In millions)~~

~~January 3, 2020~~

~~December 28, 2018~~

~~Foreign currency forward contracts~~

~~(0.1)~~

—

As of January ~~3, 2020,~~1, 2021, the net unrealized ~~gain~~loss on derivatives, before tax, of ~~$1.9~~$6.0 million was included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheets and is expected to be reclassified into net earnings over the next 12 months.

The effect of cash flow hedge accounting on the Condensed Consolidated Statements of Earnings was as follows:

Location and Amount Recognized in Earnings on Cash Flow Hedging Relationships

Three Months Ended

January 3, 2020

December 28, 2018

January 1, 2021

January 3, 2020

(In millions)

Revenues

(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

828.9

741.0

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

778.8

828.9

Gain on cash flow hedge relationships:

Foreign currency forward contracts:

Amount of gain reclassified from accumulated other comprehensive loss into net earnings

0.8

—

Amount of gain (loss) reclassified from accumulated other comprehensive loss into net earnings

(0.4)

0.8

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. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in other income, net in the Condensed Consolidated Statements of Earnings. Changes in the values of these hedging instruments are offset by changes in the values of foreign-currency-denominated assets and liabilities.

The notional amount of the Company's outstanding foreign currency forward contracts relating to balance sheet hedging activities:

(In millions) January 3,
2020 September 27,
2019
Notional value sold $ 471.3 $ 385.0
Notional value purchased $ 116.3 $ 52.3


(In millions)	January 1, 2021		October 2, 2020
Notional value sold	$	576.6	$	459.7
Notional value purchased	$	139.8	$	117.5

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

Location of Loss Recognized in Net Earnings on Derivative Instruments

Amount of Loss Recognized in Net Earnings on Derivative Instruments

Three Months Ended

(In millions)

January 3,
2020

December 28,
2018

(In millions)

January 1,
2021

January 3,
2020

Other income, net

(5.0)

2.8

Other income, net

(19.6)

(5.0)

The gains (losses) on these derivative instruments were significantly offset by the gains (losses) resulting from the re-measurement of monetary assets and liabilities denominated in currencies other than the U.S. Dollar functional currency.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

8. COMMITMENTS AND CONTINGENCIES

Product Warranty

The following table reflects the changes in the Company’s accrued product warranty:


		Three Months Ended							Three Months Ended
(In millions)	(In millions)	January 3, 2020		December 28, 2018		(In millions)	January 1, 2021		January 3, 2020
Accrued product warranty, at beginning of period	Accrued product warranty, at beginning of period	$	43.2	$	44.8	Accrued product warranty, at beginning of period	$	38.9	$	43.2
Charged to cost of revenues	Charged to cost of revenues	20.8		13.3		Charged to cost of revenues	16.7		20.8
Actual product warranty expenditures	Actual product warranty expenditures	(17.8)		(11.8)		Actual product warranty expenditures	(16.8)		(17.8)
Accrued product warranty, at end of period	Accrued product warranty, at end of period	$	46.2	$	46.3	Accrued product warranty, at end of period	$	38.8	$	46.2

Accrued product warranty was included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.

Leases

~~The Company leases its facilities and certain equipment under operating leases. The Company's operating leases have remaining lease terms ranging from less than one year to 19~~ ~~years.~~ ~~Facilities primarily include general and administrative office space, and space for manufacturing, research and development, and other services.~~ Equipment primarily includes vehicles and various office equipment. The Company's finance leases primarily relate to its sale and leaseback-subleases arrangements for certain equipment and have a remaining lease terms ranging from ~~one~~ ~~year to 8 years.~~

Lease cost for operating leases is recognized on a straight-line basis over the lease term. Lease cost for finance leases is recognized as amortization of the finance lease ROU asset and interest expense on the finance lease liability over the lease term. The Company also has variable lease cost that primarily relate to its operating leases and include ~~common area maintenance, utilities, maintenance charges, property taxes, insurance, and contingent rent.~~

The following table summarizes the components of the Company's lease cost:


	~~Three Months Ended~~
~~(In millions)~~	~~January 3, 2020~~

~~Operating lease cost~~	$	~~7.8~~
~~Finance lease cost:~~
~~Amortization of right-of-use assets~~	~~0.1~~
~~Interest on lease liabilities~~	~~0.1~~

~~Variable lease cost~~	~~4.5~~
~~Total lease cost~~	$	~~12.5~~

~~The following table summarizes the supplemental cash flow information related to the Company's operating leases:~~


	~~Three Months Ended~~
~~(In millions)~~	~~January 3, 2020~~
~~Cash paid for amounts included in the measurement of lease liabilities:~~
~~Operating cash flows for leases~~	$	~~8.8~~


	Three Months Ended
(In millions)	January 1, 2021		January 3, 2020

Operating lease cost	$	8.6	$	7.8
Finance lease cost:
Amortization of right-of-use assets	0.2		0.1
Interest on lease liabilities	0.1		0.1

Variable lease cost	3.7		4.5
Total lease cost	$	12.6	$	12.5

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The following table summarizes the supplemental cash flow information related to the Company's operating leases:


	Three Months Ended
(In millions)	January 1, 2021		January 3, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for leases	$	8.7	$	8.8

The following table summarizes supplemental balance sheet information related to the Company's operating and finance leases:


~~(In millions)~~	~~January 3, 2020~~
~~Operating leases:~~
~~Operating right-of-use assets~~	$	~~114.1~~

~~Accrued liabilities~~	$	~~24.4~~
~~Long-term lease liabilities~~	~~93.7~~
~~Total lease liabilities~~	$	~~118.1~~

~~Finance leases:~~
~~Property, plant, and equipment, net~~	$	~~14.3~~

~~Accrued liabilities~~	$	~~3.4~~
~~Other long-term liabilities~~	~~10.5~~
~~Total lease liabilities~~	$	~~13.9~~


	January 1,		October 2,
(In millions)	2021		2020
Operating leases:
Operating right-of-use assets	$	119.5	$	121.0

Accrued liabilities	$	27.2	$	27.2
Long-term lease liabilities	101.7		101.1
Total lease liabilities	$	128.9	$	128.3

Finance leases:
Property, plant, and equipment, net	$	10.6	$	11.5

Accrued liabilities	$	3.1	$	3.4
Other long-term liabilities	8.5		8.7
Total lease liabilities	$	11.6	$	12.1

The following table summarizes the weighted lease term and discount rate by operating and finance leases:


	January ~~3, 2020~~1, 2021
Weighted average remaining lease term in years
Operating leases	7.0
Finance leases	~~4.8~~4.0

Weighted average discount rate
Operating leases	~~4.8~~4.9	%
Finance leases	~~1.5~~3.9	%

As of January ~~3, 2020,~~1, 2021, the future minimum lease payments are as follows:


(In millions)	(In millions)	Operating Leases		Finance leases		(In millions)	Operating Leases		Finance leases
Remainder of 2020		$	21.5	$	2.9
2021		25.8		3.5
Remainder of 2021						Remainder of 2021	$	25.3	$	2.9
2022	2022	20.3		2.9		2022	28.3		3.3
2023	2023	15.4		2.9		2023	22.4		3.3
2024	2024	11.8		1.1		2024	16.3		1.3
2025						2025	12.9		0.8
Thereafter	Thereafter	51.4		1.1		Thereafter	56.8		0.9
Total minimum lease payments	Total minimum lease payments	$	146.2	$	14.4	Total minimum lease payments	$	162.0	$	12.5
Less: imputed interest	Less: imputed interest	28.1		0.5		Less: imputed interest	33.1		0.9
Total operating lease liability		$	118.1	$	13.9
Total lease liability						Total lease liability	$	128.9	$	11.6

At September 27, 2019, the Company was committed to minimum rentals under non-cancellable operating leases (including rent escalation clauses) for fiscal years 2020 through 2024 and thereafter, as determined under the prior accounting guidance of Accounting Standard Codification 840, as follows: $32.5 million, $26.3 million, $20.2 million, $14.5 million, $10.9 million and $49.9 million, respectively.

~~Lessor Arrangements~~

~~The Company leases some of its equipment to certain customers on operating leases generally over a period of 15 years. As of January 3, 2020,~~ the Company had $22.6 million and $6.4 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment leased to customers. As of September 27, 2019, the Company had $22.5 million and $5.5 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Lessor Arrangements

The Company leases some of its equipment to certain customers through operating leases, which generally have a term of 10 to 17 years. As of January 1, 2021, the Company had $27.1 million and $10.0 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment leased to customers. As of October 2, 2020, the Company had $26.5 million and $9.1 million included in property, plant and equipment and accumulated depreciation, respectively, related to equipment leased to customers. The Company recorded income of ~~$2.5~~$2.6 million and ~~$2.1~~$2.5 million during the three months ended January 1, 2021 and January 3, 2020 ~~and December 28, 2018, respectively,~~ on these equipment leases.

Contingencies

Environmental Remediation Liabilities

The Company’s operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities on the Company in connection with its past and present operations. Those include facilities sold as part of the Company’s electron devices business in 1995 and thin film systems business in 1997. As a result, the Company oversees various environmental cleanup projects and receives reimbursements from third parties for a portion of the costs of its cleanup activities.

As of January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ the Company had accrued ~~$4.7~~$3.9 million and ~~$4.8~~$4.0 million, respectively, net of third parties' indemnification obligations, for environmental remediation liabilities. The Company believes its reserve is adequate; however, as the scope of the Company’s obligations becomes more clearly defined, the Company may modify the reserve, and charge or credit future earnings accordingly. Based on information currently known to management, management believes the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company in any one fiscal year.

The Company also reimburses certain third parties for cleanup activities. The amount the Company spent on environmental cleanup costs, third-party claim costs, project management costs and legal costs in the three months ended January 1, 2021, and January 3, 2020, ~~and December 28, 2018,~~ was not material.

Proposed Acquisition by Siemens Healthineers

In connection with the proposed acquisition by Siemens Healthineers in August 2020, the Company expects to incur approximately $110 million in advisory fees that are contingent upon closing the pending acquisition by Siemens Healthineers. The Merger is expected to close in the first half of calendar year 2021, subject to receipt of specified regulatory approvals and other customary closing conditions. On October 15, 2020, VMS' stockholders approved and adopted the Merger Agreement. Under the terms of the Merger Agreement, if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances, a termination fee of $450.0 million in cash may be payable by VMS to Siemens Healthineers. The Merger Agreement also provides that a reverse termination fee of $450.0 million or $925.0 million in cash may be payable by Siemens Healthineers to VMS if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances.

Other Matters

On October 16, 2018, Best Medical International, Inc. sued the Company in U.S. District Court in the District of Delaware, alleging infringement of 4 patents related to treatment planning. The Company intends to defend the suit vigorously. ~~This lawsuit~~The suit is in the ~~initial stages,~~discovery stage, the parties have completed mediation, and ~~at this time,~~a trial date is currently scheduled for April 2022. At January 1, 2021, the Company ~~is unable to predict~~has accrued $8.5 million representing its best estimate of the loss that may result from this action. The ultimate outcome of this matter ~~or estimate~~is uncertain and may result in a ~~range of possible exposure. Therefore, 0 amounts have been accrued as of January 3, 2020.~~materially different outcome.

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

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

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.

Restructuring Charges

2020 Restructuring Plan

In the third quarter of fiscal year 2020, the Company implemented a global workforce reduction ("2020 Restructuring plan"), as part of the Company's plan to enhance operational performance through productivity initiatives in response to the impact of the COVID-19 pandemic.

The table below shows the activity of the 2020 Restructuring plan:


(in millions)	October 2, 2020		Restructuring Charges		Cash Payments		January 1, 2021
2020 Restructuring plan	$	6.7	$	0.7	$	(3.0)	$	4.4

The remaining balance of $4.4 million is expected to be paid in fiscal year 2021. The Company does not expect to incur additional restructuring charges under this plan. The restructuring charges are included in selling, general and administrative in the Condensed Consolidated Statements of Earnings.

9. RETIREMENT PLANS

The Company sponsors multiple defined benefit pension plans for regular full-time employees in Germany, Japan, India, Switzerland and the United Kingdom. The Company also sponsors a post-retirement benefit plan that provides healthcare benefits to certain eligible retirees in the United States.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

The components of net periodic benefit costs were as follows:


		Three Months Ended					Three Months Ended
(In millions)	(In millions)	January 3, 2020		December 28, 2018		(In millions)	January 1, 2021		January 3, 2020
Defined Benefit Plans	Defined Benefit Plans					Defined Benefit Plans
Service cost	Service cost	$	2.5	$	1.8	Service cost	$	3.3	$	2.5
Interest cost	Interest cost	0.5		0.9		Interest cost	0.5		0.5
Expected return on plan assets	Expected return on plan assets	(1.9)		(1.6)		Expected return on plan assets	(1.9)		(1.9)
Amortization of prior service cost	Amortization of prior service cost	(0.2)		(0.2)		Amortization of prior service cost	(0.4)		(0.2)
Recognized actuarial loss	Recognized actuarial loss	1.1		0.6		Recognized actuarial loss	0.9		1.1
Net periodic benefit cost	Net periodic benefit cost	$	2.0	$	1.5	Net periodic benefit cost	$	2.4	$	2.0

10. INCOME TAXES

The Company’s effective tax rate was ~~21.0%~~22.2% and ~~24.4%~~21.0% for the three months ended January 1, 2021, and January 3, 2020, ~~and December 28, 2018,~~ respectively. The ~~Company’s~~Company's effective tax rate ~~is lower in~~was higher for the three months ended January ~~3, 2020~~1, 2021, as compared to the year-ago period, primarily because of a shift in the ~~prior period included~~geographic mix of earnings, partially offset by a greater benefit from discrete items, primarily the tax ~~effect of a change in law due~~benefit from an excess deduction related to ~~the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.~~stock-based compensation.

The Company’s effective income tax rate differs from the U.S. federal statutory rate primarily because the Company’s foreign earnings are taxed at rates that are, on average, lower than the U.S. federal rate, and because the Company’s domestic earnings are subject to state income taxes. The total amount of unrecognized tax benefits did not materially change during the three months ended January ~~3, 2020;~~1, 2021; however, the amount of unrecognized tax benefits has increased as a result of positions taken during the current and prior years and has decreased as the result of the expiration of the statutes of limitation in various jurisdictions.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

11. STOCKHOLDERS’ EQUITY

Share Repurchase Program

In November 2016, the VMS Board of Directors authorized the repurchase of an additional 8.0 million shares of VMS common stock commencing on January 1, 2017. Share repurchases under the Company's authorizations may be made in open market purchases, in privately negotiated transactions (including accelerated share repurchase programs), or under Rule 10b5-1 share repurchase plans, and may be made from time to time in one or more blocks. All shares that were repurchased under the Company's share repurchase programs have been retired. As of January ~~3, 2020,~~1, 2021, approximately ~~1.9~~1.6 million shares of VMS common stock remained available for repurchase under the November 2016 authorization.

