UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________



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

For the quarterly period ended ~~December 28, 2018~~January 3, 2020



¨☐			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~~

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~~Filer

x☒

Accelerated filer

o☐

Non-Accelerated filer

☐

Smaller reporting company

o☐

Emerging growth company

o☐

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

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

~~Indicate~~As of January 31, 2020, the ~~number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 90,777,507~~registrant had 90,665,845 shares of common stock, par value $1 per share, ~~outstanding as of January 25, 2019.~~

outstanding.

VARIAN MEDICAL SYSTEMS, INC.

FORM 10-Q for the Quarter Ended ~~December 28, 2018~~January 3, 2020

INDEX

Part I.

Financial Information

~~Part I.~~Item 1.

~~Financial Information~~

~~Item 1.~~

Unaudited Financial Statements

Condensed Consolidated Statements of Earnings ~~(Loss)~~

Condensed Consolidated Statements of Comprehensive Earnings ~~(Loss)~~

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

3334

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4648

Item 4.

Controls and Procedures

Part II.

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

4950

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 ~~(LOSS)~~

(Unaudited)


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

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


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




Net earnings per share - basic	$	0.97	$	1.13




Net earnings per share - diluted	$	0.96	$	1.12

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

Three Months Ended
December 28, December 29,
(In millions, except per share amounts) 2018 2017
Revenues:
Product $ 400.2
$ 365.6
Service 340.8
312.9
Total revenues 741.0
678.5
Cost of revenues:
Product 266.6
223.9
Service 158.3
151.8
Total cost of revenues 424.9
375.7
Gross margin 316.1
302.8
Operating expenses:
Research and development 60.9
55.9
Selling, general and administrative 143.5
125.3
Total operating expenses 204.4
181.2
Operating earnings 111.7
121.6
Interest income 3.9
3.2
Interest expense (1.2 ) (2.1 )
Other income (expense), net 23.0
(0.2 )
Earnings before taxes 137.4
122.5
Taxes on earnings 33.5
234.7
Net earnings (loss) 103.9
(112.2 )
Less: Net earnings attributable to noncontrolling interests 0.7
0.1
Net earnings (loss) attributable to Varian $ 103.2
$ (112.3 )
Net earnings (loss) per share - basic $ 1.13
$ (1.22 )
Net earnings (loss) per share - diluted $ 1.12
$ (1.22 )
Shares used in the calculation of net earnings per share:
Weighted average shares outstanding - basic 91.0
91.6
Weighted average shares outstanding - diluted 92.0
91.6

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS ~~(LOSS)~~

(Unaudited)

Three Months Ended
December 28, December 29,
(In millions) 2018 2017
Net earnings (loss) $ 103.9
$ (112.2 )
Other comprehensive (loss) earnings, net of tax:
Defined benefit pension and post-retirement benefit plans:
Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.0* and $0.1, respectively (0.2 ) (0.2 )
Amortization of net actuarial loss included in net periodic benefit cost, net of tax expense of ($0.1) and ($0.2), respectively 0.5
0.5
0.3
0.3
Derivative instruments:
Change in unrealized loss, net of tax benefit of $0.0 and $0.1, respectively —
(0.2 )
Reclassification adjustments, net of tax expense of $0.0 and $0.0*, respectively —
(0.1 )
—
(0.3 )
Currency translation adjustment (4.0 ) 3.1
Other comprehensive (loss) earnings (3.7 ) 3.1
Comprehensive earnings (loss) 100.2
(109.1 )
Less: Comprehensive earnings attributable to noncontrolling interests 0.7
0.1
Comprehensive earnings (loss) attributable to Varian $ 99.5
$ (109.2 )


	Three Months Ended
	January 3,		December 28,
(In millions)	2020		2018
Net earnings	$	88.9	$	103.9
Other comprehensive earnings (loss), net of tax:
Defined benefit pension and post-retirement benefit plans:
Amortization of prior service cost included in net periodic benefit cost, net of tax benefit of $0.0* 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
	0.7		0.3
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)		—
	(0.7)		—




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

* 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,
(In millions, except par values)	2020		2019
Assets
Current assets:
Cash and cash equivalents	$	721.9	$	531.4
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
Inventories	597.4		551.5
Prepaid expenses and other current assets	248.5		206.2

Total current assets	2,647.0		2,395.4
Property, plant and equipment, net	330.3		311.5
Operating lease right-of-use assets	114.1		—
Goodwill	612.4		612.2
Intangible assets	290.9		300.7
Deferred tax assets	85.7		84.7
Other assets	370.3		397.2
Total assets	$	4,450.7	$	4,101.7
Liabilities and Equity
Current liabilities:
Accounts payable	$	215.3	$	248.5
Accrued liabilities	471.2		459.5
Deferred revenues	817.9		766.0
Short-term borrowings	542.0		410.0

Total current liabilities	2,046.4		1,884.0

Long-term lease liabilities	93.7		—
Other long-term liabilities	453.3		440.1
Total liabilities	2,593.4		2,324.1
Commitments and contingencies (Note 8)
Equity:
Varian stockholders' equity:
Preferred stock of $1 par value: 1.0 shares authorized; NaN issued and outstanding	—		—
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
Capital in excess of par value	870.4		845.6
Retained earnings	983.2		934.0
Accumulated other comprehensive loss	(97.0)		(102.1)
Total Varian stockholders' equity	1,847.3		1,768.3
Noncontrolling interest	10.0		9.3
Total equity	1,857.3		1,777.6
Total liabilities and equity	$	4,450.7	$	4,101.7

December 28, September 28,
(In millions, except par values) 2018 2018
Assets
Current assets:
Cash and cash equivalents $ 616.0
$ 504.8
Trade and unbilled receivables, net of allowance for doubtful accounts of $42.9 at December 28, 2018, and $41.1 at September 28, 2018 989.5
1,009.9
Inventories 469.6
438.1
Prepaid expenses and other current assets 223.5
233.3
Current assets of discontinued operations 2.3
2.3
Total current assets 2,300.9
2,188.4
Property, plant and equipment, net 270.1
274.6
Goodwill 310.7
293.6
Intangible assets 97.3
101.1
Deferred tax assets 102.5
102.2
Other assets 289.3
292.8
Total assets $ 3,370.8
$ 3,252.7
Liabilities and Equity
Current liabilities:
Accounts payable $ 198.1
$ 190.3
Accrued liabilities 396.3
419.7
Deferred revenues 738.6
729.7
Total current liabilities 1,333.0
1,339.7
Other long-term liabilities 355.8
324.3
Total liabilities 1,688.8
1,664.0
Commitments and contingencies (Note 8)

Equity:
Varian stockholders' equity:
Preferred stock of $1 par value: 1.0 shares authorized; none issued and outstanding —
—
Common stock of $1 par value: 189.0 shares authorized; 91.2 and 91.2 shares issued and outstanding at December 28, 2018, and at September 28, 2018, respectively 91.2
91.2
Capital in excess of par value 799.3
778.1
Retained earnings 855.5
780.4
Accumulated other comprehensive loss (69.0 ) (65.3 )
Total Varian stockholders' equity 1,677.0
1,584.4
Noncontrolling interest 5.0
4.3
Total equity 1,682.0
1,588.7
Total liabilities and equity $ 3,370.8
$ 3,252.7

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
December 28, December 29,
(In millions) 2018 2017
Cash flows from operating activities:
Net earnings (loss) $ 103.9
$ (112.2 )
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Share-based compensation expense 10.5
10.7
Depreciation 12.8
12.8
Amortization of intangible assets 4.7
6.3
Gain on sale of privately-held company (22.0 ) —
Deferred taxes —
44.9
Loss on equity investments 2.2
—
Provision for doubtful accounts receivable 2.0
1.5
Other, net (0.5 ) (0.8 )
Changes in assets and liabilities:

Trade and unbilled receivables 2.9
65.9
Inventories (32.4 ) (11.7 )
Prepaid expenses and other assets 8.6
28.2
Accounts payable 13.5
(10.3 )
Accrued liabilities and other long-term liabilities (12.5 ) 125.1
Deferred revenues 47.2
18.6
Net cash provided by operating activities 140.9
179.0
Cash flows from investing activities:

Purchases of property, plant and equipment (14.0 ) (9.3 )
Acquisitions, net of cash acquired (25.5 ) —
Sale of privately-held company 29.9
—
Investment in available-for-sale securities —
(6.0 )
Loans to CPTC (0.5 ) (4.6 )
Escrow deposit —
(2.6 )
Investment in privately-held companies (0.8 ) (2.5 )
Amounts paid to deferred compensation plan trust account (2.5 ) (1.3 )
Other, net 0.3
0.7
Net cash used in investing activities (13.1 ) (25.6 )
Cash flows from financing activities:

Repurchases of common stock (34.8 ) (56.7 )
Proceeds from issuance of common stock to employees 22.0
24.2
Tax withholdings on vesting of equity awards (4.4 ) (0.3 )
Borrowings under credit facility agreement —
166.4
Repayments under credit facility agreement —
(166.4 )
Net repayments under the credit facility agreements with maturities less than 90 days —
(10.0 )
Net cash used in financing activities (17.2 ) (42.8 )
Effects of exchange rate changes on cash, cash equivalents, and restricted cash 1.7
(4.0 )
Net increase in cash, cash equivalents, and restricted cash 112.3
106.6
Cash, cash equivalents, and restricted cash at beginning of period 516.4
718.5
Cash, cash equivalents, and restricted cash at end of period $ 628.7
$ 825.1

See accompanying notes to the condensed consolidated financial statements.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)