At the beginning of the third quarter of fiscal year 2020, as a precautionary measure due to the COVID-19 pandemic, the Company paused its share repurchase program. The Company repurchased shares of VMS common stock during the periods presented as follows:

Three Months Ended
(In millions, except per share amounts) January 3,
2020 December 28,
2018
Number of shares 0.3 0.3
Average repurchase price per share $ 139.67 $ 108.90
Total cost of shares repurchased $ 46.4 $ 34.8

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~


	Three Months Ended
(In millions, except per share amounts)		January 1, 2021		January 3, 2020
Number of shares		0		0.3
Average repurchase price per share		$	0	$	139.67
Total cost of shares repurchased		$	0	$	46.4

Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component and related tax effects are summarized as follows:


(In millions)	(In millions)	Net Unrealized Gains (Losses) Defined Benefit Pension and Post-Retirement Benefit Plans		Net Unrealized Gains Cash Flow Hedging Instruments		Cumulative Translation Adjustment		Accumulated Other Comprehensive Loss		(In millions)	Net Unrealized Gains Defined Benefit Pension and Post-Retirement Benefit Plans		Net Unrealized Gains (Losses) Cash Flow Hedging Instruments		Cumulative Translation Adjustment		Accumulated Other Comprehensive Loss
Balance at September 27, 2019		$	(61.7)	$	2.1	$	(42.5)	$	(102.1)
Balance at October 2, 2020										Balance at October 2, 2020	$	(46.9)	$	(0.1)	$	(38.7)	$	(85.7)
Other comprehensive earnings (loss) before reclassifications	Other comprehensive earnings (loss) before reclassifications	—		(0.1)		5.1		5.0		Other comprehensive earnings (loss) before reclassifications	0		(6.3)		13.0		6.7
Amounts reclassified out of other comprehensive earnings (loss)	Amounts reclassified out of other comprehensive earnings (loss)	0.9		(0.8)		—		0.1		Amounts reclassified out of other comprehensive earnings (loss)	0.4		0.4		0		0.8
Tax (expense) benefit		(0.2)		0.2		—		—
Balance at January 3, 2020		$	(61.0)	$	1.4	$	(37.4)	$	(97.0)
Tax benefit										Tax benefit	0		1.4		0		1.4
Balance at January 1, 2021										Balance at January 1, 2021	$	(46.5)	$	(4.6)	$	(25.7)	$	(76.8)

(In millions) Net Unrealized Gains
(Losses) Defined
Benefit Pension and
Post-Retirement
Benefit Plans Cumulative
Translation
Adjustment Accumulated
Other
Comprehensive Loss
Balance at September 28, 2018 $ (35.2) $ (30.1) $ (65.3)
Other comprehensive earnings (loss) before reclassifications — (4.0) (4.0)
Amounts reclassified out of other comprehensive earnings (loss) 0.4 — 0.4
Tax expense (0.1) — (0.1)
Balance at December 28, 2018 $ (34.9) $ (34.1) $ (69.0)

~~The amounts reclassified, before taxes, out of other comprehensive earnings (loss) into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows:~~

(In millions) Three Months Ended
Comprehensive Earnings (Loss) Components January 3,
2020 December 28,
2018 Line Item in Statements of Earnings
Unrealized loss on defined benefit pension and post-retirement benefit plans $ (0.9) $ (0.4) Other income, net
Unrealized earnings on cash flow hedging instruments 0.8 — Revenues
Total amounts reclassified out of other comprehensive earnings (loss) $ (0.1) $ (0.4)


(In millions)	Net Unrealized Gains (Losses) Defined Benefit Pension and Post-Retirement Benefit Plans		Net Unrealized Gains (Losses) Cash Flow Hedging Instruments		Cumulative Translation Adjustment		Accumulated Other Comprehensive Loss
Balance at September 27, 2019	$	(61.7)	$	2.1	$	(42.5)	$	(102.1)
Other comprehensive earnings (loss) before reclassifications	0		(0.1)		5.1		5.0
Amounts reclassified out of other comprehensive earnings (loss)	0.9		(0.8)		0		0.1
Tax (expense) benefit	(0.2)		0.2		0		0
Balance at January 3, 2020	$	(61.0)	$	1.4	$	(37.4)	$	(97.0)

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The amounts reclassified, before taxes, out of other comprehensive earnings into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows:


(In millions)	Three Months Ended
Other Comprehensive Earnings Components		January 1, 2021		January 3, 2020		Line Item in Statements of Earnings
Unrealized loss on defined benefit pension and post-retirement benefit plans		$	(0.4)	$	(0.9)	Other income, net
Unrealized earnings (loss) on cash flow hedging instruments		(0.4)		0.8		Revenues
Total amounts reclassified out of other comprehensive earnings		$	(0.8)	$	(0.1)

12. EMPLOYEE STOCK PLANS

The table below summarizes the share-based compensation expense recognized for employee stock awards and employee stock purchase plan shares:

Three Months Ended
(In millions) January 3,
2020 December 28,
2018
Cost of revenues - Product $ 0.8 $ 0.7
Cost of revenues - Service 1.3 1.1
Research and development 1.2 1.1
Selling, general and administrative 11.6 7.6
Total share-based compensation expense $ 14.9 $ 10.5
Income tax benefit for share-based compensation $ (2.9) $ (2.3)


	Three Months Ended
(In millions)		January 1, 2021		January 3, 2020
Cost of revenues - Product		$	1.0	$	0.8
Cost of revenues - Service		1.6		1.3
Research and development		1.9		1.2
Selling, general and administrative		12.2		11.6
Total share-based compensation expense		$	16.7	$	14.9
Income tax benefit for share-based compensation		$	(3.3)	$	(2.9)

The fair value of stock options and performance stock options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:

Three Months Ended
January 3,
2020 December 28,
2018
Employee Stock Option Plans
Expected term (in years) 3.8 3.8
Risk-free interest rate 1.6 % 2.9 %
Expected volatility 26.0 % 22.2 %
Expected dividend — % — %
Weighted average fair value at grant date⁽¹⁾
$ 29.42 $ 25.87

^{Three Months Ended
January 1,
2021 January 3,
2020
Employee Stock Option Plans (1)
Expected term (in years) — 3.8
Risk-free interest rate 0 % 1.6 %
Expected volatility 0 % 26.0 %
Expected dividend 0 % 0 %
Weighted average fair value at grant date (2) $ 0 $ 29.42}

(1)The Company did not grant stock options to its employees in the period ending January 1, 2021.

(2)Excludes the fair value of the market condition based on a relative total shareholder return for the performance stock options granted during the period.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:


		Three Months Ended							Three Months Ended
		January 3, 2020			December 28, 2018				January 1, 2021			January 3, 2020
Employee Stock Purchase Plan	Employee Stock Purchase Plan							Employee Stock Purchase Plan
Expected term (in years)	Expected term (in years)	0.5			0.5			Expected term (in years)	0.50			0.50
Risk-free interest rate	Risk-free interest rate	1.6		%	2.5		%	Risk-free interest rate	0.1		%	1.6		%
Expected volatility	Expected volatility	26.4		%	18.6		%	Expected volatility	2.4		%	26.4		%
Expected dividend	Expected dividend	—		%	—		%	Expected dividend	0		%	0		%
Weighted average fair value at grant date	Weighted average fair value at grant date	$	27.58		$	22.82		Weighted average fair value at grant date	$	27.10		$	27.58

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

The activity for stock options and performance stock options is summarized as follows:

Options Outstanding
(In millions, except per share amounts) Number of
Shares Weighted
Average
Exercise
Price Weighted
Average
Remaining
Term (in years)
Aggregate
Intrinsic
Value⁽¹⁾
Balance at September 27, 2019 2.2 $ 97.66
Granted 0.1 131.34
Cancelled or expired — 99.35
Exercised (0.1) 82.03
Balance at January 3, 2020 2.2 $ 101.01 4.6 $ 98.0
Exercisable at January 3, 2020 1.1 $ 82.38 3.4 $ 68.2


	Options Outstanding
(In millions, except per share amounts)	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (1)
Balance at October 2, 2020	1.9	$	110.79


Cancelled or expired	(0.1)	108.59
Exercised	(0.5)	97.90
Balance at January 1, 2021	1.3	$	115.67	4.5	$	78.8

Exercisable at January 1, 2021	0.6	$	99.56	3.5	$	47.8

⁽¹⁾The aggregate intrinsic value represents the total pre-tax intrinsic value, which is computed based on the difference between the exercise price and the closing price of VMS common stock of ~~$144.93~~$175.01 as of ~~January 3,~~December 31, 2020, the last trading date of the first quarter of fiscal year ~~2020,~~2021, and ~~which~~ represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that ~~date..~~date.

As of January ~~3, 2020,~~1, 2021, there was ~~$20.7~~$12.3 million of total unrecognized compensation expense related to stock options and performance stock options granted under the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of ~~2.1~~1.6 years.

As of January ~~3, 2020~~1, 2021, there was ~~$0.6~~$1.7 million of total unrecognized compensation expense related to cash-settled stock appreciation rights granted outside of the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of ~~2.2~~1.8 years.

The activity for ~~restricted stock,~~ restricted stock units, deferred stock units and performance units is summarized as follows:


(In millions, except per share amounts)	(In millions, except per share amounts)	Number of Shares	Weighted Average Grant-Date Fair Value		(In millions, except per share amounts)	Number of Shares	Weighted Average Grant-Date Fair Value
Balance at September 27, 2019		0.7	$	108.35
Balance at October 2, 2020					Balance at October 2, 2020	0.7	$	133.82
Granted	Granted	0.1	140.74		Granted	0.3	173.51

Vested	Vested	(0.1)	84.99		Vested	(0.1)	129.34
Cancelled or expired	Cancelled or expired	(0.1)	117.11		Cancelled or expired	0	119.34
Balance at January 3, 2020		0.6	$	115.82
Balance at January 1, 2021					Balance at January 1, 2021	0.9	$	148.44

As of January ~~3, 2020,~~1, 2021, unrecognized compensation expense totaling ~~$43.7~~$89.4 million was related to awards of restricted stock units, deferred stock units and performance units granted under the Company's employee stock plans. This unrecognized share-based compensation expense is expected to be recognized over a weighted average period of ~~2.0~~2.4 years.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

13. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted net earnings per share:


		Three Months Ended					Three Months Ended
(In millions, except per share amounts)	(In millions, except per share amounts)	January 3, 2020		December 28, 2018		(In millions, except per share amounts)	January 1, 2021		January 3, 2020
Net earnings	Net earnings	$	88.9	$	103.9	Net earnings	$	96.8	$	88.9
Less: Net earnings attributable to noncontrolling interests	Less: Net earnings attributable to noncontrolling interests	0.7		0.7		Less: Net earnings attributable to noncontrolling interests	0.3		0.7
Net earnings attributable to Varian	Net earnings attributable to Varian	$	88.2	$	103.2	Net earnings attributable to Varian	$	96.5	$	88.2

Denominator:	Denominator:					Denominator:
Weighted average shares outstanding - basic	Weighted average shares outstanding - basic	90.9		91.0		Weighted average shares outstanding - basic	91.4		90.9
Dilutive effect of potential common shares	Dilutive effect of potential common shares	0.8		1.0		Dilutive effect of potential common shares	0.8		0.8
Weighted average shares outstanding - diluted	Weighted average shares outstanding - diluted	91.7		92.0		Weighted average shares outstanding - diluted	92.2		91.7
Net earnings per share attributable to Varian - basic	Net earnings per share attributable to Varian - basic	$	0.97	$	1.13	Net earnings per share attributable to Varian - basic	$	1.06	$	0.97
Net earnings per share attributable to Varian - diluted	Net earnings per share attributable to Varian - diluted	$	0.96	$	1.12	Net earnings per share attributable to Varian - diluted	$	1.05	$	0.96
Anti-dilutive employee share-based awards, excluded	Anti-dilutive employee share-based awards, excluded	0.8		0.9		Anti-dilutive employee share-based awards, excluded	0		0.8

14. PROTON SOLUTIONS LOANS AND INVESTMENTS

In limited cases, the Company participates, along with other investors and at market terms, in the financing of proton therapy centers. Over time, the Company has divested some of its investments, including investments in CPTC, the New York Proton Center ("NYPC"), the Georgia Proton Treatment Center and the Delray Radiation Therapy Center.

The following table lists the Company's notes receivable, including accrued interest, senior secured debt, available-for-sale securities, loans outstanding and future commitments for funding the development, construction and operation of various proton therapy centers:


		January 3, 2020						September 27, 2019					January 1, 2021		October 2, 2020
(In millions)	(In millions)	Balance		Commitment		Balance		Commitment		(In millions)	Balance		Balance
Notes Receivable and Secured Debt: ⁽¹⁾	Notes Receivable and Secured Debt: ⁽¹⁾									Notes Receivable and Secured Debt: (1)
NYPC loan	NYPC loan	$	32.3	$	—	$	31.8	$	—	NYPC loan	$	35.7	$	34.9
RPTC senior secured debt	RPTC senior secured debt	24.0		—		23.5		—		RPTC senior secured debt	26.4		25.2
Proton International LLC loan	Proton International LLC loan	1.8		—		1.8		—		Proton International LLC loan	1.8		1.8
		$	58.1	$	—	$	57.1	$	—		$	63.9	$	61.9
Available-For-Sale Securities: ⁽¹⁾	Available-For-Sale Securities: ⁽¹⁾									Available-For-Sale Securities: (1)
MPTC Series B-1 Bonds	MPTC Series B-1 Bonds	$	27.6	$	—	$	27.1	$	—	MPTC Series B-1 Bonds	$	19.2	$	18.9
MPTC Series B-2 Bonds	MPTC Series B-2 Bonds	25.7		—		25.1		—		MPTC Series B-2 Bonds	21.1		20.6

APTC securities	APTC securities	6.7		—		6.6		—		APTC securities	5.5		5.4
		$	60.0	$	—	$	58.8	$	—		$	45.8	$	44.9

CPTC Loans and Investment:
Short-term revolving loan ⁽²⁾		$	5.3	$	1.9	$	5.3	$	1.9
Term loan ⁽³⁾		44.0		—		44.0		—
CPTC Loans:										CPTC Loans:

		$	49.3	$	1.9	$	49.3	$	1.9
CPTC Loans (2)										CPTC Loans (2)	$	11.8	$	11.8

⁽¹⁾Included in other assets at January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019~~ on the Company's Condensed Consolidated Balance Sheets, except for amounts related to short-term interest receivable.

⁽²⁾~~Included in prepaid and other current assets on the Company's Condensed Consolidated Balance Sheets.~~

⁽³⁾Included in prepaid and other current assets at January 3,1, 2021 and October 2, 2020, ~~and other assets at September 27, 2019~~ on the Company's Condensed Consolidated Balance Sheets.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

Alabama Proton Therapy Center ("APTC") Securities

In December 2017, the Company purchased $6.0 million in Subordinate Revenue Bonds, which financed the APTC. The Subordinate Revenue Bonds carry an interest rate of 8.5% and pay interest semi-annually. In fiscal year 2020, the Company

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

recorded a $0.9 million impairment charge on the Subordinate Revenue Bonds. The Company is scheduled to start receiving annual principal payments on the Subordinate Revenue Bonds beginning on November 1, 2022. The Subordinate Revenue Bonds will mature on October 1, 2047.

At January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ the Company had ~~$3.9~~$7.2 million and ~~$2.1~~$6.9 million in trade and unbilled receivables, respectively, which included $5.7 million in long-term unbilled receivables for both periods from APTC.

Rinecker Proton Therapy Center ("RPTC") Senior Secured Debt

In July 2017, the Company purchased the outstanding senior secured debt related to the RPTC in Munich, Germany for €21.5 million, or $24.5 million. By purchasing the senior secured debt, the Company has a right to approximately 77 million Euros in claims against all of RPTC's assets. In September 2017, the management of RPTC filed for bankruptcy in Germany. In January 2018, the final insolvency proceedings commenced, and in December 2019 the center closed for clinical operations and decommissioning began. Upon finalization of bankruptcy proceedings, the Company believes it is probable it will recover the outstanding senior secured debt balance and trade accounts receivable, net. The Company classified its senior secured debt as long-term other assets because it expects the bankruptcy proceedings to be ~~complete~~completed in ~~greater~~more than one year.

At January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ the Company had ~~$4.2~~$4.1 million and ~~$4.6~~$4.2 million, respectively, in long-term trade receivables, net, from RPTC, which does not include any unbilled receivables.

New York Proton Center ("NYPC") Loan

In July 2015, the Company committed to loan up to $91.5 million to MM Proton I, ~~LLC.~~LLC, the project developer of the NYPC. In June 2016, the Company assigned $73.0 million of this loan to Deutsche Bank AG. The remaining balance is comprised of an $18.5 million “Subordinate Loan” with a six-and-a-half-year term at up to 13.5% interest. In December 2019, the interest rate on the loan was reduced to 10%, effective May 1, 2019. As of January ~~3, 2020,~~1, 2021, the Subordinate Loan ~~is $32.3~~was $35.7 million, including accrued interest. The principal balance and accrued interest on the Subordinate Loan are due in full at maturity in January 2022.

At January 3,1, 2021 and October 2, 2020, ~~and September 27, 2019,~~ the Company had ~~$18.0~~$8.3 million and ~~$16.6~~$20.0 million, respectively, in trade and unbilled receivables, which included ~~$6.4~~$1.0 million and ~~$6.0~~$5.0 million in unbilled receivables, respectively, from NYPC.

Maryland Proton Treatment Center ("MPTC") Securities

~~The~~In August 2018, MPTC refinanced its then outstanding subordinated debt, including accrued interest, and notes receivable balances. As part of the refinancing, in exchange for its then outstanding subordinated loan, the Company ~~has~~received $22.9 million in Subordinate Revenue Bonds ("MPTC Series B-2 Bonds") that carry an interest rate of 8.5% per annum with interest accruing up to the MPTC Series B-2 Bonds face amount of $33.9 million until January 1, 2022, and then will pay cash interest semi-annually. The MPTC Series B-2 Bonds will mature on January 1, 2049. ~~The~~In exchange for its outstanding deferred equipment payment arrangement, the Company also ~~has~~received $6.0 million in cash and $25.0 million in Subordinate Revenue Bonds ("MPTC Series B-1 Bonds") that carry an interest rate of 7.5% with interest accruing up to the MPTC Series B-1 Bonds face amount of $32.0 million onuntil January 1, 2022, and then will pay cash interest semi-annually. In fiscal year 2020, the Company recorded $16.9 million in impairment charges on its MPTC Series B-1 Bonds and MPTC Series B-2 Bonds. The MPTC Series B-1 Bonds will mature on January 1, 2048. The MPTC Series B-1 Bonds are senior in right and time to the MPTC Series B-2 Bonds.

At both January 3,1, 2021 and October 2, 2020, ~~and September 27, 2019,~~ the Company had 0$0.6 million in net trade and unbilled receivables, respectively, from MPTC.

~~Variable Interest Entities~~

The Company has determined that MM Proton I, LLC and RPTC are variable interest entities and that the Company holds a significant variable interest of each of the entities through its participation in the loan facilities and its agreements to supply and service the proton therapy equipment. The Company has concluded that it is not the primary beneficiary of any of these entities. The Company has no voting rights, has no approval authority or veto rights for these centers' budget, and does not have the power to direct patient recruitment, clinical operations and management of these Centers, which the Company believes are the matters that most significantly affect their economic performance. The Company’s exposure to loss as a result of its

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

~~involvement with MM Proton I, LLC and RPTC is limited to the carrying amounts of the above-mentioned assets on its Condensed Consolidated Balance Sheets.~~

California Proton Therapy Center ("CPTC") Loans ~~and Investment~~

Between September 2011 and November 2015, the Company, ORIX and J.P. Morgan (the "Lenders”) funded loans (“Original CPTC Loans”) to the Scripps Proton Therapy Center in San Diego, California. ORIX is the loan agent.

In March 2017, California Proton Treatment Center, LLC ("Original CPTC") filed for bankruptcy and concurrently entered into a Debtor-in-Possession Facility (the "DIP Facility") with the Lenders where the Company's pro-rata share of the DIP Facility was $7.3 million. In September 2017, the Lenders and Scripps signed a Transition Agreement to transition the operations of the center from Scripps to Proton Doctors Professional Corporation. As a result of these events, the Company recorded an impairment charge of $51.4 million to its Original CPTC Loans in fiscal year 2017.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Pursuant to an order of the Bankruptcy Court, the California Proton Treatment Center ("Original CPTC") conducted an auction of the Scripps Proton Therapy Center. On December 6, 2017 (“Closing Date”), the Bankruptcy Court approved the sale of Scripps Proton Therapy Center to California Proton Therapy Center, LLC (“CPTC”), an entity owned by the Lenders. The Lenders purchased all assets and assumed $112.0 million of Original CPTC’s outstanding liabilities. On December 13, 2017, the Bankruptcy Court dismissed the bankruptcy filing of Original CPTC.

On the Closing Date, the Lenders entered into a Credit Agreement with Original CPTC of which the terms of the Original CPTC Loans, DIP Facility and accrued interest (collectively “Former Loans”) have been modified. In addition to the partially satisfied Original CPTC Loans reinstated by the Bankruptcy Court, the Company received a 47.08% equity ownership in CPTC, which it sold for a nominal amount in March 2019. Original CPTC has assigned all its Former Loans to CPTC at an amount of $112.0 million, the partially satisfied loan balance. Per the terms of the Credit Agreement, the Company's portion of the $112.0 million is $53.5 million; the remainder is allocated between ORIX and J.P. Morgan. The $53.5 million is composed of 4 tranches: Tranche A of $2.0 million, Tranche B of $7.2 million, Tranche C of $15.6 million, and Tranche D of $28.7 million (collectively, the "Term Loan"). The original maturity date of the Term Loan iswas three years from the Closing Date. The Term Loan is secured by the assets of CPTC.

In addition, the Lenders have committed to lend up to $15.0 million in a Revolving Loan with aan original maturity date of one year from the Closing Date. In the first quarters of fiscal 2019, fiscal 2020 and subsequent to the end of the first quarter of fiscal 2020, as provided in the initial agreement, the Lenders have granted extensions to the term of the Revolving Loan with a current maturity of June 30, 2020. The Company's share of the funding commitment from the Revolving Loan is $7.2 million, and as of January ~~3, 2020,~~1, 2021, the Company has fully funded ~~$5.3 million.~~the Revolving Loan.

In December 2020, the Lenders granted an extension of the maturity date of both the Term Loan and Revolving Loan to December 31, 2021.

All of the tranches accrue paid-in-kind interest at 7.5% per annum, except the Tranche B and the Revolving Loan, which accrue paid-in-kind interest at 10% per annum. The seniority of these loans is as follows: Revolving Loan, Tranche A, Tranche B, Tranche C and Tranche D. If CPTC is in default, the interest rate of the Tranche A, C and D will increase to 9.5% and the interest rate on the Tranche B and the Revolving Loan will increase to 12.0%.

~~The~~Primarily as a result of the COVID-19 pandemic, during March and April 2020, CPTC suffered material negative impacts to its operating plan, including declines in current and projected patient volume and delays in partnership with a significant clinical partner. Therefore, the Company ~~believes~~concluded it iswas no longer probable that it will collect the amounts owed under the Term Loan and Revolving Loan (collectively "CPTC Loans") when due ~~based on CPTC’s current operating plan. This plan includes an increase~~and recorded a $40.5 million impairment charge to its CPTC Loans using the probability weighted expected return model, utilizing management's assumptions of different outcomes, in ~~patient volume, partnership with~~the Condensed Consolidated Statements of Earnings in the second quarter of fiscal year 2020. As a ~~significant clinical partner, and maintenance~~result of ~~its current reimbursement structure. In July 2019,~~this impairment charge, the ~~Centers for Medicare and Medicaid Services ("CMS") proposed an alternative payment model (or “APM”) pilot program for radiation oncology. This proposed APM could materially impact~~CPTC Loans were written down to their estimated fair value of $10.0 million. As of January 1, 2021, the ~~reimbursement to CPTC for its services. CPTC's inability to execute its operating plan, as well as finalization~~fair value of the proposed APM as currently drafted could negatively impact CPTC's ability to repay or refinance the debt when it comes due, which may result in an impairment of the loan receivable; this impairment could be material.CPTC Loans was $11.8 million.

At both January 3,1, 2021, and October 2, 2020, ~~and September 27, 2019,~~ the Company had ~~$2.9~~$3.1 million ~~and $2.6 million, respectively,~~ in trade receivables, net, from CPTC.

~~Further, the~~Variable Interest Entities

The Company has determined that, CPTC, ~~is a~~MM Proton I, LLC and RPTC are variable interest ~~entity because~~entities and that the Company holds a significant variable interest of each of the ~~Company's~~entities through its participation in the loan facilities and its ~~operations~~agreements to supply and ~~maintenance agreement.~~service the proton therapy equipment. The Company has no voting rights, has no special approval authority or veto rights for ~~CPTC’s~~these centers' budget, and does not have the power to direct patient recruitment, clinical operations and management of ~~CPTC,~~these entities, which the Company believes are the matters that most significantly affect their economic performance. ~~Therefore, the~~The Company ~~does not have majority voting rights and no power to direct activities at CPTC, and as a result~~has concluded that it is not the primary beneficiary of ~~CPTC.~~any of these entities. The Company’s exposure to loss as a result of its involvement with CPTC, MM Proton I, LLC and RPTC is limited to the carrying amounts of the above-mentioned assets on its Condensed Consolidated Balance Sheets.

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

15. SEGMENT INFORMATION

The Company has 2 reportable operating segments: Oncology Systems and Proton Solutions. The Company's Interventional Solutions business is reflected in the "Other" category because it does not meet the criteria for a reportable operating segment. The operating segments were determined based on how the Company’s Chief Executive Officer, its Chief Operating Decision Maker (“CODM”), views and evaluates the Company’s operations. The CODM allocates resources to, and evaluates the financial performance of each operating segment primarily based on operating earnings.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Description of Segments

The Oncology Systems segment designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiation therapy, and advanced treatments such as fixed field intensity-modulated radiation therapy (“IMRT”), image-guided radiation therapy (“IGRT”), volumetric modulated arc therapy ("VMAT"), stereotactic radiosurgery (“SRS”), stereotactic body radiotherapy (“SBRT”) and brachytherapy as well as associated quality assurance equipment.

The Oncology Systems’ hardware products include linear accelerators, brachytherapy afterloaders, treatment accessories, artificial intelligence-powered adaptive delivery systems and quality assurance software. The Oncology Systems’ software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices.

Oncology Systems’ products enable radiation oncology departments in hospitals and clinics to perform conventional radiotherapy treatments and offer advanced treatments such as IMRT, IGRT, VMAT, SRS and SBRT, and treat patients using brachytherapy techniques, which involve the introduction or temporary insertion of radioactive sources. The Oncology Systems' products are also used by surgeons and radiation oncologists to perform stereotactic radiosurgery and by medical oncology departments to manage patient treatments. Oncology Systems’ customers worldwide include university research and community hospitals, private and governmental institutions, healthcare agencies, physicians’ offices, medical oncology practices, radiotherapy centers and cancer care clinics.

The Oncology Systems segment offers services ranging from hardware phone support, break/fix repair of linear accelerators, obsolescence protection of hardware, software support, software upgrades, hosting as a service, as well as clinical consulting services.

The Oncology Systems segment also provides clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed at facilitating improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, the Company operates 1013 multi-disciplinary cancer centers and 1 specialty hospital in India and 1 multi-disciplinary cancer center in Sri Lanka.

The Proton Solutions segment develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam radiotherapy using proton beams, for the treatment of cancer.

The Other category primarily includes the Interventional Solutions business, which offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolization. Interventional Solutions also provides software and remote services for post treatment dose calculation for Yttrium-90 microspheres used in selective internal radiation therapy. The Other category also includes assets related to the use of radiation in the heart and other forms of radiosurgery for cardiovascular disease.

The following information is provided for the purpose of achieving an understanding of operations but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies may not be meaningful.

~~The~~ Company allocates corporate costs to its operating segments based on the relative revenues of Oncology Systems, Proton Solutions and Interventional Solutions. The Company allocates these costs, excluding certain corporate related costs, transactions or adjustments that the Company's CODM considers to be non-operational, such as restructuring and impairment charges, significant litigation charges or benefits and legal costs, and acquisition-related ~~expenses and in process research and development.~~expenses. Although the Company excludes these amounts from segment operating earnings, they are included in the condensed consolidated operating earnings and included in the reconciliation below.

Accordingly, the following information is provided for purposes of achieving an understanding of operations but may not be indicative of the financial results of the reported segments were they independent organizations. In addition, comparisons of the Company’s operations to similar operations of other companies may not be meaningful.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

The following table summarizes select financial results for each reportable segment:


		Three Months Ended					Three Months Ended
(In millions)	(In millions)	January 3, 2020		December 28, 2018		(In millions)	January 1, 2021		January 3, 2020
Revenues	Revenues					Revenues
Oncology Systems	Oncology Systems	$	782.4	$	702.5	Oncology Systems	$	744.5	$	782.4
Proton Solutions	Proton Solutions	27.6		38.5		Proton Solutions	25.6		27.6
Total reportable segments	Total reportable segments	810.0		741.0		Total reportable segments	770.1		810.0
Other	Other	18.9		—		Other	8.7		18.9
Total Company	Total Company	$	828.9	$	741.0	Total Company	$	778.8	$	828.9
Earnings from continuing operations before taxes
Earnings before taxes						Earnings before taxes
Oncology Systems	Oncology Systems	$	136.4	$	124.1	Oncology Systems	$	142.0	$	136.4
Proton Solutions	Proton Solutions	(14.3)		(8.8)		Proton Solutions	(10.5)		(14.3)
Total reportable segments	Total reportable segments	122.1		115.3		Total reportable segments	131.5		122.1
Other	Other	2.8		—		Other	(5.3)		2.8
Unallocated corporate	Unallocated corporate	(14.9)		(3.6)		Unallocated corporate	(9.0)		(14.9)
Operating earnings	Operating earnings	110.0		111.7		Operating earnings	117.2		110.0
Interest income (expense), net	Interest income (expense), net	(1.7)		2.7		Interest income (expense), net	1.5		(1.7)
Other income, net	Other income, net	4.4		23.0		Other income, net	5.7		4.4
Total Company	Total Company	$	112.7	$	137.4	Total Company	$	124.4	$	112.7

Disaggregation of Revenues

The Company disaggregates its revenues from contracts by major product categories, geographic region, and by timing of revenue recognition for each of its reportable operating segments, as the Company believes this best depicts how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors. See details in the tables below.

Revenues by Product Type


		Three Months Ended					Three Months Ended
Total Revenues by Product Type	Total Revenues by Product Type	January 3,		December 28,		Total Revenues by Product Type	January 1,		January 3,
(In millions)	(In millions)	2020		2018		(In millions)	2021		2020
Hardware	Hardware					Hardware
Oncology Systems	Oncology Systems	$	320.0	$	313.6	Oncology Systems	$	279.8	$	320.0
Proton Solutions	Proton Solutions	20.1		33.6		Proton Solutions	15.6		20.1
Other	Other	18.9		—		Other	8.7		18.9
Total Hardware	Total Hardware	359.0		347.2		Total Hardware	304.1		359.0
Software ⁽¹⁾	Software ⁽¹⁾					Software (1)
Oncology Systems	Oncology Systems	148.8		131.2		Oncology Systems	142.8		148.8
Proton Solutions	Proton Solutions	—		—		Proton Solutions	1.4		0
Total Software	Total Software	148.8		131.2		Total Software	144.2		148.8
Service	Service					Service
Oncology Systems	Oncology Systems	313.6		257.7		Oncology Systems	321.9		313.6
Proton Solutions	Proton Solutions	7.5		4.9		Proton Solutions	8.6		7.5
Total Service	Total Service	321.1		262.6		Total Service	330.5		321.1
Total Revenues	Total Revenues	$	828.9	$	741.0	Total Revenues	$	778.8	$	828.9

⁽¹⁾Includes software support agreements that are recorded in revenues from service, and software licenses that are recorded in revenues from product in the Condensed Consolidated Statements of Earnings.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Revenues by Geographical Region


		Three Months Ended					Three Months Ended
Total Revenues by Geographical Region	Total Revenues by Geographical Region	January 3,		December 28,		Total Revenues by Geographical Region	January 1,		January 3,
(In millions)	(In millions)	2020		2018		(In millions)	2021		2020
Americas	Americas					Americas
Oncology Systems	Oncology Systems	$	378.9	$	330.8	Oncology Systems	$	332.5	$	378.9
Proton Solutions	Proton Solutions	16.9		19.6		Proton Solutions	11.3		16.9
Other	Other	6.4		—		Other	5.2		6.4
Total Americas	Total Americas	402.2		350.4		Total Americas	349.0		402.2
EMEA	EMEA					EMEA
Oncology Systems	Oncology Systems	259.8		234.5		Oncology Systems	254.2		259.8
Proton Solutions	Proton Solutions	10.3		16.5		Proton Solutions	11.9		10.3
Other	Other	2.8		—		Other	1.5		2.8
Total EMEA	Total EMEA	272.9		251.0		Total EMEA	267.6		272.9
APAC	APAC					APAC
Oncology Systems	Oncology Systems	143.7		137.2		Oncology Systems	157.8		143.7
Proton Solutions	Proton Solutions	0.4		2.4		Proton Solutions	2.4		0.4
Other	Other	9.7		—		Other	2.0		9.7
Total APAC	Total APAC	153.8		139.6		Total APAC	162.2		153.8
Total Revenues	Total Revenues	$	828.9	$	741.0	Total Revenues	$	778.8	$	828.9
North America ⁽¹⁾	North America ⁽¹⁾					North America (1)
Oncology Systems	Oncology Systems	$	355.2	$	309.1	Oncology Systems	$	313.1	$	355.2
Proton Solutions	Proton Solutions	16.9		19.6		Proton Solutions	11.3		16.9
Other	Other	6.4		—		Other	5.2		6.4
Total North America	Total North America	378.5		328.7		Total North America	329.6		378.5
International	International					International
Oncology Systems	Oncology Systems	427.2		393.4		Oncology Systems	431.4		427.2
Proton Solutions	Proton Solutions	10.7		18.9		Proton Solutions	14.3		10.7
Other	Other	12.5		—		Other	3.5		12.5
Total International	Total International	450.4		412.3		Total International	449.2		450.4
Total Revenues	Total Revenues	$	828.9	$	741.0	Total Revenues	$	778.8	$	828.9

⁽¹⁾North America primarily includes the United States and Canada.

Revenues by Timing of Revenue Recognition


		Three Months Ended					Three Months Ended
Timing of revenue recognition	Timing of revenue recognition	January 3,		December 28,		Timing of revenue recognition	January 1,		January 3,
(In millions)	(In millions)	2020		2018		(In millions)	2021		2020
Products transferred at a point in time	Products transferred at a point in time					Products transferred at a point in time
Oncology Systems	Oncology Systems	$	382.0	$	366.6	Oncology Systems	$	338.5	$	382.0

Proton Solutions						Proton Solutions	1.4		0
Other	Other	18.9		—		Other	8.7		18.9
Total products transferred at a point in time	Total products transferred at a point in time	400.9		366.6		Total products transferred at a point in time	348.6		400.9
Products and services transferred over time	Products and services transferred over time					Products and services transferred over time
Oncology Systems	Oncology Systems	400.4		335.9		Oncology Systems	406.0		400.4
Proton Solutions	Proton Solutions	27.6		38.5		Proton Solutions	24.2		27.6

Total products and services transferred over time	Total products and services transferred over time	428.0		374.4		Total products and services transferred over time	430.2		428.0
Total Revenues	Total Revenues	$	828.9	$	741.0	Total Revenues	$	778.8	$	828.9

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

16. BUSINESS COMBINATIONS

Business Combinations in Fiscal Year ~~2020~~2021

The Company completed an acquisition inrelated to its Oncology Systems business that was not material in the first quarter of fiscal year ~~2020. The acquisition~~2021, which was comprised of ~~goodwill~~intangible assets acquired and ~~assets acquired. The purchase accounting from this transaction is not yet finalized.~~

~~Business Combinations in Fiscal Year 2019~~

~~Assets acquired from Boston Scientific~~

In August 2019, the Company acquired Boston Scientific's embolics microspheres business, for treating arteriovenous malformations and hypervascular tumors, for a purchase price of $90.0 million in cashcontingent consideration. The assets from this purchase are included in the Company's Interventional Solutions business, which is included in the Other category. The purchase accounting from this transaction has been finalized.