	Common Stock
(In millions)	Shares	Amount		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total Varian Stockholders' Equity		Noncontrolling Interests		Total Equity
Balance at September 27, 2019	90.8	$	90.8	$	845.6	$	934.0	$	(102.1)	$	1,768.3	$	9.3	$	1,777.6
Net earnings	—	—		—		88.2		—		88.2		0.7		88.9
Other comprehensive earnings	—	—		—		—		5.1		5.1		—		5.1
Issuance of common stock	0.3	0.3		20.7		—		—		21.0		—		21.0
Tax withholdings on vesting of equity awards	—	—		(3.6)		—		—		(3.6)		—		(3.6)
Share-based compensation expense	—	—		14.7		—		—		14.7		—		14.7
Repurchases of common stock	(0.4)	(0.4)		(7.0)		(39.0)		—		(46.4)		—		(46.4)

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

Common Stock
(In millions) Shares Amount Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Varian Stockholders' Equity Noncontrolling Interests Total Equity
Balance at September 28, 2018 91.2
$ 91.2
$ 778.1
$ 780.4
$ (65.3 ) $ 1,584.4
$ 4.3
$ 1,588.7
Net earnings —
—
—
103.2
—
103.2
0.7
103.9
Other comprehensive loss —
—
—
—
(3.7 ) (3.7 ) —
(3.7 )
Issuance of common stock 0.3
0.3
21.7
—
—
22.0
—
22.0
Tax withholdings on vesting of equity awards —
—
(4.4 ) —
—
(4.4 ) —
(4.4 )
Share-based compensation expense —
—
10.5
—
—
10.5
—
10.5
Repurchases of common stock (0.3 ) (0.3 ) (6.6 ) (27.9 ) —
(34.8 ) —
(34.8 )
Other —
—
—
(0.2 ) —
(0.2 ) —
(0.2 )
Balances at December 28, 2018 91.2
$ 91.2
$ 799.3
$ 855.5
$ (69.0 ) $ 1,677.0
$ 5.0
$ 1,682.0

Balances at September 29, 2017 91.7
$ 91.7
$ 716.1
$ 778.6
$ (68.8 ) $ 1,517.6
$ 4.3
$ 1,521.9
Net loss —
—
—
(112.3 ) —
(112.3 ) 0.1
(112.2 )
Other comprehensive earnings —
—
—
—
3.1
3.1
—
3.1
Issuance of common stock 0.4
0.4
23.8
—
—
24.2
—
24.2
Tax withholdings on vesting of equity awards —
—
(0.3 ) —
—
(0.3 ) —
(0.3 )
Share-based compensation expense —
—
10.7
—
—
10.7
—
10.7
Repurchases of common stock (0.5 ) (0.5 ) (10.4 ) (45.8 ) —
(56.7 ) —
(56.7 )
Other —
—
0.6
(0.3 ) —
0.3
—
0.3
Balances at December 29, 2017 91.6
$ 91.6
$ 740.5
$ 620.2
$ (65.7 ) $ 1,386.6
$ 4.4
$ 1,391.0




Balances at September 28, 2018	91.2	$	91.2	$	778.1	$	780.4	$	(65.3)	$	1,584.4	$	4.3	$	1,588.7
Net earnings	—	—		—		103.2		—		103.2		0.7		103.9
Other comprehensive loss	—	—		—		—		(3.7)		(3.7)		—		(3.7)
Issuance of common stock	0.3	0.3		21.7		—		—		22.0		—		22.0
Tax withholdings on vesting of equity awards	—	—		(4.4)		—		—		(4.4)		—		(4.4)
Share-based compensation expense	—	—		10.5		—		—		10.5		—		10.5
Repurchases of common stock	(0.3)	(0.3)		(6.6)		(27.9)		—		(34.8)		—		(34.8)
Other	—	—		—		(0.2)		—		(0.2)		—		(0.2)
Balances at December 28, 2018	91.2	$	91.2	$	799.3	$	855.5	$	(69.0)	$	1,677.0	$	5.0	$	1,682.0

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 its clinical experience and strengths in technology development and new product innovation. The Company offers solutions in radiation therapy and medical oncology, as well as interventional oncology, an emerging area of cancer care. The Company designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, and ~~brachytherapy.~~brachytherapy, and offers products for interventional oncology procedures and treatments, including cryoablation, microwave ablation and embolization. Software solutions include treatment planning, informatics, ~~software for information management,~~ clinical knowledge exchange, patient care management, practice management and ~~decision-making~~decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices. The Company also develops, designs, manufactures, sells and services proton therapy products and systems for cancer treatment.

The Company has expanded its services offerings to include clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed at facilitating improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, the Company operates 10 multi-disciplinary cancer centers and 1 specialty hospital in India and 1 multi-disciplinary cancer center in Sri Lanka.

Basis of Presentation

The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of September 27, 2019, was derived from audited financial statements as of that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September ~~28, 2018~~27, 2019 (the ~~“2018~~“2019 Annual Report”).

In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of ~~December 28, 2018,~~January 3, 2020, and September ~~28, 2018,~~27, 2019, results of operations and statements of comprehensive earnings ~~(loss)~~ for the three months ended January 3, 2020, and December 28, 2018, ~~and December 29, 2017,~~ statements of cash flows for the three months ended January 3, 2020, and December 28, 2018, ~~and December 29, 2017,~~ and statements of equity for the three months ended January 3, 2020, and December 28, ~~2018, and December 29, 2017.~~2018. The results of operations for the three months ended ~~December 28, 2018,~~January 3, 2020, are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.