~~Cancer Treatment Services International~~

In June 2019, the Company acquired CTSI, a privately-held company for a purchase price of $277.0 million, consisting of $262.8 million of cash consideration, $8.2 million of contingent consideration, and $6.0 million of other consideration. The undiscounted range of the contingent consideration payments is 0 to $58 million and is based on actual revenues over the 18 months following the acquisition date. There have been 0 changes this quarter to the fair value of the contingent consideration included in the initial purchase price. The Company has included this acquisition in its Oncology Systems business. The purchase accounting ~~from~~for this transaction is not yet finalized. ~~The~~

Measurement Period Adjustments

In the first quarter of fiscal year 2021, the Company recorded a measurement period adjustment of $0.5 million to the fair value of the purchase consideration of a business combination that occurred in the ~~first~~fourth quarter of fiscal year ~~2020 that was not material.~~

~~Endocare~~2020. The adjustment consisted of an increase to goodwill and ~~Alicon~~

~~In June 2019, the Company acquired Endocare and Alicon for~~ a combined purchase price of $210.0 million consisting of $197.4 million of cash consideration and $12.6 million of contingent consideration. The undiscounted range of the contingent consideration payments is 0corresponding increase to $40 million and is based on actual revenues through March 2020. Due to better than expected actual and projected financial performance for Endocare and Alicon, as well as a change in the expected mix of products, the Company recorded an $8.8 million increase in the fair value of contingent consideration in the first quarter of fiscal year 2020, in addition to a $18.6 million increase in the fair value of the contingent consideration recorded in the fourth quarter of fiscal year 2019. The Company has recorded a total of $40.0 million in contingent consideration related to the Endocare and Alicon acquisitions, which is expected to be paid in fiscal year 2020. These acquisitions are included in the Company's Interventional Solutions business, which is included in the Other category. The purchase accounting from this transaction is not yet finalized. The Company has not recorded any measurement period adjustments this quarter.

liability
.

~~Other Acquisitions~~Business Combinations in Fiscal Year ~~2019~~2020

~~In the third quarter of~~During fiscal year ~~2019, the Company purchased a privately-held company for a cash purchase price of $15.2 million, including a holdback of~~ ~~$3.6 million~~ and contingent consideration. At the closing date, the value of the contingent consideration was 0 because none of the milestones were probable to be achieved however, the Company could potentially pay up to approximately ~~$9 million~~ by 2023 if certain milestones were met plus additional payments for achieving revenue targets through 2035. The acquisition was classified as an asset acquisition. This acquisition is included in the Other category.

~~In the first quarter of fiscal year 2019,~~2020, the Company acquired a ~~privately-held software company for~~distributor of radiotherapy equipment, for a purchase price of ~~$28.5 million.~~$32.7 million, which consisted of $25.5 million in cash consideration, $5.8 million of contingent consideration and $1.4 million in other consideration. The ~~acquisition~~purchase price primarily consisted of ~~$21.9~~$13.1 million in goodwill and ~~$6.5~~$12.1 million in finite-lived intangible assets. The Company ~~integrated~~has included this acquisition ~~into~~in its Oncology Systems ~~reporting unit.~~business. The goodwill for this acquisition is not deductible for income tax. The purchase accounting for this transaction is not yet finalized.

The Company also completed 5 other acquisitions which had an aggregate purchase price of $11.5 million. The Company has included these acquisitions in its Oncology Systems business. The purchase accounting for some of these transactions is not yet finalized.

Other Information

The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount. The Company believes the factors that contributed to goodwill in its completed acquisitions include synergies not available to market participants, as well as the acquisition of a talented workforce.

The fair value of assets acquired and liabilities assumed, has been determined on a preliminary basis for acquisitions completed in the current year and certain acquisitions in the previous fiscal year. The Company will finalize these amounts as it obtains the

~~VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES~~

~~NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)~~

~~(Unaudited)~~

information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of a business combination may result in certain adjustments. The Company expects to finalize these amounts no later than one year from the date of each business combination.

The condensed consolidated financial statements include the operating results from the date the above businesses were acquired. Pro forma results of operations for the completed acquisitions have not been presented because the effects were not material to the Company's condensed consolidated financial statements.

The Company incurred ~~acquisition~~ transaction costs of ~~$3.9~~$7.5 million and ~~$2.4~~$3.9 million during the three months ended January 1, 2021 and January 3, 2020, ~~and December 28, 2018,~~ respectively.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by, and information currently available to the management of ~~Varian Medical Systems, Inc. (“VMS”) and its subsidiaries (collectively “we,” “our” or~~ the ~~“Company”).~~Company. The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements or management’s current expectations due to the factors cited in this “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations” (“MD&A”),~~Operations,” the Risk Factors listed under Part II, Item 1A of this Quarterly Report on Form 10-Q, and other factors described from time to time in our other filings with the ~~Securities and Exchange Commission (“SEC”),~~SEC, or other reasons. For this purpose, statements concerning: ~~growth strategies; industry~~ the continuing impact of the COVID-19 pandemic on our business, including but not limited to, the impact on our workforce, operations, supply chain, demand for our products and services, and our financial results and condition; our ability to successfully manage the challenges associated with the COVID-19 pandemic; our ability to achieve expected synergies from acquisitions; risks associated with integrating recent acquisitions; global economic conditions and changes to trends for cancer treatment regionally; currency exchange rates and tax rates; the impact of the Tax Cuts and Jobs Act; the impact of the Affordable Health Care for America Act (including excise taxes on medical devices) and any further healthcare reforms (including changes to Medicare and Medicaid), and/or market segment outlook; economic and market conditions; domestic and global trends; development, market acceptance of or transition to new products, technologies, solutions or services; growth drivers; future orders, revenues, operating expenses, tax rate, cash flows, backlog, earnings growth or other financial results; expected capital expenditures; new and potential futurechanges in third-party reimbursement levels; tariffs and exclusions therefrom, or cross-border trade restrictions; ~~currency fluctuation,~~demand for and delays in delivery of the company’s products; the company’s ability to develop, commercialize and deploy new products; the company’s ability to meet Food and Drug Administration (FDA) and other regulatory requirements, regulations or procedures; changes in ~~political,~~ regulatory ~~safety~~environments; risks associated with the company providing financing for the construction and start-up operations of particle therapy centers, challenges associated with commercializing the company’s Proton Solutions business; challenges to public tender awards and the loss of such awards or ~~economic conditions;~~ other orders; the effect of adverse publicity; the company’s reliance on sole or limited-source suppliers; the company’s ability to maintain or increase margins; the impact of competitive products and pricing; the potential loss of key distributors or key personnel; challenges related to entering into new business lines; the expected timing of the closing of Merger, the estimated amount of advisory fees related to the Merger; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the failure to obtain certain required regulatory approvals or the failure to satisfy any of the other closing conditions to the completion of the Merger; risks related to disruption of management's attention from the Company's ongoing business operations due to the Merger; the effect of the announcement of the Merger on the ability of the Company to retain and hire key personnel and maintain relationships with its customers, suppliers, distributors and others with whom it does business, or on its operating results and business generally; the ability to meet expectations regarding the timing and completion of the Merger; risks associated with Merger-related litigation;and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “would,” “could,” “estimate,” “may,” “intended,” “potential,” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management’s current expectations. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.

This discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes included elsewhere in this Quarterly Report on Form 10-Q and the Consolidated Financial Statements, the Notes to the Consolidated Financial Statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in ~~our~~the 2020 Annual Report, ~~on Form 10-K for the fiscal year ended September 27, 2019 (the “2019 Annual Report”),~~ as well as the information contained under Part I, Item 1A "Risk Factors" of the ~~2019~~2020 Annual Report and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q, , and other information provided from time to time in our other filings with the SEC.

Overview

We, Varian Medical Systems, Inc., are a Delaware corporation originally incorporated in 1948 as Varian Associates, Inc. We are the world’s leading manufacturer of medical devices and software for treating cancer and other medical conditions with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, brachytherapy and proton therapy. ~~Through recent acquisitions, we now~~We operate a hospital and a network of cancer centers in India and Sri Lanka; provide cancer care professional services to healthcare providers worldwide; and are a supplier of a broad portfolio of interventional solutions.

Our vision is a world without fear of cancer. Our mission is to combine the ingenuity of people with the power of data and technology to achieve new victories against cancer. Our long-term growth and value creation strategy is to transform our company from the global leader in radiation therapy (also referred to as radiotherapy) to the global leader in multi-disciplinary,

integrated cancer care solutions that leverages our clinical experience and strengths in technology development and new product innovation. To achieve these long-term objectives, we are focused on driving growth through strengthening our leadership in radiation therapy, extending our global footprint and expanding into new markets and therapies.

We have two reportable operating segments: Oncology Systems and Proton Solutions. Our Interventional Solutions business is reflected in the Other category because it does not meet the criteria for a reportable operating segment. The operating segments were determined based on how our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), views and evaluates our operations. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on operating earnings. We report revenues in three regions. The Americas region includes North America (primarily United States and Canada) and Latin America. The EMEA region includes Europe, Russia, the Middle East, India and Africa. The APAC region primarily includes East and Southeast Asia and Australia.

Proposed Acquisition by Siemens Healthineers

On August 2, 2020, VMS, Siemens Healthineers, Merger Sub, and, with respect to certain provisions, the Guarantor, entered into the Merger Agreement, pursuant to which, on the terms and subject to the conditions set forth therein, Merger Sub will be merged with and into VMS, with VMS surviving the Merger as a wholly owned subsidiary of Siemens Healthineers. Under the terms of the Merger Agreement, which has been unanimously approved by VMS' Board of Directors, Siemens Healthineers will acquire all outstanding shares of VMS for $177.50 per share in cash, in a transaction valued at approximately $16.4 billion on a fully diluted basis. The Merger is expected to close in the first half of calendar year 2021, subject to receipt of specified regulatory approvals and other customary closing conditions. On October 15, 2020, VMS' stockholders approved and adopted the Merger Agreement. Under the terms of the Merger Agreement, if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances, a termination fee of $450.0 million in cash may be payable by VMS to Siemens Healthineers. The Merger Agreement also provides that a reverse termination fee of $450.0 million or $925.0 million in cash may be payable by Siemens Healthineers to VMS if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances.

COVID-19 Impact

The COVID-19 pandemic has impacted our day-to-day operations and the operations of the vast majority of our customers, suppliers and distributors globally. The COVID-19 response by hospitals and healthcare professionals has placed a severe strain on healthcare systems. Many of our hospital customers have prioritized their efforts on their COVID-19 response and have diverted focus and resources away from their normal operations and restricted access to their sites in efforts to contain the spread of the virus. The global nature of the pandemic has resulted in authorities implementing numerous measures designed to contain the virus, including travel bans and restrictions, border closures, quarantines, shelter-in-place orders, business limitations and shutdowns. The prioritization of COVID-19 treatment and containment have presented us with unique operational challenges, including delays in capital equipment purchasing decisions by customers, obstacles to our ability to market, deliver, install and service our products, and disruptions and delays in our logistics and supply chain.

Revenues and Orders Trends

The impact of COVID-19 on our operations has varied by region, with mixed impacts based on the geographical spread, stage of containment, and recurrence of the pandemic in each region. Our operations in China were impacted first, beginning early in the second quarter of our fiscal year 2020, followed by other parts of our Asia Pacific geography, with our EMEA and Americas geographies experiencing the initial impacts of the pandemic late in the second quarter of our fiscal year 2020. Our second quarter revenues were trending higher than the comparable second quarter fiscal 2019 period, until March 2020 when we started to experience a decline in hardware product revenues in our EMEA and Americas geographies due to the spread of COVID-19. In the third quarter of our fiscal year 2020, these trends in declining revenues continued across all of our geographies, both in comparison to the second quarter of our fiscal year 2020 and in comparison to our third quarter of fiscal 2019, with the exception of revenues from the China region, which increased with respect to both comparison periods, driven by recovery from COVID-19 in China which began at the end of the second quarter of our fiscal year 2020. In the fourth quarter of our fiscal year 2020, we experienced improvement in revenues in comparison to the third quarter of our fiscal year 2020 in all three geographies, although our total revenues decreased by 3% in comparison to the fourth quarter of our fiscal year 2019. The sequential improvement in revenues was driven primarily by fourth quarter seasonality and to some extent by recovery in our Americas and EMEA geographies and continued recovery in China and other Asia Pacific countries. We continued to experience sequential recovery globally in the first quarter of our fiscal year 2021, although total revenues decreased 6% in comparison to the first quarter of our 2020 fiscal year, at which point we had not begun to experience impacts from the COVID-19 pandemic, and decreased 8% in comparison to the fourth quarter of our fiscal year 2020 due to fourth quarter seasonality.

We have experienced adverse impacts to revenues for both our hardware and software products, primarily resulting from customer capital constraints, site access challenges and delays to pre-installation activities. We have experienced minimal impact to our services revenues and expect that our services revenues will continue to be reasonably insulated from COVID-19 given the long-term nature of the underlying contracts and our current installed base; however, installation and commissioning service revenues linked to hardware installation have trended downward, consistent with delays to hardware installations. If treatment volumes decline materially and impact hospitals’ operating costs, it may impact our service contract renewals, pricing and service revenues.

We have experienced similar trends in orders as we have in revenues. We began to experience delays in orders, primarily for capital equipment, during the second quarter of our fiscal year 2020. Orders continued to decline across most regions during the third quarter of our fiscal year 2020, with our EMEA geography experiencing the most severe negative impact to orders and our Americas geography also experiencing significant negative impacts. However, in the third quarter of our fiscal year 2020 our APAC geography experienced an increase in orders both in comparison to the second quarter of our fiscal year 2020, driven by recovery in China, and in comparison to the third quarter of our fiscal year 2019, driven by recovery in Southeast Asia and Korea. In the fourth quarter of our fiscal year 2020, we experienced significant improvement in orders compared to the third quarter of our fiscal year 2020 in all three geographies, as our customers began to resume capital purchasing activity, although our total gross orders decreased by 8% in comparison to the fourth quarter of our fiscal year 2019.We continued to experience improvement in orders globally in the first quarter of our fiscal year 2021. Total gross orders increased by 4% in comparison to the first quarter of our fiscal year 2020, although total orders did not increase sequentially quarter- over- quarter due to fourth quarter seasonality.

We are not able to accurately predict the full impact that COVID-19 will have on our future results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and the extent and effectiveness of containment measures imposed in different geographies, including vaccination programs. To the extent lockdown measures continue to restrict access to customer sites and delay vault construction or such measures increase in scope and duration, it could have an adverse impact on our revenues during our fiscal year 2021. In addition, a lack of coordinated COVID-19 response by the U.S. government, including with respect to vaccination programs and variants in the virus, could result in significant increases to the duration and severity of the pandemic in the United States. We expect that customer financial constraints, foreign currency headwinds, and uncertainty around the pandemic may lead our customers to continue to defer capital equipment purchases during our fiscal year 2021.

We believe that we will continue to experience improvement in both our revenues and orders over the course of our fiscal year 2021 to the extent COVID-19 impacts to our operations continue to decrease as the pandemic is controlled. We believe that our existing orders backlog, together with recurring services revenues, should soften the impact of order delays on our revenues. Based on regional machine utilization trends, beginning in the fourth quarter of our fiscal year 2020, radiation therapy treatment volume levels have been returning to historical averages in certain regions that experienced recovery from the pandemic, which we would expect to have a corresponding positive impact on hospital operating budgets; however, lockdown measures that were put in place in response to resurgence of the pandemic in several countries could negatively impact utilization trends. We expect to continue to experience some logistical, manufacturing and shipment delays, and some increased logistics-related costs for so long as COVID-19 related travel and customer site access restrictions remain in place.

General Increase in Risks

While we believe that orders trends and our revenues will return to historical norms over time as the pandemic is controlled, if the COVID-19 pandemic proliferates for an extended period, capital expenditure delays could be prolonged and have a material impact on revenues and orders well into our fiscal year 2021. Worldwide economies have been significantly impacted by the COVID-19 pandemic, and on June 8, 2020, the National Bureau of Economic Research announced that the United States was in recession. An extended economic recession in the United States or elsewhere could have a material adverse effect on our business over the longer term if hospitals reduce or curtail capital and overall spending. Some of our hospital customers may decide to no longer purchase our products or services, and certain of our customers, suppliers and distributors may become insolvent.

For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of this Form 10-K.

Our Response

Since the outbreak of the pandemic, our focus has been on keeping our employees safe, supporting our customers and their patients, and ensuring supply chain stability and business continuity.

•Our employees are crucial to our mission, and we have taken the following actions to ensure their safety and well-being.

◦We have instituted work-from-home policies and workplace safety measures and protocols, including strict site access guidelines and ensuring the availability of personal protective equipment. To support the health and well-being of our employees, customers, distributors, partners and communities, as of October 2, 2020, approximately 54% of our employees are working remotely, whereas typically only 15% of our employees, such as field service employees, work remotely.

◦We have implemented new programs aimed at educating our employees on how to operate in virtual, social-distancing environments.

◦As of February 9, 2021, all of our manufacturing facilities are fully operational. We have implemented stringent safety protocols at all of our manufacturing facilities, including rigorous health and safety training for all manufacturing employees and the institution of new workplace spacing requirements.

•Our customers are facing unique challenges, and we are taking actions to support their priorities. Among other efforts, we are taking actions to ensure that all of our customers can continue to deliver radiation therapy, a non-elective procedure, to their patients, and we are actively deploying remote tools across our training, installation and field service teams to ensure continued access to our products and solutions.

•Despite certain logistical and manufacturing challenges, to date, we have been successful in our efforts to secure and stabilize our global supply chain, and we are actively coordinating with our suppliers and distributors to maintain adequate inventory to fulfill our customer commitments.

•We have a solid balance sheet, as of January 1, 2021, with approximately $1.7 billion in accessible liquidity, including approximately $773 million in cash and cash equivalents and approximately $972 million available under our $1.2 billion revolving credit facility. To date, we have not experienced a significant decline in customer credit quality or a significant increase in requests for changes or extension of payment terms as a result of COVID-19, although we will continue to closely monitor these metrics going forward. While our capital allocation priorities remain unchanged, as a precautionary measure we have paused our share buybacks to preserve liquidity and are focused on reducing costs to bolster our financial flexibility in light of the broad range of potential outcomes over the foreseeable future. In our third and fourth quarter of fiscal year 2020, we implemented several cost cutting measures designed to preserve liquidity, including a reduction in force that impacted approximately 3% of our work force, a temporary reduction in certain employee benefits, and requiring our employees to take mandatory paid personal leave days during a set week in each of the third quarter and fourth quarters of our fiscal year 2020 and in the first quarter of our fiscal year 2021.

Despite the challenges that we are facing due to the COVID-19 pandemic, we remain confident that the actions that we are taking to manage such challenges, combined with our strong liquidity, position us well to navigate through the current economic environment and continue to execute on our long-term value creation strategy.

Highlights for the Three Months Ended January ~~3, 2020~~1, 2021

Financial Summary


		Three Months Ended															Three Months Ended
(In millions, except per share amounts)	(In millions, except per share amounts)	January 3, 2020			December 28, 2018			Change		(In millions, except per share amounts)	January 1, 2021			January 3, 2020			Change
Gross Orders	Gross Orders	$	818.6		$	721.7		13	%	Gross Orders	$	853.7		$	818.6		4	%
Oncology Systems	Oncology Systems	773.8			716.5			8	%	Oncology Systems	789.4			773.8			2	%
Proton Solutions	Proton Solutions	25.9			5.2			399	%	Proton Solutions	55.6			25.9			114	%
Other	Other	18.9			—			n/m		Other	8.7			18.9			(54)	%
Backlog	Backlog	$	3,305.3		$	3,174.7		4	%	Backlog	$	3,381.7		$	3,305.3		2	%
Revenues	Revenues	$	828.9		$	741.0		12	%	Revenues	$	778.8		$	828.9		(6)	%
Oncology Systems	Oncology Systems	782.4			702.5			11	%	Oncology Systems	744.5			782.4			(5)	%
Proton Solutions	Proton Solutions	27.6			38.5			(28)	%	Proton Solutions	25.6			27.6			(7)	%
Other	Other	18.9			—			n/m		Other	8.7			18.9			(54)	%
Gross margin as a percentage of revenues	Gross margin as a percentage of revenues	44.2		%	42.7		%	160 bps		Gross margin as a percentage of revenues	46.1		%	44.2		%	190 bps
Effective tax rate	Effective tax rate	21.0		%	24.4		%			Effective tax rate	22.2		%	21.0		%
Net earnings attributable to Varian	Net earnings attributable to Varian	$	88.2		$	103.2		(14)	%	Net earnings attributable to Varian	$	96.5		$	88.2		9	%
Diluted net earnings per share	Diluted net earnings per share	$	0.96		$	1.12		(14)	%	Diluted net earnings per share	$	1.05		$	0.96		9	%
Net cash provided by operating activities	Net cash provided by operating activities	$	112.6		$	140.9		(20)	%	Net cash provided by operating activities	$	141.4		$	112.6		26	%
Number of shares repurchased	Number of shares repurchased	0.3			0.3			4	%	Number of shares repurchased	—			0.3			n/m
Total cost of shares repurchased	Total cost of shares repurchased	$	46.4		$	34.8		33	%	Total cost of shares repurchased	$	—		$	46.4		n/m

n/m - not meaningful

Tariff Measures.Between July 2018 and May 2019, the Trump Administration imposed a series of tariffs, ranging from 5% to 25%, on numerous products imported into the United States from China, including Varian’s radiotherapy systems manufactured in China and certain components used in our manufacturing and service activities. In July and August 2018, China retaliated against the U.S. tariffs by imposing its own series of tariffs, ranging from 10% to 25%, on certain products imported into China from the United States, including Varian’s radiotherapy systems and certain manufacturing and service components.

We participated in the Office of the U.S. Trade Representative (“USTR”) process to seek product-specific exclusions from the U.S. tariffs on Chinese imports. To date, USTR has granted tariff exclusions for four products: certain radiotherapy systems manufactured in China, as well as three key components of the radiation therapy systems that we manufacture in the United ~~States -multi-leaf~~States: multi-leaf collimators, certain printed circuit board assemblies and tungsten shielding. We submitted an additional U.S. exclusion request in September 2019, in relation to a manufacturing component, which ~~is pending.~~was ultimately not granted. In ~~December~~ 2019, USTR granted a one-year extension to our exclusion for radiotherapy ~~systems.~~systems through December 28, 2020, which has now expired. Two additional component exclusion extensions, for multi-leaf collimators and certain printed circuit board assemblies, were granted through December 31, 2020 and only multi-leaf collimators has been further extended to March 31, 2021. One additional exclusion request, for tungsten shielding, was not extended and expired on September 19, 2020.

In June and July 2019, we submitted formal requests to the Chinese government for exclusions from the Chinese retaliatory tariffs for manufacturing inputs, service parts and radiotherapy systems imported into China from the United States. In September 2019, the Chinese government granted a tariff exclusion for medical linear accelerators, including our radiotherapy systems, ~~with retroactive effect. The~~which was extended through September 16, 2021. We utilize a monthly exclusion program to further mitigate the tariffs on other ~~exclusion requests are still pending. The U.S. and Chinese government tariff exclusions are for one-year periods, with anticipated renewal processes.~~ items. In the aggregate, these tariffs will be referred to as "U.S./China tariffs."

Restructuring Charges. In the third quarter of fiscal year 2020, we implemented a global workforce reduction, as part of our plan to enhance operational performance through productivity initiatives, in response to the impact of the COVID-19 pandemic. The Company incurred $0.7 million in restructuring charges in the first quarter of fiscal year 2021, which primarily consisted of employee severance costs. We paid $3.0 million for restructuring charges in the first quarter of fiscal year 2021. The restructuring accrual balance at January 1, 2021 was $4.4 million, and it is expected to be paid in fiscal year 2021. As of January 1, 2021, we do not expect to incur additional restructuring charges under this plan. The restructuring charges are included in selling, general and administrative in the Condensed Consolidated Statements of Earnings.

Currency Fluctuation. In order to assist with the assessment of how our underlying businesses performed, we compare the percentage change in revenues and Oncology Systems gross orders from one period to another, excluding the effect of foreign currency fluctuations (i.e., using constant currency exchange rates). To present this information on a constant currency basis, we convert current period revenues and gross orders in currencies other than U.S. Dollars into U.S. Dollars using the comparable prior period’s average exchange rate. Percentage changes in revenues and gross orders are not adjusted for constant currency unless indicated.

Currency fluctuations had approximately a ~~$5.4~~$12 million ~~and $3.6 million unfavorable~~favorable impact onfor total revenues and a $11 million favorable impact for Oncology Systems gross orders, respectively, for the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period. We expect that fluctuations of non-U.S. Dollar currencies against the U.S. Dollar may continue to cause variability in our financial performance.

Our Businesses

Oncology Systems. Our Oncology Systems business designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy, and advanced treatments such as fixed field intensity-modulated radiation therapy (“IMRT”), image-guided radiation therapy (“IGRT”), volumetric modulated arc therapy (“VMAT”), stereotactic radiosurgery, stereotactic body radiotherapy, artificial intelligence based Adaptive Radiotherapy and brachytherapy as well as associated quality assurance equipment. Our software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices. We offer services ranging from hardware phone support, break/fix repair of linear accelerators, obsolescence protection of hardware, software support, software upgrades, hosting as a service, as well as clinical consulting services.

We have expanded our services offerings to include clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed to facilitate improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, ~~we operate ten~~the Company operates 13 multi-disciplinary cancer centers and one specialty hospital in India and one multi-disciplinary cancer center in Sri Lanka. We also expect to innovate and incubate new solutions such as technology-enabled services, and to develop additional technologies that incorporate artificial intelligence and machine learning capabilities, in an environment of data security and patient privacy integrity.

Our primary goal in the Oncology Systems business is to promote the adoption of more advanced and effective cancer treatments. In our view, the fundamental market forces that drive long-term growth in our Oncology Systems business are the rise in cancer cases; technology advances and product developments that are leading to improvements in patient care and outcomes; customer demand for the more advanced and effective cancer treatments that we enable; competitive conditions among hospitals and clinics to offer such advanced treatments; continued improvement in safety and cost efficiency in delivering radiation therapy; and underserved medical needs outside of the United States. Approximately half of Oncology Systems gross orders and revenues come from international markets, within which certain emerging markets typically can have lower gross margins and longer installation cycles since many of these purchases are for new sites where treatment vaults need to be constructed. We have also been investing a higher portion of our Oncology Systems research and development budget in software and software-related products, which have a higher gross margin than our hardware products.

WeSubject to the potential impact of COVID-19, we believe international markets will be our fastest growing markets. The radiation oncology market in North America is largely characterized by the replacements of older machines, with periodic increases in demand driven by the introduction of new technologies. Reimbursement rates in the United States have generally supported a favorable return on investment for the purchase of new radiotherapy equipment and technologies. While we believe that improved product functionality, greater cost-effectiveness and prospects for better clinical outcomes with new capabilities, such as IMRT, IGRT and VMAT, tend to drive demand for radiotherapy products, large changes in reimbursement rates or reimbursement structure can affect customer demand and cause market shifts.

We believe that growth of the radiation oncology market in the United States could be impacted as customers’ decision-making processes are complicated by the uncertainties surrounding reimbursement rates and new models for radiotherapy and radiosurgery, such as the final rule for the alternative payment model pilot program for radiation oncology, ~~that~~which was ~~proposed~~released by the Centers for Medicare and Medicaid ~~Services~~Innovation Center in ~~July 2019.~~September 2020. This pilot program is scheduled to commence on January 1, 2022, and is intended to test whether an episode-based payment structure would reduce Medicare expenditures. We believe that this uncertainty will likely continue in future fiscal years and could impact transaction size, timing and purchasing processes, and also contribute to increased quarterly business ~~variability.~~variability as customers recover from the COVID-19 pandemic.

~~In the radiation~~

Global demand for oncology ~~markets outside~~equipment varies by geography and size of cancer burden. The number of new cancer cases diagnosed annually is projected to increase from approximately 18 million in 2018 to almost 25 million by 2030. Markets such as North America, ~~we expect~~developed Europe and Japan are primarily replacement markets with growth consistent with the ~~EMEA~~aging cycle of the installed base and ~~Latin America~~the aging of populations. Emerging markets such as Brazil, Russia, India, China and Africa have large gaps in access to care and are expected to grow faster to address this gap. Variations in spend on oncology equipment will occur over the long term with varying growth rates across the regions. In APAC, we expect China to lead longer-term regional growth. Overall, we believe the global radiation oncology market can grow over the long term,time based on economic factors in ~~constant currencies, in the mid-single-digit range.~~individual countries.

Proton Solutions. Our Proton Solutions business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam therapy using proton beams, for the treatment of cancer. Proton therapy is a preferred option for treating certain cancers, particularly tumors near critical structures such as the base of the skull, spine, optic nerve and most pediatric cancers. Although proton therapy has been in clinical use for more than four decades, it has not been widely deployed due to the high capital cost.

We are investing resources to drive growth and innovation in this business. Proton therapy facilities are large-scale construction projects that have long lead times and involve significant customer investment and often complex project financing. Consequently, this business is vulnerable to general economic and market conditions, as well as reimbursement rates. Customer decision-making cycles tend to be very long, and orders generally involve many contingencies. ~~Credit markets for proton therapy projects have improved in recent years but the~~The funding environment for large capital projects, such as proton therapy projects, ~~is still challenging.~~remains challenging and volatile. Our current focus is bringing our expertise in traditional radiation therapy to proton therapy to improve its clinical utility, reduce its cost of treatment per patient and drive innovation, so that it is more widely accepted and deployed.

As of January ~~3, 2020,~~1, 2021, we had a ~~total~~carrying value of ~~$167.4~~$121.5 million of notes receivable, including accrued interest, senior secured debt, available-for-sale securities, and loans outstanding to Proton Solutions customers. See Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed Consolidated Financial Statements for further information.

Other. The Other category includes our Interventional Solutions business that offers products for interventional oncology and interventional radiology procedures and treatments, including cryoablation, microwave ablation and embolization. We also provide software and remote services for post treatment ~~image-guided dosimetry~~dose calculation for Yttrium-90 microspheres used in selective internal radiation therapy. ~~The Other category also includes assets related~~Our goal is to offer a wide range of innovative products to the ~~use~~global oncology and radiology markets through a direct sales force and a network of ~~radiation in the heart and other forms of radiosurgery for cardiovascular disease.~~distributors.

Critical Accounting Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances. Our critical accounting policies that are affected by accounting estimates require us to use judgments, often as a result of the need to make estimates and assumptions regarding matters that are inherently uncertain, and actual results could differ materially from these estimates.

We periodically review our accounting policies, estimates and assumptions and make adjustments when facts and circumstances dictate. During the three months ended January ~~3, 2020,~~1, 2021, there were no significant changes except as noted below to our critical accounting policies and estimates as described in the financial statements contained in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our ~~2019~~2020 Annual Report.

Allowance for Credit Losses

We evaluate the creditworthiness of our customers prior to authorizing shipment for all major sale transactions. Except for government tenders, group purchases and orders with letters of credit in Oncology Systems, our payment terms often require payment of a small portion of the total amount due when the customer signs the purchase order, a significant amount upon transfer of risk of loss to the customer and the remaining amount due upon completion of the installation. Following the adoption of ASU 2016-13, we record credit loss reserves to allowance for credit losses when we establish a trade or unbilled accounts receivable, if credit losses are expected over the asset's contractual life. We generally base our estimates of credit loss reserves on historical experience and adjust, as necessary, to reflect current conditions using reasonable and supportable forecasts not already reflected in the historical loss information. Further, on a quarterly basis, we evaluate aged items in our accounts receivable aging report and, if necessary, record an additional allowance in an amount we deem adequate for credit losses. If our evaluation of our customers’ financial conditions does not reflect our future ability to collect outstanding receivables, additional provisions may be needed, and our operating results could be negatively affected.

Results of Operations

Fiscal Year

Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2021 is the 52-week period ending October 1, 2021, and fiscal year 2020 was the 53-week period ~~ending~~that ended October 2, ~~2020,~~2020. The fiscal quarter ended January 1, 2021 was a 13-week period and ~~fiscal year 2019 was~~ the ~~52-week period that ended September 27, 2019. The~~ fiscal quarter ended January 3, 2020 was a 14-week ~~period and the fiscal quarter ended December 28, 2018 was a 13-week~~ period.

Discussion of Results of Operations for the Three Months Ended January ~~3, 2020~~1, 2021 Compared to the Three Months Ended ~~December 28, 2018~~January 3, 2020

Total Revenues


Revenues by sales classification	Revenues by sales classification	Three Months Ended															Revenues by sales classification	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		(Dollars in millions)	January 1, 2021			January 3, 2020				Percent Change
Product	Product	$	421.0		$	400.2		5	%	Product	$	364.2		$	421.0			(13)	%
Service	Service	407.9			340.8			20	%	Service	414.6			407.9				2	%
Total Revenues	Total Revenues	$	828.9		$	741.0		12	%	Total Revenues	$	778.8		$	828.9			(6)	%
Product as a percentage of total revenues	Product as a percentage of total revenues	51		%	54		%			Product as a percentage of total revenues	47		%	51		%
Service as a percentage of total revenues	Service as a percentage of total revenues	49		%	46		%			Service as a percentage of total revenues	53		%	49		%

Total product revenues ~~increased~~decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, mostly driven by a decline in hardware product revenues from Oncology Systems due to ~~$18.9 million~~the inability to access sites and delays to pre-installation construction activities caused by COVID-19 restrictions and, to a lesser extent, decreases in product revenues from the Other category and ~~an increase in revenues from Oncology Systems, partially offset by a decrease in revenues from~~ Proton Solutions.

Total service revenues increased in the three months ended January 3, 2020, compared to the year-ago period, primarily due to Oncology Systems, which included approximately $19 million in additional service revenues due to the three months ended January 3, 2020, being a 14-week period and approximately $18 million in service revenues from CTSI.