Reclassifications

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

Fiscal Year

The fiscal years of the Company as reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year ~~2019 is~~2020 was the ~~52-week~~53-week period ending ~~September 27, 2019.~~October 2, 2020. Fiscal year ~~2018~~2019 was the 52-week period that ended on September ~~28, 2018.~~27, 2019. The fiscal ~~quarters~~quarter ended January 3, 2020 was a 14-week period, and the fiscal quarter ended December 28, 2018, ~~and December 29, 2017, were both~~was a 13-week ~~periods.~~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, 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.

Significant Accounting Policies

~~There~~With the exception of the change for the accounting of leases as a result of the adoption of Accounting Standard Codification Topic 842, there have been no material changes to the Company's significant accounting policies provided in ~~"Note 1: Summary~~Note 1, "Summary of Significant Accounting ~~Policies"~~Policies," within ~~the Notes to the Consolidated Financial Statements~~Item 8 of the Company's ~~2018~~ Annual ~~Report.~~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.

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 ~~2019,~~fiscal year 2020, the Company adopted the Financial Accounting Standards Board ("FASB") ~~guidance~~standard on ~~which changes~~accounting for leases, "Leases." The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record ROU assets and corresponding lease liabilities on the ~~terms or conditions of a share-based payment award require an entity to apply modification accounting.~~balance sheet. The Company adopted this ~~amendment prospectively~~standard under the optional transition method, which applies the standard on the effective date, rather than the earliest comparative period presented in the financial statements. The Company elected: (1) the "package of practical expedients," which does not require the Company to reassess its prior conclusions about lease identification, lease classification, and ~~it did~~initial direct costs under the new standard; (2) not ~~have~~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 ~~material~~lessee. See Note 8, "Commitments and Contingencies," for more information on the impact of this adoption on the Company's condensed consolidated financial statements.

In the first quarter of ~~2019,~~fiscal year 2020, the Company adopted ~~the~~ FASB guidance that added the Overnight Index Swap rate based on the Secured Overnight Financing Rate ("SOFR") as a benchmark interest rate for hedge accounting ~~related to defined benefit plans~~purposes. The amendment recognizes SOFR as a likely LIBOR replacement and ~~other post-retirement benefits. This~~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 ~~requires~~prospectively as the ~~service cost component of net periodic pension and post-retirement benefit cost to be presented~~Company may consider interest rate hedges in the ~~same line item as~~future. The Company is monitoring the LIBOR to SOFR migration and will coordinate the transition of outstanding LIBOR based debt and any related interest rate derivatives with counterparties when the market is liquid to ensure an orderly and efficient transition.

In the first quarter of fiscal year 2020, the Company adopted FASB guidance that allows companies to reclassify disproportionate tax effects in accumulated other ~~employee compensation costs, while~~comprehensive income caused by the ~~other components must be presented separately as other income (expense), net.~~Tax Cuts and Jobs Act to retained earnings. The ~~adoption~~impact of adopting this amendment ~~did not have a material impact~~ on the Company's condensed consolidated financial ~~statements.~~

In the first quarter of 2019, the Company adopted the FASB guidance on the classification and presentation of restricted cash in the statement of cash flow. The amendment requires entities to include restricted cash in cash and cash equivalents in the statement of cash flows. The Company adopted the amendment retrospectively and prior period amounts on the Condensed Consolidated Statements of Cash Flows have been recast to conform with the current period presentation as shown in the reconciliation provided below. See Note 3, "Other Financial Information," for a reconciliation of the cash balances within the Condensed Consolidated Statements of Cash Flows to the Condensed Consolidated Balance Sheets.

Three Months Ended December 29, 2017
(In millions) As previously reported Adjustments As Adjusted
Cash used in investing activities $ (25.8 ) $ 0.2
$ (25.6 )
Cash, cash equivalents, and restricted cash at beginning of period $ 716.2
$ 2.3
$ 718.5
Cash, cash equivalents, and restricted cash at end of period $ 822.6
$ 2.5
$ 825.1

In the first quarter of 2019, the Company adopted the FASB guidance for tax accounting for intra-entity asset transfers. The amendment removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The adoption of this amendment didstatements was not ~~have a material impact on the Company's condensed consolidated financial statements. See Note 10, "Income Taxes," for more information about the impact of the adoption.~~

In the first quarter of 2019, the Company adopted the FASB guidance related to the classification of certain cash receipts and cash payments. The amendment was issued to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The Company adopted the amendment retrospectively and it did not have an impact on the Company’s condensed consolidated financial statements.