Revenues by geographical region Three Months Ended
(Dollars in millions) January 3,
2020 December 28,
2018 Percent Change Constant Currency
Americas $ 402.2 $ 350.4 15 % 15 %
EMEA 272.9 251.0 9 % 11 %
APAC 153.8 139.6 10 % 10 %
Total Revenues $ 828.9 $ 741.0 12 % 13 %
North America ⁽¹⁾
$ 378.5 $ 328.7 15 % 15 %
International 450.4 412.3 9 % 11 %
Total Revenues $ 828.9 $ 741.0 12 % 13 %
North America as a percentage of total revenues 46 % 44 %
International as a percentage of total revenues 54 % 56 %

⁽¹⁾~~North America primarily includes the United States and Canada.~~

~~The Americas revenues increased in the three months ended January 3, 2020,~~1, 2021, compared to the year-ago period, primarily due to an increase in service revenues from Oncology Systems driven by a larger install base, and from Proton Solutions as more proton centers transition to ~~a lesser extent, an~~service contracts. The increase ~~in revenues from the Other category,~~was partially offset by ~~a decrease~~approximately $19 million in additional service revenues from ~~Proton Solutions. EMEA revenues increased~~Oncology Systems in the three months ended January 3, 2020 ~~compared to the year-ago period, primarily~~ due to ~~an increase from Oncology Systems, which included approximately $14 million in~~it being a 14-week period.


Revenues by geographical region	Three Months Ended
(Dollars in millions)	January 1, 2021			January 3, 2020			Percent Change		Constant Currency
Americas	$	349.0		$	402.2		(13)	%	(13)	%
EMEA	267.6			272.9			(2)	%	(5)	%
APAC	162.2			153.8			5	%	2	%
Total Revenues	$	778.8		$	828.9		(6)	%	(8)	%

North America (1)	$	329.6		$	378.5		(13)	%	(13)	%
International	449.2			450.4			—	%	(3)	%
Total Revenues	$	778.8		$	828.9		(6)	%	(8)	%
North America as a percentage of total revenues	42		%	46		%
International as a percentage of total revenues	58		%	54		%

(1) North America primarily includes the United States and Canada.

The Americas region revenues ~~from CTSI and, to a lesser extent, an increase in revenues from the Other category, partially offset by a decrease in revenues from Proton Solutions. APAC revenues increased~~decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to an increase in ~~revenues from~~Oncology Systems and, to a lesser extent, decreases in Proton Solutions and the Other ~~category and~~category. The EMEA region revenues decreased in the three months ended January 1, 2021, compared to the year-ago period, primarily due to a decrease in Oncology Systems. The APAC region revenues increased in the three months ended January 1, 2021, as

compared to the prior period, primarily due to an increase Oncology Systems, partially offset by a decrease in ~~revenues from Proton Solutions.~~the Other category.

Oncology Systems Revenues


Revenues by sales classification	Revenues by sales classification	Three Months Ended																			Revenues by sales classification	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		Constant Currency		(Dollars in millions)	January 1, 2021			January 3, 2020			Percent Change			Constant Currency
Product	Product	$	382.0		$	366.6		4	%	5	%	Product	$	338.5		$	382.0		(11)	%		(13)	%
Service	Service	400.4			335.9			19	%	20	%	Service	406.0			400.4			1	%		—	%
Total Oncology Systems Revenues	Total Oncology Systems Revenues	$	782.4		$	702.5		11	%	12	%	Total Oncology Systems Revenues	$	744.5		$	782.4		(5)	%		(6)	%
Product as a percentage of total Oncology Systems revenues	Product as a percentage of total Oncology Systems revenues	49		%	52		%					Product as a percentage of total Oncology Systems revenues	45		%	49		%
Service as a percentage of total Oncology Systems revenues	Service as a percentage of total Oncology Systems revenues	51		%	48		%					Service as a percentage of total Oncology Systems revenues	55		%	51		%
Oncology Systems revenues as a percentage of total revenues	Oncology Systems revenues as a percentage of total revenues	95		%	95		%					Oncology Systems revenues as a percentage of total revenues	96		%	95		%

Oncology Systems product revenues ~~increased~~decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily driven by a decline in hardware product revenues due to ~~higher software sales. In~~ the ~~three months ended December 28, 2018, revenues from hardware products included a negative impact of approximately $8 million from the U.S./China Tariffs, as compared~~inability to ~~a benefit of approximately $3 million related~~access sites and delays to ~~tariff refunds in the three months ended January 3, 2020.~~pre-installation construction activities caused by COVID-19 restrictions.

Oncology Systems service revenues, which include performance obligations for installation, training and warranty, increased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to ~~the ongoing customer adoption of service contracts as the warranty periods on our TrueBeam systems expire and~~ an increase in the number of customers as the installed base of our products continues to grow. The ~~three months ended January 3, 2020~~increase was ~~a 14-week period, which resulted~~

inpartially offset by approximately $19 million in additional service revenues ~~being recorded. Also, Oncology Systems service revenues include approximately $18 million in revenues from CTSI in the three months ended January 3, 2020.~~

Revenues by geographical region Three Months Ended
(Dollars in millions) January 3,
2020 December 28,
2018 Percent Change Constant Currency
Americas $ 378.9 $ 330.8 15 % 15 %
EMEA 259.8 234.5 11 % 13 %
APAC 143.7 137.2 5 % 4 %
Total Oncology Systems Revenues $ 782.4 $ 702.5 11 % 12 %
North America $ 355.2 $ 309.1 15 % 15 %
International 427.2 393.4 9 % 10 %
Total Oncology Systems Revenues $ 782.4 $ 702.5 11 % 12 %
North America as a percentage of total Oncology Systems revenues 45 % 44 %
International as a percentage of total Oncology Systems revenues 55 % 56 %

~~Americas Oncology Systems revenues increased~~ in the three months ended January 3, 2020, due to it being a 14-week period.


Revenues by geographical region	Three Months Ended
(Dollars in millions)	January 1, 2021			January 3, 2020			Percent Change		Constant Currency
Americas	$	332.5		$	378.9		(12)	%	(12)	%
EMEA	254.2			259.8			(2)	%	(5)	%
APAC	157.8			143.7			10	%	6	%
Total Oncology Systems Revenues	$	744.5		$	782.4		(5)	%	(6)	%

North America	$	313.1		$	355.2		(12)	%	(12)	%
International	431.4			427.2			1	%	(2)	%
Total Oncology Systems Revenues	$	744.5		$	782.4		(5)	%	(6)	%
North America as a percentage of total Oncology Systems revenues	42		%	45		%
International as a percentage of total Oncology Systems revenues	58		%	55		%

In the first quarter of fiscal year 2021, Oncology Systems revenues for hardware products were impacted across all regions by the inability to access sites and delays to pre-installation construction activities caused by COVID-19 restrictions.

Oncology Systems revenues decreased in the Americas region in the three months ended January 1, 2021, compared to the year-ago period, primarily due to ~~an increase~~a decrease in ~~revenues from services and~~ hardware ~~products in North America.~~

~~EMEA~~product revenues. Oncology Systems revenues ~~increased~~decreased in the EMEA region in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to decreases in revenues from hardware products and software licenses, partially offset by an increase in revenues from ~~services and software licenses. EMEA~~services. Oncology Systems revenues from ~~services include approximately $14 million from CTSI.~~

the APAC ~~Oncology Systems revenues~~region increased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to an increase in revenues from ~~services, partially offset by~~hardware products and, to a ~~decrease~~lesser extent, an increase in ~~revenue from hardware products. In the three months ended December 28, 2018,~~ revenues from ~~hardware products included a negative impact of approximately $8 million from the U.S./China Tariffs.~~services.

Variations of higher and lower revenues between the North America and international regions are impacted by regional factors influencing our gross orders, which include the impact of COVID-19, government spending, philanthropy/donations, timing of replacement or new site expansions, economic and political instability in some countries, uncertainty created by U.S. health care policy, such as the ~~excise tax on the sale of most medical devices,~~possibility for bundled reimbursement payments and accountable care organizations, Medicare

reimbursement rates and consolidation of free standing clinics in the United States, and different technology adoption cycles. See further discussion of orders under “Gross Orders.”

Proton Solutions Revenues


Revenues by sales classification	Revenues by sales classification	Three Months Ended															Revenues by sales classification	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		(Dollars in millions)	January 1, 2021			January 3, 2020				Percent Change
Product	Product	$	20.1		$	33.6		(40)	%	Product	$	17.0		$	20.1			(16)	%
Service	Service	7.5			4.9			54	%	Service	8.6			7.5				15	%
Total Proton Solutions Revenues	Total Proton Solutions Revenues	$	27.6		$	38.5		(28)	%	Total Proton Solutions Revenues	$	25.6		$	27.6			(7)	%
Proton Solutions revenues as a percentage of total revenues	Proton Solutions revenues as a percentage of total revenues	3		%	5		%			Proton Solutions revenues as a percentage of total revenues	3		%	3		%

~~Revenues from~~

Proton Solutions revenues decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to ~~a decrease in product revenues that resulted from~~ the timing of project completion and stage of progress that was partially due to COVID-19, partially offset by an increase in service revenues resulting from the increase in the number of proton centers which transitioned to service contracts.

Other Revenues

Revenues from the Other category ~~was $18.9~~decreased $10.2 million for the three months ended January ~~3, 2020. Revenues~~1, 2021, primarily driven by lower volumes from ~~the Other category are allocated~~distributors in China. This business is still developing and is subject to ~~product revenues~~variability in order and ~~are related to our Interventional Solutions business.~~revenue patterns, driven in part by distributors.

Gross Margin


Dollars by segment	Dollars by segment	Three Months Ended															Dollars by segment	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		(Dollars in millions)	January 1, 2021			January 3, 2020				Percent Change
Oncology Systems	Oncology Systems	$	353.0		$	309.8		14	%	Oncology Systems	$	353.1		$	353.0			—	%
Proton Solutions	Proton Solutions	—			6.3			n/m		Proton Solutions	0.5			—				n/m
Other	Other	13.8			—			n/m		Other	5.4			13.8				(61)	%
Gross margin	Gross margin	$	366.8		$	316.1		16	%	Gross margin	$	359.0		$	366.8			(2)	%
Percentage by segment	Percentage by segment									Percentage by segment
Oncology Systems	Oncology Systems	45.1		%	44.1		%			Oncology Systems	47.4		%	45.1		%
Proton Solutions	Proton Solutions	n/m			16.9		%			Proton Solutions	1.8		%	n/m
Other	Other	72.8		%	—		%			Other	62.0		%	72.8		%
Total Company	Total Company	44.2		%	42.7		%			Total Company	46.1		%	44.2		%
Percentage by sales classification	Percentage by sales classification									Percentage by sales classification
Total Company - Product	Total Company - Product	35.4		%	33.4		%			Total Company - Product	32.7		%	35.4		%
Total Company - Service	Total Company - Service	53.4		%	53.6		%			Total Company - Service	57.9		%	53.4		%
Oncology Systems - Product	Oncology Systems - Product	36.1		%	35.8		%			Oncology Systems - Product	35.0		%	36.1		%
Oncology Systems - Service	Oncology Systems - Service	53.7		%	53.2		%			Oncology Systems - Service	57.8		%	53.7		%

n/m - not meaningful

Oncology Systems product gross margin percentage ~~increased~~decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to certain tariff exclusions. In the three months ended December 28, 2018, the U.S./China tariffs had a negative impact of approximately $11 million, comprised of a negative impact of $8 million in revenuesportfolio and ~~$3 million in cost of revenues, compared to a total negative impact of approximately $0.8 million in the three months ended January 3, 2020.~~

geographic mix. Oncology Systems service gross margin percentage increased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to lower installation and travel costs due to COVID-19.

Proton Solutions gross margin percentage increased in the three months ended January 1, 2021, compared to the year-ago period, primarily due to the mix of projects and an increase in service revenues.

~~Proton Solutions~~Other category gross margin percentage decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, ~~primarily~~partially due to ~~project mix and increased project costs.~~the write-off of expired inventory.

Research and Development


		Three Months Ended															Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		(Dollars in millions)	January 1, 2021			January 3, 2020			Percent Change
Research and development	Research and development	$	67.1		$	60.9		10	%	Research and development	$	72.2		$	67.1		8	%
Research and development as a percentage of total revenues	Research and development as a percentage of total revenues	8		%	8		%			Research and development as a percentage of total revenues	9		%	8		%

Research and development expenses increased ~~$6.2~~$5.1 million in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to an increase in investments in software, ~~Flash~~flash technology, adaptive radiotherapy and other strategic programs.

Selling, General and Administrative and Acquisition-related expenses


		Three Months Ended															Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		(Dollars in millions)	January 1, 2021			January 3, 2020			Percent Change
Selling, general and administrative	Selling, general and administrative	$	177.0		$	141.1		25	%	Selling, general and administrative	$	161.9		$	177.0		(9)	%

Acquisition-related expenses	Acquisition-related expenses	$	12.7		$	2.4		419	%	Acquisition-related expenses	$	7.7		$	12.7		(40)	%
Selling, general and administrative as a percentage of total revenues	Selling, general and administrative as a percentage of total revenues	21		%	19		%			Selling, general and administrative as a percentage of total revenues	21		%	21		%

Acquisition-related expenses as a percentage of total revenues	Acquisition-related expenses as a percentage of total revenues	2		%	—		%			Acquisition-related expenses as a percentage of total revenues	1		%	2		%

Selling, general and administrative expenses ~~increased $35.9~~decreased $15.1 million in the three months ended January 1, 2021, compared to the year-ago period, primarily due to cost-saving measures that were put in place in the second half of fiscal year 2020 due to the COVID-19 pandemic.

Acquisition-related expenses in the three months ended January 1, 2021, primarily includes $4.9 million in transactions costs for advisory fees related to the proposed acquisition by Siemens Healthineers. Acquisition-related expenses in the three months ended January 3, 2020, compared to the year-ago period, as we continue to invest in scaling our operations to support growth, including an increase in headcount to support sales and marketing for recent acquisitions and investments in product management for treatment planning in Oncology Systems. Also contributing to the increase in the three months ended January 3, 2020, was $5.3 million in additional amortization of intangible assets and approximately $3 million in additional costs due to the three months ended January 3, 2020 being a 14-week period.

~~Acquisition-related expenses increased in the three months ended January 3, 2020, compared to the year-ago period,~~ primarily ~~due to~~includes an $8.8 million increase in the fair value of contingent consideration related to the Endocare and Alicon ~~acquisitions.~~acquisitions in fiscal year 2019.

Other Income, Net


		Three Months Ended											Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020		December 28, 2018		Percent Change		(Dollars in millions)	January 1, 2021		January 3, 2020		Percent Change
Interest income	Interest income	$	3.0	$	3.9	(25)	%	Interest income	$	2.8	$	3.0	(4)	%
Interest expense	Interest expense	$	(4.7)	$	(1.2)	282	%	Interest expense	$	(1.3)	$	(4.7)	(72)	%
Other income, net	Other income, net	$	4.4	$	23.0	(81)	%	Other income, net	$	5.7	$	4.4	31	%

Interest income decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to lower income generated from our cash balances due to a decrease in interest ~~income from loans to our Proton Solution customers and available-for-sale securities.~~rates. Interest expense decreased in the three months ended January 1, 2021, compared to the year-ago period, primarily due to a decrease in borrowings on our Credit Facility. Other income, net, increased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to ~~an increase in borrowings. Other income, net, decreased~~$8.6 million that was mostly due to increases in the ~~three months ended January 3, 2020, compared to the year-ago period, primarily due to a $22.0~~fair value of our equity investments, partially offset by $3.8 million ~~gain on the sale of an equity investment~~ in ~~the three months ended December 28, 2018.~~foreign exchange losses.

Taxes on Earnings


		Three Months Ended															Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020			December 28, 2018			Change		(Dollars in millions)	January 1, 2021			January 3, 2020			Change
Taxes on earnings	Taxes on earnings	$	23.8		$	33.5		(29.0)	%	Taxes on earnings	$	27.6		$	23.8		17.0	%
Effective tax rate	Effective tax rate	21.0		%	24.4		%			Effective tax rate	22.2		%	21.0		%

Our effective tax rate is ~~lower~~higher in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily because of a shift in the ~~prior year-ago period included~~geographic mix of earnings, partially offset by a greater benefit from discrete items, primarily the tax ~~effect of a change in law due~~benefit from an excess deduction related to ~~the enactment of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.~~stock-based compensation.

Our effective tax rate is impacted by the percentage of our total earnings that comes from our international regions, the mix of particular tax jurisdictions within our international regions, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws or interpretations of those laws. We expect that our effective tax rate may experience increased fluctuations from period to period. See Note 10, "Income Taxes," of the Notes to the Consolidated Financial Statements in our ~~2019~~2020 Annual Report.

~~Diluted Net Earnings Per Share~~

Three Months Ended
January 3,
2020 December 28,
2018 Percent Change
Diluted net earnings per share $ 0.96 $ 1.12 (14) %

~~n/m - not meaningful~~

Net Earnings Per Diluted ~~net~~Share


	Three Months Ended
	January 1, 2021		January 3, 2020		Percent Change

Diluted net earnings per share	$	1.05	$	0.96	9	%

Net earnings per diluted share ~~decreased~~increased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to ~~a $22.0 million gain on the sale of~~ an ~~equity investment in the three months ended December 28, 2018, and an $8.8 million~~ increase in ~~the fair value of contingent consideration related to the Endocare and Alicon acquisition in the three months ended January 3, 2020,~~ operating earnings, gains from equity investments, partially offset by ~~a decrease~~an increase in the effective tax rate in the ~~three months ended January 3, 2020, as compared to the prior period.~~first quarter of fiscal year 2021.