In the first quarter of 2019, the Company adopted the FASB guidance related to recognition and measurement of financial assets and financial liabilities. The amendment addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Most prominent among the changes is the requirement for changes in the fair value of the Company's equity investments to be recognized through net earnings rather than other comprehensive income. Under the amendment, equity investments that do not have a readily determinable fair value are eligible for the measurement alternative, which will require the Company to measure these investments at cost, with adjustments for changes in price or impairments reflected through net earnings. The Company adopted the amendment prospectively for its privately-held investments for which the measurement alternative was elected, and adopted the amendment on a modified retrospective basis for all other financial instruments. The adoption did not have an impact to the Company's condensed consolidated financial statements.material.

Recent Accounting Standards or Updates Not Yet Effective

In ~~November 2018,~~December 2019, the FASB ~~amended its~~issued guidance ~~to clarify revenue~~which simplifies the accounting for ~~collaborative arrangements.~~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 ~~2020 and will be applied retrospectively to the date of the initial application of ASC 606.~~2022. Early adoption is permitted. The Company is evaluating the impact of adopting this ~~amendment~~guidance to its condensed consolidated financial statements.

In October 2018, the FASB amended its guidance which will add the Overnight Index Swap rate based on the Secured Overnight Financing Rate as a benchmark interest rate for hedge accounting purposes. The standard is effective for the

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

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

~~(Unaudited)~~

Company beginning in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.

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

In August 2018, the FASB issued guidancewhich modifies the disclosure requirements for employers that have sponsor defined benefit pension or other post-retirement plans by removing and adding certain disclosures for these plans. The standard is effective for the Company beginning in the first quarter of fiscal year 2022. Early adoption is permitted. The Company is evaluating the impact of adopting this guidance to its condensed consolidated financial statements.

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

In February 2018, the FASB amended its guidance that will allow companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the Tax Cuts and Jobs Act to retained earnings. The amendment will be effective for the Company beginning in its first quarter of fiscal year 2020. The Company is evaluating the impact of adopting this amendment to its condensed consolidated financial statements.

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.

In February 2016, the FASB issued a new standard on accounting for leases. The new standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new standard will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of earnings. The new standard is required to be adopted using a modified retrospective method to each prior reporting period presented with various optional practical expedients. The new standard will be effective for the Company beginning in its first quarter of fiscal year 2020. The Company is evaluating the impact of adopting this new standard to its condensed consolidated financial statements.

2. ~~BUSINESS COMBINATIONS~~

~~Business Combination in fiscal year 2019~~

In the first quarter of fiscal year 2019, the Company acquired a privately-held software company for a purchase price of $28.9 million. The acquisition primarily consists of $22.5 million in goodwill and $6.5 million in finite-lived intangible assets. The Company has integrated this acquisition into its Oncology Systems reporting unit. The goodwill for this acquisition is not deductible for income tax.

~~Measurement period adjustments~~

In the first quarter of fiscal year 2019, the Company recorded a measurement period adjustment of $9.6 million to the fair value of the purchase consideration of a business combination that occurred in the fourth quarter of fiscal year 2018 and a corresponding decrease in the fair value of the contingent consideration liability, a decrease to the finite-lived intangible assets of $5.4 million, and a decrease of $4.7 million to goodwill.

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

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

~~(Unaudited)~~

~~Other Information~~

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

The fair value of assets acquired and liabilities assumed has been determined on a preliminary basis, and the Company will finalize these amounts as it obtains the information necessary to complete the measurement process. Any changes resulting from facts and circumstances that existed as of the date of a business combination may result in certain adjustments. The Company expects to finalize these amounts no later than one year from the date of each business combination.

Management applied significant judgment in determining the fair value of intangible assets, which involved the use of significant estimates and assumptions with respect to the revenue growth rates, the economic lives, and the discount rate.

The condensed consolidated financial statements include the operating results from the date the business was acquired. The impact of the business combination completed to the periods presented was not material. Pro forma results of operations for the business combination completed have not been presented because the effects were not material to the Company's condensed consolidated financial statements.

~~During the three months ended December 28, 2018 and December 29, 2017, the Company incurred acquisition-related expenses of $2.4 million and $1.5 million, respectively.~~

3. OTHER FINANCIAL INFORMATION

Contracts with Customers

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


(In millions)	January 3, 2020		September 27, 2019
Unbilled receivables - current	$	315.8	$	346.7
Unbilled receivables - long-term ⁽¹⁾	42.7		35.1


Deferred revenues - current	(817.9)		(766.0)
Deferred revenues - long-term ⁽²⁾	(78.9)		(73.1)
Total net unbilled receivables (deferred revenues)	$	(538.3)	$	(457.3)

(In millions) December 28,
2018 September 28,
2018
Unbilled receivables - current $ 320.4
$ 362.8
Unbilled receivables - long-term ⁽¹⁾
46.5
36.3
Deferred revenues - current (738.6 ) (729.7 )
Deferred revenues - long-term ⁽²⁾
(76.9 ) (38.6 )
Total net unbilled receivables (deferred revenues) $ (448.6 ) $ (369.2 )
⁽¹⁾Included in other assets on the Company's Condensed Consolidated Balance Sheets.