Gross Orders


Gross orders by segment	Gross orders by segment	Three Months Ended											Gross orders by segment	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020		December 28, 2018		Percent Change		(Dollars in millions)	January 1, 2021		January 3, 2020			Percent Change
Oncology Systems	Oncology Systems	$	773.8	$	716.5	8	%	Oncology Systems	$	789.4	$	773.8		2	%
Proton Solutions	Proton Solutions	25.9		5.2		399	%	Proton Solutions	55.6		25.9			114	%
Other	Other	18.9		—		n/m		Other	8.7		18.9			(54)	%
Total Gross Orders	Total Gross Orders	$	818.6	$	721.7	13	%	Total Gross Orders	$	853.7	$	818.6		4	%

n/m - not meaningful

Gross orders are defined as new orders recorded during the period and revisions to previously recorded orders. New orders are recorded for the total contractual amount, excluding certain pass-through items and service items, which are recognized as revenue is recognized, once a written agreement for the delivery of goods or provision of services is in place and, other than Proton Solutions, when shipment of the product is expected to occur within two years, so long as any contingencies are deemed perfunctory. For our Proton Solutions business, we record orders when construction of the related proton therapy treatment center is reasonably expected to start within two years, but only if any contingencies are deemed perfunctory. We will not record Proton Solutions orders if there are financing contingencies, if a substantial portion of the financing for the project is not reasonably assured or if customer board approval contingencies are pending. We perform a quarterly review to verify that outstanding orders remain valid. If an order is no longer expected to ultimately convert to revenue, we record a backlog adjustment, which reduces backlog but does not impact gross orders for the period.

Gross orders in any period may not be directly correlated to the level of revenues in any particular future quarter or period since the timing of revenue recognition will vary significantly based on the delivery requirements of individual orders, acceptance schedules and the readiness of individual customer sites for installation of our ~~products.~~products, all of which was impacted by COVID-19. Moreover, certain types of orders, such as orders for software or newly introduced products in our Oncology Systems segment, typically take more time from order to completion of installation and acceptance than hardware or older products. Because an order for a proton therapy system can be relatively large, an order in one fiscal period will cause gross orders in our Proton Solutions business to vary significantly, making comparisons between fiscal periods more difficult.

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Oncology Systems Gross Orders


Gross orders by geographical region	Gross orders by geographical region	Three Months Ended															Gross orders by geographical region	Three Months Ended
(Dollars in millions)	(Dollars in millions)	January 3, 2020		December 28, 2018		Percent Change		Constant Currency		(Dollars in millions)	January 1, 2021		January 3, 2020		Percent Change			Constant Currency
Americas	Americas	$	359.5	$	335.9	7	%	7	%	Americas	$	346.9	$	359.5	(4)	%		(3)	%
EMEA	EMEA	236.7		218.3		8	%	11	%	EMEA	286.0		236.7		21	%		18	%
APAC	APAC	177.6		162.3		9	%	9	%	APAC	156.5		177.6		(12)	%		(14)	%
Total Oncology Systems Gross Orders	Total Oncology Systems Gross Orders	$	773.8	$	716.5	8	%	9	%	Total Oncology Systems Gross Orders	$	789.4	$	773.8	2	%		1	%

North America	North America	$	326.8	$	313.5	4	%	4	%	North America	$	325.5	$	326.8	—	%		(1)	%
International	International	447.0		403.0		11	%	12	%	International	463.9		447.0		4	%		1	%
Total Oncology Systems Gross Orders	Total Oncology Systems Gross Orders	$	773.8	$	716.5	8	%	9	%	Total Oncology Systems Gross Orders	$	789.4	$	773.8	2	%		1	%

The Americas Oncology Systems gross orders ~~increased~~decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period,primarily due to a decrease in hardware and software product orders. EMEA Oncology Systems gross orders increasedin the three months ended January 1, 2021, compared to the year-ago period, primarily due to an increase in ~~gross orders from services in North America, partially offset with a decrease in gross orders from~~ hardware ~~products.~~

~~EMEA~~ product orders. APAC Oncology Systems gross orders ~~increased~~ decreased in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, primarily due to an increase in gross orders from services, partially offset by a decrease in gross orders from hardware products. EMEA Oncology Systems gross orders from services include approximately $14 million from CTSI.

~~APAC Oncology Systems gross orders increased in the three months ended January 3, 2020, compared to the year-ago period,~~ primarily due to a ~~growth in orders across the region, primarily in Greater China, Southeast Asia, and South Korea, for our products and services, partially offset by a~~ decrease in hardware and software product ~~orders in Japan.~~orders.

The trailing 12 months' growth in gross orders for Oncology Systems at the end of the first quarter of fiscal year ~~2020~~2021 and at the end of each of the previous three fiscal quarters was:


		Trailing 12 Months Ended								Trailing 12 Months Ended
		January 3, 2020	September 27, 2019	June 28, 2019	March 29, 2019		January 1, 2021	October 2, 2020	July 3, 2020	April 3, 2020
Americas	Americas	6%	7%	6%	8%	Americas	(9)%	(7)%	2%	4%
EMEA	EMEA	11%	12%	13%	18%	EMEA	(3)%	(6)%	(1)%	9%
APAC	APAC	6%	9%	22%	20%	APAC	—%	6%	(1)%	(2)%
North America	North America	6%	8%	6%	9%	North America	(8)%	(7)%	2%	3%
International	International	9%	10%	15%	17%	International	(4)%	(2)%	(1)%	5%
Total Oncology Systems Gross Orders	Total Oncology Systems Gross Orders	8%	9%	11%	13%	Total Oncology Systems Gross Orders	(5)%	(4)%	1%	5%

Consistent with the historical pattern, we expect that Oncology Systems gross orders will continue to experience regional fluctuations. We expect that that customer financial constraints, foreign currency headwinds, and uncertainty around the COVID-19 pandemic may lead our customers to continue to defer capital equipment purchases for a significant portion of fiscal year 2021, which will have an adverse effect on Oncology Systems gross orders in fiscal year 2021. Over the long-term, we expect international gross orders, specifically from emerging markets, towill grow as a percentage of overall orders. Oncology Systems gross orders are affected by foreign currency fluctuations, which could impact the demand for our products. In addition, government programs that stimulate the purchase of healthcare products could affect the demand for our products from period to period, and could therefore make it difficult to compare our financial results.

Proton Solutions Gross Orders

Proton Solutions gross orders increased ~~$20.7~~$29.7 million in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period, ~~primarily~~mostly due to ~~one~~ a larger proton therapy system order in ~~the three months ended January 3, 2020, as~~the first quarter of fiscal year 2021 compared to ~~none in~~ the prior year period. ~~Also contributing to the increase in~~

Other Category Gross Orders

The Other category gross orders ~~was an increase in service orders.~~

~~Other Gross Orders~~

~~Other gross orders were $18.9~~decreased $10.2 million in the three months ended January ~~3, 2020,~~1, 2021, compared to the year-ago period,primarily driven by lower volumes from distributors in China. This business is still developing and ~~was~~is subject to variability in order and revenue patterns, driven in part by distributors. Gross orders from the Other category are related to our Interventional Solutions business.

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Backlog

Backlog is the accumulation of all gross orders for which revenues have not been recognized but are still considered valid. Backlog is stated at historical foreign currency exchange rates and revenue is released from backlog at current exchange rates, with any difference recorded as a backlog adjustment. At January ~~3, 2020,~~1, 2021, total Company backlog was ~~$3.3~~$3.4 billion, an increase of 4%2% compared to the backlog at ~~December 28, 2018.~~January 3, 2020. Our Oncology Systems backlog at January ~~3, 2020~~1, 2021 was 4%1% higher than the backlog at ~~December 28, 2018,~~January 3, 2020, which reflected an increase of ~~4% for the both~~7% from our international ~~and~~region, offset by a decrease of 6% from our North America ~~regions, respectively.~~region. Proton Solutions backlog was ~~$220~~approximately $263 million at January ~~3, 2020.~~1, 2021.

We perform a quarterly review to verify that outstanding orders in the backlog remain valid. Aged orders that are not expected to ultimately convert to revenues are ~~classified as~~deemed dormant and are reflected as a reduction in the backlog amounts in the period identified. Backlog adjustments are comprised of dormancies, cancellations, foreign currency exchange rate adjustments, backlog acquired from our acquisitions, and other adjustments. Gross orders do not include backlog adjustments. Backlog adjustments totaled a net ~~reductions~~reduction of ~~$74.5~~$88.1 million in the three months ended January ~~3, 2020,~~1, 2021, compared to a net ~~addition~~reduction of ~~$11.0~~$74.5 million in the year-ago period.

Liquidity and Capital Resources

Liquidity is the measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, acquire businesses or make other investments or loans, repurchase shares of VMS common stock, and fund continuing operations and capital expenditures. Our sources of cash have included operations, borrowings, stock option exercises, and employee stock purchases.

Cash, Cash Equivalents, and Restricted Cash

The following table summarizes our cash, cash equivalents, and restricted cash:


(In millions)	(In millions)	January 3, 2020		September 27, 2019		Increase		(In millions)	January 1, 2021		October 2, 2020		Increase
Cash and cash equivalents	Cash and cash equivalents	$	721.9	$	531.4	$	190.5	Cash and cash equivalents	$	773.3	$	766.1	$	7.2
Restricted cash	Restricted cash	20.3		12.7		7.6		Restricted cash	19.8		19.7		0.1
Total cash, cash equivalents, and restricted cash	Total cash, cash equivalents, and restricted cash	$	742.2	$	544.1	$	198.1	Total cash, cash equivalents, and restricted cash	$	793.1	$	785.8	$	7.3

The increase in cash, cash equivalents, and restricted cash in the three months ended January ~~3, 2020~~1, 2021 was primarily due to ~~$132.0 million in net borrowings from our credit facility, $112.6~~$141.4 million of cash provided by operating activities, ~~$19.7~~$52.4 million in proceeds from the issuance of common stock to employees, ~~and $9.2 million in proceeds from the sale of an equity investment,~~ partially offset by ~~$43.8~~$145.0 million ~~used for the repurchase of shares of VMS common stock, $22.6~~in net repayments on our credit facility, $16.8 million used for purchases of property, plant, and equipment, $10.3 million for the purchase of equity investments and ~~$3.6~~notes receivable in privately-held companies, and $7.6 million used for tax withholdings on vesting of equity awards.

At January ~~3, 2020,~~1, 2021, we had approximately ~~$29~~$213 million, or 4%28%, of cash and cash equivalents in the United States, which includes approximately ~~$18~~$87 million in money market funds, and approximately ~~$693~~$561 million, or ~~96%~~72%, of cash and cash equivalents was held abroad. In light of the changes to the U.S. federal taxation of foreign earnings in the Act, we no longer consider the earnings of our foreign subsidiaries to be indefinitely reinvested. As a result, we have accrued for the foreign and state income taxes that we expect would be imposed upon a future remittance.

As of January ~~3, 2020,~~1, 2021, most of our cash and cash equivalents that were held abroad were in U.S. Dollars and were primarily held as bank deposits. In addition to cash flows generated from operations, a significant portion of which are generated in the United States, we have used our credit facilities to meet our cash needs from time to time and expect to continue to do so in the future. Borrowings under our credit facilities may be used for working capital, capital expenditures, VMS share repurchases, acquisitions and other corporate purposes.

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Cash Flows


		Three Months Ended							Three Months Ended
(In millions)	(In millions)	January 3, 2020		December 28, 2018		(In millions)	January 1, 2021		January 3, 2020
Net cash flow provided by (used in):	Net cash flow provided by (used in):					Net cash flow provided by (used in):
Operating activities	Operating activities	$	112.6	$	140.9	Operating activities	$	141.4	$	112.6
Investing activities	Investing activities	(15.1)		(13.1)		Investing activities	(27.6)		(15.1)
Financing activities	Financing activities	103.4		(17.2)		Financing activities	(100.2)		103.4
Effects of exchange rate changes on cash, cash equivalents and restricted cash	Effects of exchange rate changes on cash, cash equivalents and restricted cash	(2.8)		1.7		Effects of exchange rate changes on cash, cash equivalents and restricted cash	(6.3)		(2.8)
Net increase in cash, cash equivalents and restricted cash	Net increase in cash, cash equivalents and restricted cash	$	198.1	$	112.3	Net increase in cash, cash equivalents and restricted cash	$	7.3	$	198.1

Our primary cash inflows and outflows were as follows:

•In the three months ended January ~~3, 2020,~~1, 2021, net cash provided by operating activities was ~~$112.6~~ $141.4 million compared to ~~$140.9~~$112.6 million in the three months ended ~~December 28, 2018.~~January 3, 2020. The ~~$28.3~~$28.8 million ~~decrease~~increase in net cash from operating activities was driven by a ~~$53.8~~$21.4 million ~~decrease~~increase in the net change from operating assets and liabilities, and a ~~$15.0~~$7.9 million ~~decrease~~increase in net earnings, partially offset by a ~~$40.5~~$0.5 million ~~increase from~~decrease in non-cash items.

•The major contributors to the net change in operating assets and liabilities, net of effects of acquisitions, in the three months ended January ~~3, 2020~~1, 2021, were as follows:

◦Trade and unbilled receivables decreasing ~~$29.5~~$29.1 million, primarily due to higher collections of receivables in Proton Solutions.

◦Deferred revenues increasing by $70.9 million primarily due to ~~a decrease~~an increase in ~~unbilled receivables~~billings ahead of revenue recognition in Oncology ~~Systems.~~

◦~~Inventory increasing $44.9 million primarily to support a higher volume~~Systems and receipt of ~~orders~~down payments in ~~Oncology Systems.~~Proton Solutions; and

◦Accounts payable ~~decreasing $32.7~~increasing $8.0 million, primarily due to the timing of ~~payments.~~payments at the end of December;

Partially offset by,

◦Inventory increasing $52.5 million, primarily due to an increase in raw materials and finished goods driven by a ramp up in production in Oncology Systems and strategic inventory produced due to scheduled lapses of certain tariff exclusions at the end of calendar year; and

◦Accrued liabilities and other long-term liabilities decreasing ~~$42.1~~$64.2 million, primarily due to the timing of payments processed for accrued ~~compensation and payments related to operating leases resulting from the adoption of the lease accounting standard.~~

◦~~Deferred revenues increasing $57.4 million primarily due to an increase in billing ahead of revenue recognition resulting from changes in the mix of contractual billing terms.~~compensation.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, timing of product shipments, product installation or customer acceptance, ~~trade~~collection of accounts receivable, ~~collections,~~ inventory management, contracts with extended payment terms, and the timing and amount of ~~taxes~~tax and other payments. For additional discussion, please refer to the “Risk Factors” in Item 1A herein and in Part I, Item 1A of our ~~2019~~2020 Annual Report.

•In the three months ended January ~~3, 2020,~~1, 2021, cash used in investing activities was ~~$15.1~~$27.6 million, compared to ~~$13.1~~$15.1 million in the three months ended ~~December 28, 2018.~~January 3, 2020. In the three months ended January 1, 2021, cash used in investing activities primarily included $16.8 million used for purchases of property, plant and equipment, and $10.3 million for the purchase of equity and notes receivable in privately-held companies. In the three months ended January 3, 2020, cash used in investing activities primarily included $22.6 million used for purchases of property, plant and equipment, partially offset by $9.2 million in proceeds from the sale of an equity investment. In the three months ended December 28, 2018, cash used in investing activities primarily included $25.5 million used for acquisitions and $14.0 million for the purchases of property, plant and equipment, partially offset by $29.9 million in proceeds from the sale of an equity investment.

•In the three months ended January ~~3, 2020,~~1, 2021, cash used in financing activities was $100.2 million, compared to $103.4 million provided by financing activities ~~was $103.4 million, compared to cash used of $17.2 million~~ in the three months ended ~~December 28, 2018.~~January 3, 2020. In the three months ended January 1, 2021, cash used in financing activities primarily included $145.0 million in net repayments on our credit facility and $7.6 million used for tax withholdings on vesting of equity awards, partially offset by $52.4 million in proceeds received from stock option exercises and employee stock purchases. In the three months ended January 3, 2020, cash provided by financing activities primarily included $132.0 million in net borrowings from our credit facility and $19.7 million in proceeds received from stock option exercises and employee stock purchases, partially offset by ~~$43.8~~

$43.8 million used for the repurchase of VMS common stock, and $3.6 million used for tax withholdings on vesting of equity awards. In the three months ended December 28, 2018, cash used in financing activities primarily included $34.8 million used for the repurchase of VMS common stock and $4.4 million used for tax withholdings on vesting of equity

~~awards, partially offset by $22.0 million in proceeds received from stock option exercises and employee stock purchases.~~

Revolving Credit Facility

The following table summarizes our short-term borrowings:


(Dollars in millions)	(Dollars in millions)	January 3, 2020					September 27, 2019							(Dollars in millions)	January 1, 2021				October 2, 2020
		Amount		Weighted-Average Interest Rate	Amount		Weighted-Average Interest Rate			Amount		Weighted-Average Interest Rate			Amount		Weighted-Average Interest Rate
Revolving Credit Facility	Revolving Credit Facility	$	542.0	2.80%	$	410.0	3.05	%	Revolving Credit Facility	$	210.0	1.18	%		$	355.0	1.18	%

Total short-term borrowings	Total short-term borrowings	$	542.0		$	410.0			Total short-term borrowings	$	210.0				$	355.0

See Note 6, "Borrowings," of the Notes to the Condensed Consolidated Financial Statements for further information about our Credit Agreement and other borrowing arrangements.