⁽¹⁾ ⁽²⁾Included in other long-term liabilities on the Company's Condensed Consolidated Balance Sheets.	~~Included in other assets on the Company's Condensed Consolidated Balance Sheets.~~


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

During the three months ended ~~December 28, 2018,~~January 3, 2020, unbilled receivables ~~net~~decreased by $23.3 million, primarily due to the timing of billings in Oncology Systems, and deferred revenues ~~decreased~~increased by ~~$79.4~~$57.7 million primarily due to the contractual timing of billings occurring ~~after~~before the revenues were ~~recognized, as well as the timing of milestone payments.~~recognized.

During the three months ended January 3, 2020 and December 28, 2018, ~~and December 29, 2017,~~ the Company recognized revenues of ~~$213.4~~$314.5 million, and ~~$193.1~~$263.4 million, which were included in the deferred revenues ~~balance~~balances at September 27, 2019 and September 28, 2018, ~~and September 29, 2017,~~ respectively.

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

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

~~(Unaudited)~~

Unfulfilled Performance Obligations

The following table represents the Company's unfulfilled performance obligations as of ~~December 28, 2018,~~January 3, 2020, and the estimated ~~revenue~~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)	Remainder of 2019		2020		2021		Thereafter		(In millions)	Remainder of 2020		2021		2022		Thereafter
Unfulfilled Performance Obligations	$	1,959.6	$	1,808.7	$	666.8	$	1,678.6	Unfulfilled Performance Obligations	$	1,884.1	$	2,003.2	$	787.7	$	2,122.9

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

Cash, Cash Equivalents, and Restricted Cash

The following table ~~provides a reconciliation of~~summarizes the Company's cash, cash equivalents and restricted ~~cash as of December 28, 2018 and September 28, 2018:~~cash:


(In millions)	January 3, 2020		September 27, 2019
Cash and cash equivalents	$	721.9	$	531.4
Restricted cash - current ⁽¹⁾	3.7		4.2
Restricted cash - long-term ⁽²⁾	16.6		8.5
Total cash, cash equivalents, and restricted cash	$	742.2	$	544.1

(In millions) December 28,
2018 September 28,
2018
Cash and cash equivalents $ 616.0
$ 504.8
Restricted cash - current ⁽¹⁾
4.0
3.1
Restricted cash - long-term ⁽²⁾
8.7
8.5
Total cash, cash equivalents and restricted cash $ 628.7
$ 516.4


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


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

~~Inventories~~

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

(In millions) December 28,
2018 September 28,
2018
Raw materials and parts $ 330.0
$ 304.1
Work-in-process 61.8
50.6
Finished goods 77.8
83.4
Total inventories $ 469.6
$ 438.1

~~Other long-term liabilities~~

~~The following table summarizes the Company's other long-term liabilities:~~Condensed Consolidated Balance Sheets.

(In millions) December 28,
2018 September 28,
2018
Long-term income taxes payable $ 192.3
$ 189.1
Deferred income taxes 29.2
31.4
Long-term deferred revenues 76.9
38.6
Other 57.4
65.2
Total other long-term liabilities $ 355.8
$ 324.3

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 ~~income (expense), net~~Long-Term Liabilities

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


(In millions)	January 3, 2020		September 27, 2019
Income taxes payable	$	180.8	$	180.3

Deferred income taxes	78.1		75.3
Deferred revenues	78.9		73.1

Contingent consideration	42.5		42.3
Defined benefit pension plan	30.4		31.1
Other	42.6		38.0
Total other long-term liabilities	$	453.3	$	440.1

Other Income, Net

The following table summarizes the Company's other income, ~~(expense),~~ net:


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

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

Three Months Ended
(In millions) December 28,
2018 December 29,
2017
Gain on sale of privately-held company $ 22.0
$ —
Net foreign currency exchange gain 1.3
0.4
Other (0.3 ) (0.6 )
Total other income (expense), net $ 23.0
$ (0.2 )

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

4.3. 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 Measurement Using											Fair Value Measurements at January 3, 2020
	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	(Level 1)		(Level 2)		(Level 3)			Balance			Type of Instruments	(Level 1)		(Level 2)		(Level 3)		Balance
(In millions)											(In millions)
Assets at December 28, 2018:
Assets:											Assets:
Cash equivalents:											Cash equivalents:
Money market funds	$	77.1	$	—	$	—		$	77.1		Money market funds	$	17.5	$	—	$	—	$	17.5
Available-for-sale securities:											Available-for-sale securities:
MPTC Series B-1 Bonds ⁽¹⁾	—		25.6		—			25.6
MPTC Series B-2 Bonds ⁽²⁾	—		23.6		—			23.6
APTC securities ⁽¹⁾	—		6.2		—			6.2
GPTC securities ⁽¹⁾	—		8.3		—			8.3
MPTC Series B-1 Bonds											MPTC Series B-1 Bonds	—		27.6		—		27.6
MPTC Series B-2 Bonds											MPTC Series B-2 Bonds	—		25.7		—		25.7
APTC securities											APTC securities	—		6.7		—		6.7

Derivative assets											Derivative assets	—		2.3		—		2.3
Total assets measured at fair value	$	77.1	$	63.7	$	—		$	140.8		Total assets measured at fair value	$	17.5	$	62.3	$	—	$	79.8

Liabilities at December 28, 2018:
Liabilities:											Liabilities:

Contingent consideration	$	—	$	—	$	(17.8	)	$	(17.8	)	Contingent consideration	$	—	$	—	$	(84.3)	$	(84.3)
Total liabilities measured at fair value	$	—	$	—	$	(17.8	)	$	(17.8	)	Total liabilities measured at fair value	$	—	$	—	$	(84.3)	$	(84.3)

Assets at September 28, 2018:
Cash equivalents:
Money market funds	$	44.1	$	—	$	—		$	44.1
Available-for- sale securities:
MPTC Series B-1 Bonds ⁽¹⁾	—		25.1		—			25.1
MPTC Series B-2 Bonds ⁽²⁾	—		23.1		—			23.1
APTC securities ⁽¹⁾	—		6.4		—			6.4
GPTC securities ⁽¹⁾	—		7.9		—			7.9
Total assets measured at fair value	$	44.1	$	62.5	$	—		$	106.6

Liabilities at September 28, 2018:
Contingent consideration	$	—	$	—	$	(24.4	)	$	(24.4	)
Total liabilities measured at fair value	$	—	$	—	$	(24.4	)	$	(24.4	)

⁽¹⁾


	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)

~~Included in prepaid and other current assets on the Company's Condensed Consolidated Balance Sheets because the Company has the ability and intent to sell this security in the next twelve months.~~


⁽²⁾	Included in other assets on the Company's Condensed Consolidated Balance Sheets because the maturity dates are greater than one year and the Company does not have the intent and ability to collect or sell all or a portion of these loans or securities in the next twelve months.

The Company classifies its money market funds as Level 1 because they have daily liquidity, quoted prices for the underlying investments can be obtained, and there are active markets for the underlying investments. The Company's Level 2 available-for-sale securities consist of bonds for the Maryland Proton Therapy Center ("MPTC"), and the Alabama Proton Therapy Center

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

(“APTC”~~), and Georgia Proton Treatment Center ("GPTC"~~). The observable inputs for these securities are comparable bond issues, broker/dealer quotations for the same or similar investments in active markets, and other observable inputs such as yields, credit risks, default rates, and volatility. 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 ~~December 28, 2018~~January 3, 2020, and September ~~28, 2018,~~27, 2019, the carrying amount of the Company's Level 1

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

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

~~(Unaudited)~~

money market funds and Level 2 available-for-sale securities approximated their respective fair values.~~SeeNote 14, "Proton Solutions Loans and Investments,"for further information about the available-for-sale securities.~~

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 ~~the income approach by using a discounted cash flow model~~Monte Carlo pricing models with key assumptions that include estimated ~~sales units or~~ 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 ~~sales units,~~ revenues or probability of completing certain milestones were to increase or decrease during the respective earn-out period, the fair value of the contingent consideration would increase or decrease, respectively. If the estimated discount rates were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. Changes in ~~volatility~~key assumptions may result in an increase or decrease in the fair value of contingent consideration. The Company's contingent consideration is from its business combinations and is included in accrued liabilities and other long-term liabilities on the Condensed Consolidated Balance Sheets.

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

(In millions) Contingent
Consideration
Balance at September 28, 2018 $ (24.4 )
Business combination (5.3 )
Measurement period adjustment to a business combination in prior year 11.9
Balance at December 28, 2018 $ (17.8 )


(In millions)	Contingent Consideration
Balance at September 27, 2019	$	(75.3)



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

There were no transfers of assets or liabilities between fair value measurement levels during either the three months ended ~~December 28, 2018,~~January 3, 2020, or the three months ended December ~~29, 2017.~~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, ~~short-term notes receivable,~~ revolving loan to ~~CPTC, RPTC senior secured debt,~~California Proton Therapy Center ("CPTC"), accounts payable, and ~~accounts payable~~short-term borrowings approximate their carrying amounts due to their short maturities.

As of ~~December 28, 2018,~~January 3, 2020, the fair value of the Term Loan (as defined below) with CPTC approximated its carrying value of $44.0 million. ~~See Note 14, "Proton Solutions Loans and Investments," for further information.~~ The carrying value is based on the present value of expected future cash payments discounted at a rate reflecting the nature and duration of the loans, risks involved with CPTC, and its industry. As a result, the Term Loan is categorized as Level 3 in the fair value hierarchy. See Note 14, "Proton Solutions Loans and Investments," for further information.

The Company's equity investments in privately-held companies were $56.4 million and $64.2 million at January 3, 2020 and September 27, 2019, respectively.