Our liquidity is affected by many factors, some of which result from the normal ongoing operations of our business and some of which arise from uncertainties and conditions in the United States and global economies. Although our cash requirements will fluctuate, ~~as a result of the shifting influences of these factors,~~ we believe that existing cash and cash equivalents, cash to be generated from operations, and current ~~or future~~ credit facilities will be sufficient to satisfy anticipated commitments for capital expenditures, and other cash requirements for at least the next 12 months and into the foreseeable future. We currently anticipate that we will continue to utilize our available liquidity and cash flows from operations, as well as borrowed funds, to make strategic acquisitions, invest in the growth of our business, invest in advancing our systems and processes, repurchase VMS common stock, fund loan commitments and other strategic investments.months.

Days Sales Outstanding

Our Oncology Systems trade and unbilled receivables days sales outstanding (“DSO”) ~~was 112~~increased to 118 days at January 1, 2021, from 112 at January 3, ~~2020, as compared to 111 days at December 28, 2018.~~2020. Our accounts receivable and DSO are impacted by a number of factors, primarily including: the timing of product shipments, product installation or customer acceptance, collections performance, payment terms, the mix of revenues from different regions, and the effects of economic instability. Proton Solutions' DSO is not meaningful because it is highly variable. Trade and unbilled receivables from our Other category are not material. As of January ~~3, 2020,~~1, 2021, approximately 4%9% of our net trade and unbilled receivables balance was related to customer contracts with remaining terms of more than one year.

Share Repurchase Program

We repurchased shares of VMS common stock during the periods presented as follows:


	Three Months Ended
(In millions, except per share amounts)	January 1, 2021		January 3, 2020
Number of shares	—		0.3
Average repurchase price per share	$	—	$	139.7
Total cost of shares repurchased	$	—	$	46.4

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. As of January ~~3, 2020,~~1, 2021, approximately ~~1.9~~1.6 million shares of VMS common stock remained available for repurchase under the November 2016 authorization.At the beginning of our third quarter of fiscal year 2020, due to the COVID-19 pandemic, as a precautionary measure we paused our share repurchase program.

Stock repurchases may be made in the open market, in privately negotiated transactions (including accelerated share repurchase programs), or under Rule 10b5-1 share repurchase plans, and also may be made from time to time or in one or more larger blocks. All shares that were repurchased under our share repurchase programs have been retired.

Contractual Obligations

Long-term income taxes payable includes the liability for uncertain tax positions, including interest and penalties, and the noncurrent portion of the one-time transition tax on unremitted foreign earnings under the Act. As of January ~~3, 2020,~~

1, 2021, our liability for uncertain tax positions was ~~$45.6~~$49.5 million, of which we do not anticipate making any payments in the next 12

months. We are unable to reliably estimate the timing of the remainder of future payments related to uncertain tax positions; we believe that existing cash and cash equivalents, cash to be generated from operations, and current or future credit facilities will be sufficient to satisfy any payment obligations that may arise related to our liability for uncertain tax positions. We have elected to pay the one-time transition tax over a period of 8eight years as follows: 8% per year for each of the first five years and 15%, 20%, and 25%, in years 6six through 8,eight, respectively. As of January ~~3, 2020,~~1, 2021, the noncurrent portion of the one-time transition tax on unremitted foreign earnings was ~~$135.2~~$122.3 million.

See Note 8, "Commitments and Contingencies," of the Notes to the Condensed Consolidated Financial Statements for further information about contractual obligations regarding lease arrangements.

Except for the item discussed above, there has been no significant change to the other contractual obligations we reported in our ~~2019~~2020 Annual Report.

Contingencies

Environmental Remediation Liabilities

For a discussion of environmental remediation liabilities, see Note 8, "Commitments and Contingencies," of the Notes to the Condensed Consolidated Financial Statements, which discussion is incorporated herein by reference.

Proposed Acquisition by Siemens Healthineers

In connection with the proposed acquisition by Siemens Healthineers in August 2020, we expect to incur approximately $110 million in advisory fees that are contingent upon closing the pending acquisition by Siemens Healthineers. The Merger is expected to close in the first half of calendar year 2021, subject to receipt of specified regulatory approvals and other customary closing conditions. On October 15, 2020, VMS' stockholders approved and adopted the Merger Agreement. Under the terms of the Merger Agreement, if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances, a termination fee of $450.0 million in cash may be payable by VMS to Siemens Healthineers. The Merger Agreement also provides that a reverse termination fee of $450.0 million or $925.0 million in cash may be payable by Siemens Healthineers to VMS if the Merger Agreement is terminated by VMS or Siemens Healthineers under certain specified circumstances.

Other Matters

From time to time, we are 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 our business or otherwise. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. See Note 8, "Commitments and Contingencies," of the Notes to the Condensed Consolidated Financial Statements, which discussion is incorporated herein by reference.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification of business partners and customers for losses suffered or incurred for property damages, death and injury and for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products. The terms of these indemnification arrangements are generally perpetual. Except for losses related to property damages, the maximum potential amount of future payments we could be required to make under these arrangements is unlimited. As of January ~~3, 2020,~~1, 2021, we have not incurred any significant costs to defend lawsuits or settle claims related to these indemnification arrangements. As a result, we believe the estimated fair value of these arrangements is minimal.

We have entered into indemnification agreements with our directors and officers and certain of our employees that serve as officers or directors of our foreign subsidiaries that may require us to indemnify our directors and officers and those certain employees against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified.

From time to time, we are required to provide letters of credit, surety bonds and bank guarantees to support certain obligations that arise in the ordinary course of business and in some cases, in place of pledging cash collateral. There has been no significant change to the balance of these outstanding instruments from what we reported in our ~~2019~~2020 Annual Report.

Recent Accounting Standards Adopted or Updates Not Yet Effective

See Note 1, "Summary of Significant Accounting Policies," of the Notes to the condensed consolidated financial statements for a description of recent accounting standards, including the expected dates of adoption and the estimated effects on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to three primary types of market risks: credit risk and counterparty risk, foreign currency exchange rate risk and interest rate risk. Our exposures to ~~the three market risks~~credit risk and counterparty risk, foreign currency exchange risk and interest rate risk have not changed materially since ~~September 27, 2019.~~October 2, 2020. For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our ~~2019~~2020 Annual Report.

Item 4. Controls and Procedures

(a)Disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) required by Exchange Act Rules 13a-15(b) or 15d-15(b), as applicable, our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the first quarter of fiscal year ~~2020~~2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings and claims that are discussed in Note 8, "Commitments and Contingencies," to the Condensed Consolidated Financial Statements, which discussion is incorporated by reference into this item.

Item 1A. Risk Factors

There were no material changes during the period covered in this report to the risk factors previously disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended ~~September 27, 2019,~~October 2, 2020, except as follows:

~~Economic, political and other risks associated with international sales and operations could adversely affect our sales or make them less predictable.~~

Revenues outside of the United States accounted for approximately 57%, 55%, and 53% of our total revenues during fiscal years 2019, 2018 and 2017, respectively. Correspondingly, we must provide significant service and support globally. We also manufacture many of our products and conduct a significant portion of our research and development outside of the United Stat~~es. W~~e intend to continue to expand our presence in international markets and expect to expend significant resources in doing so. We cannot assure you that we will be able to recover these investments in international markets.RISKS RELATING TO COVID-19

Our business and results of ~~operation could~~operations have been adversely affected, and our business, results of operations, cash flow and financial condition may in the future be materially adversely affected by ~~a variety of factors, including, among other things:~~the COVID-19 pandemic and any associated economic disruptions.


•We are subject to risks associated with public health threats and epidemics, including the global COVID-19 pandemic. The COVID-19 pandemic has adversely impacted nearly all aspects of our business and markets globally, including our workforce and operations and the operations of our customers, suppliers, distributors and business partners, and has created significant volatility, uncertainty and economic disruption to healthcare activity globally. While we are unable to predict the extent to which the COVID-19 pandemic may have a material adverse effect on our business, results of operations, cash flow and financial condition, we may experience a broad range of operational and financial impacts, including:			~~lower sales prices and gross margins usually associated with sales of our products and services in international regions, and in emerging markets in particular;~~

•			~~the longer payment cycles associated with many foreign customers;~~

•			~~the typically longer periods from placement of orders to revenue recognition in certain international and emerging markets;~~

•			~~currency fluctuations;~~

4850


•
•			~~difficulties~~Increased fluctuations in ~~interpreting or enforcing agreements~~our operating results, including quarterly gross orders, revenues, margins, and ~~collecting receivables through the legal systems of many foreign countries;~~cash flows and resulting volatility in our stock price;

•			~~unstable regional political and economic conditions~~Significant volatility or ~~changes~~reductions in ~~restrictions on trade between~~demand for our products or services, or delays in the ~~United States and other countries;~~timing of orders;

•			~~changes in~~Impacts to the ~~political, regulatory, safety or economic conditions in a country or region, including as a result~~normal operations of ~~the United Kingdom (the “U.K.”) exit from the European Union (“E.U.”) (“Brexit”);~~our customers which may impact our ability to market, sell, deliver, install and service our products and systems, and increase customer payment, credit and insolvency risk;

•			Limitations on our business operations resulting from shelter-in-place orders and other travel restrictions implemented to contain the ~~imposition by governments, including~~pandemic and the ~~United States,~~timing of ~~additional taxes, tariffs, global economic sanctions programs or other restrictions on foreign trade;~~relaxation of such containment measures across geographies;

•			~~any inability~~Increased risks related to ~~obtain required export or import licenses or approvals;~~the health and safety of our employees and associated employment-related disputes and retention issues;

•			~~any inability~~Disruptions to ~~comply with export or import laws~~our manufacturing operations and ~~requirements or any violation of sanctions regulations, which may result in enforcement actions, civil or criminal penalties~~distribution and ~~restrictions on exportation;~~supply chains;

•			~~any increase in the cost~~Distraction of ~~trade compliance functions to comply with changes to regulatory requirements;~~management time and attention;

•			~~failure to obtain proper~~Potential disproportionate adverse impacts, including political, social and economic impacts, in the emerging markets in which we operate, which could increase security risks for our personnel and harm our business ~~licenses or other documentation, or to otherwise comply with local laws~~ and ~~requirements to conduct business~~operating results in ~~a foreign jurisdiction;~~such markets;

•			~~the possibility that it~~Increased volatility of foreign currency exchange rates, which may ~~be more difficult to protect~~impact demand for our ~~intellectual property in foreign countries;~~products and services;

•			~~natural disasters, outbreaks~~Increased risk of ~~pandemic disease, climate change or~~cybersecurity attacks and security breaches by bad actors seeking to exploit the ~~fear of such events; and~~crisis;

•			~~difficulties~~Delays to acquisition plans, increased risks to the operations and financial condition of newly acquired businesses, and increased costs or delays to integration of newly acquired businesses;

•			The impact of any reprioritization of capital allocations on our ability to achieve our strategic objectives over the medium and long-term;

•			Write downs or impairments to our loans to proton centers, investments in ~~staffing~~third parties, goodwill or intangible assets from recently acquired businesses, accounts receivable, or other assets;

•			Potential liquidity constraints and ~~managing international operations.~~credit impacts;

•			Delays in obtaining regulatory clearances and approvals to market our products or delays to clinical trial activity;

•			Local or global recessions caused by the COVID-19 pandemic, which may result in hospitals reducing or curtailing capital or overall spending.

~~Currently, we provide customer services, manufacture products~~In addition, a lack of an effective COVID-19 response by U.S. and ~~conduct research~~foreign governments, including with respect to vaccination programs and emergence of variants in ~~China. We also sell a~~the virus, could result in significant ~~amount of equipment~~increases to the duration and ~~services to customers located in China. In December 2019, a novel strain~~severity of the ~~coronavirus was first identified~~pandemic in ~~Wuhan, China~~the United States and ~~has resulted in an outbreak of respiratory illness. While~~other countries and could have a corresponding negative impact on our operations in China are not based in Wuhan, it is possible that the spread of the coronavirus in China could adversely impact our business by, among other things, disrupting or restricting our ability to travel, provide services and manufacture and distribute our products, both within and outside of China, as well as resulting in temporary closures of our facilities or the facilities of our suppliers or customers all of which could adversely affect our revenue. At this point, thebusiness. The extent to which the ~~coronavirus may~~COVID-19 global pandemic and measures taken in response to it will continue to impact our business, ~~is uncertain.~~results of operations and cash flows and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. These developments include, but are not limited to, the duration and spread of the pandemic, its severity, the effectiveness of actions to contain the virus or address its impact, including vaccination programs, U.S. and foreign government actions to respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.

~~The U.K.'s exit from~~We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussion of the ~~E.U. may negatively~~potential impact ~~our operations.~~of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.

~~The U.K.’s exit from the E.U. on January 31, 2020, commonly referred to as Brexit, has caused, and may continue to cause, uncertainty in the global markets.~~Political and regulatory responses to the withdrawal are still developing, and we are in the process of assessing the impact that the withdrawal may have on our business as more information becomes available. While we have not experienced any material financial impact from Brexit on our U.K. business to date, sales into the U.K. represented approximately 3% of our total revenues in fiscal year 2019, and we cannot predict the future implications of Brexit. Any impact from Brexit on our business and operations over the long term will depend, in part, on the outcome of tariff, tax treaties, trade, regulatory, and other negotiations the U.K. conducts.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Not applicable

(b)Not applicable

(c)~~The following table provides information with respect to the shares of common stock repurchased by us during the first quarter of fiscal year 2020 (in millions, except per share amounts):~~Not applicable

Period Total Number of
Shares Purchased Average Price
Paid Per Share Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs⁽¹⁾
September 28, 2019 - October 15, 2019 — $ — — 2.2
October 26, 2019 - November 22, 2019 — $ — — 2.2
November 23, 2019 - January 3, 2020 0.3 $ 139.67 0.3 1.9
Total 0.3 $ 139.67 0.3 1.9

⁽¹⁾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 may be made in the open market, in privately negotiated transactions (including accelerated share repurchase programs), or under Rule 10b5-1 share repurchase plans, and also may be made from time to time or in one or more larger blocks. All shares that were repurchased under the Company's share repurchase programs have been retired.

The preceding table excludes an immaterial number of shares of VMS common stock that were withheld by VMS in satisfaction of tax withholding obligations upon the vesting of restricted stock units granted under our employee stock plans.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed below are filed or incorporated by reference as part of this Form 10-Q:


Exhibit No.	Description

10.1*
10.1	~~Form~~Letter Agreement between the Registrant and J. Michael Bruff, effective as of ~~Registrant’s Non-Employee Director Restricted Stock Unit Agreement under~~November 25, 2020 (incorporated by reference to Exhibit No. 10.1 to the Registrant’s ~~Fifth Amended and Restated 2005 Omnibus Stock Plan.~~Form 8-K Current Report filed as of November 27, 2020, File No. 1-7598).

10.2		~~Amendment No. 2 to Credit~~Letter Agreement ~~dated~~between the Registrant and Christopher A. Toth, effective as of November ~~1, 2019, by and among Registrant, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and each lender from time to time party thereto~~25, 2020 (incorporated by reference to Exhibit ~~10.41~~No. 10.2 to the ~~Registrants Annual~~Registrant’s Form 8-K Current Report ~~on Form 10-K~~ filed as of November ~~25, 2019,~~27, 2020, File No. 1-7598).

31.1*		Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2*		Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.

32.1**		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101*	The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended January ~~3, 2020:~~1, 2021: (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Earnings, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Equity, and (vi) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.










104*	The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended January ~~3, 2020,~~1, 2021, formatted in Inline XBRL


*	Filed herewith
**	Furnished, not filed

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

VARIAN MEDICAL SYSTEMS, INC.

(Registrant)

Dated:

February ~~11, 2020~~9, 2021

By:

/s/ J. MICHAEL BRUFF

J. Michael Bruff

Senior Vice President, Finance and

Chief Financial Officer

(Duly Authorized Officer and

Principal Financial Officer)

5253


(In millions)	Three Months Ended
Comprehensive Earnings (Loss) Components	January 3, 2020		December 28, 2018		Line Item in Statements of Earnings
Unrealized loss on defined benefit pension and post-retirement benefit plans	$	(0.9)	$	(0.4)	Other income, net
Unrealized earnings on cash flow hedging instruments	0.8		—		Revenues

Total amounts reclassified out of other comprehensive earnings (loss)	$	(0.1)	$	(0.4)


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs⁽¹⁾
September 28, 2019 - October 15, 2019	—	$	—	—	2.2
October 26, 2019 - November 22, 2019	—	$	—	—	2.2
November 23, 2019 - January 3, 2020	0.3	$	139.67	0.3	1.9
Total	0.3	$	139.67	0.3	1.9