The fair value of the outstanding long-term notes receivable, including accrued interest, approximated their carrying value of ~~$30.6~~$34.1 million and ~~$29.7~~$33.6 million at ~~December 28, 2018~~January 3, 2020 and September ~~28, 2018,~~27, 2019, respectively, because they are based on terms of recent comparable transactions and are categorized as Level 3 in the fair value hierarchy. The fair value is based on the income approach by using the discounted cash flow model with key assumptions that include discount rates corresponding to the terms and risks as well as underlying cash flow assumptions. See Note 14, "Proton Solutions Loans and Investments," for information on the long-term notes receivable.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

5.4. RECEIVABLES

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


(In millions)	January 3, 2020		September 27, 2019
Trade and unbilled receivables, gross	$	1,174.7	$	1,193.5
Allowance for doubtful accounts	(47.0)		(46.5)
Trade and unbilled receivables, net	$	1,127.7	$	1,147.0
Short-term	$	1,079.2	$	1,106.3
Long-term ⁽¹⁾	$	48.5	$	40.7


Long-term notes receivable ^{(1) (2)}	$	34.1	$	33.6

(In millions) December 28,
2018 September 28,
2018
Trade and unbilled receivables, gross $ 1,084.3
$ 1,093.0
Allowance for doubtful accounts (42.9 ) (41.1 )
Trade and unbilled receivables, net $ 1,041.4
$ 1,051.9
Short-term $ 989.5
$ 1,009.9
Long-term ⁽¹⁾
$ 51.9
$ 42.0

Notes receivable $ 30.7
$ 29.8
Short-term ⁽²⁾
$ 0.1
$ 0.1
Long-term ^{(1) (3)}
$ 30.6
$ 29.7
⁽¹⁾Included in other assets on the Company's Condensed Consolidated Balance Sheets.


⁽¹⁾ ⁽²⁾Balances include accrued interest and are recorded in other assets on the Company's Condensed Consolidated Balance Sheets.	~~Included in other assets on the Company's Condensed Consolidated Balance Sheets.~~


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


⁽³⁾	~~Balances include accrued interest and are recorded in other assets on the Company's Condensed Consolidated Balance Sheets.~~

A financing receivable represents a financing arrangement with a contractual right to receive money, on demand or on fixed or determinable dates, and that is recognized as an asset on the Company’s Condensed Consolidated Balance Sheets. The Company’s financing receivables consist of trade receivables with contractual maturities of more than one year and notes receivable. A small portion of the Company's financing trade receivables are included in short-term trade accounts receivable.

As of ~~December 28, 2018~~January 3, 2020, and September ~~28, 2018,~~27, 2019, the allowance for doubtful accounts is entirely related to short-term trade and unbilled receivables.

See Note 14, "Proton Solutions Loans and Investments," for more information on the Company's long-term notes receivable balances.

6.5. GOODWILL AND INTANGIBLE ASSETS

The following table ~~reflects~~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

(In millions)
Oncology
Systems
Proton Solutions Total
Balance at September 28, 2018 $ 242.1
$ 51.5
$ 293.6
Business combination 22.5
—
22.5
Measurement period adjustment to a business combination in prior year
(4.7 ) —
(4.7 )
Foreign currency translation adjustments —
(0.7 ) (0.7 )
Balance at December 28, 2018 $ 259.9
$ 50.8
$ 310.7
⁽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.

~~See Note 2, "Business Combinations,"~~The following table summarizes the gross carrying amount and accumulated amortization of the Company's intangible assets:


	January 3, 2020										September 27, 2019
(In millions)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Technologies and patents	$	226.4	$	(92.2)	$	134.2	$	226.4	$	(85.9)	$	140.5
Customer contracts, supplier relationships, and partner relationships	121.1		(28.1)		93.0		121.1		(25.7)		95.4
Trade names	55.1		(4.1)		51.0		55.1		(3.0)		52.1
Other	6.1		(6.1)		—		6.1		(6.1)		—
Total intangible with finite lives	408.7		(130.5)		278.2		408.7		(120.7)		288.0
In-process research and development with indefinite lives	12.7		—		12.7		12.7		—		12.7
Total intangible assets	$	421.4	$	(130.5)	$	290.9	$	421.4	$	(120.7)	$	300.7

Amortization expense for ~~more information.~~

intangible assets was $10.1 million and $4.7 million during the three months ended January 3, 2020 and December 28, 2018, respectively.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

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

December 28, 2018 September 28, 2018
(In millions) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount
Technologies and patents $ 141.6
$ (77.2 ) $ 64.4
$ 139.6
$ (73.9 ) $ 65.7
Customer contracts and supplier relationship 44.4
(20.6 ) 23.8
44.9
(19.1 ) 25.8
Other 6.1
(5.8 ) 0.3
6.6
(5.8 ) 0.8
Total intangible with finite lives 192.1
(103.6 ) 88.5
191.1
(98.8 ) 92.3
In-process research and development with indefinite lives 8.8
—
8.8
8.8
—
8.8
Total intangible assets $ 200.9
$ (103.6 ) $ 97.3
$ 199.9
$ (98.8 ) $ 101.1

~~Amortization expense for intangible assets was $4.7 million and $6.3 million during the three months ended December 28, 2018 and December 29, 2017, respectively.~~

As of ~~December 28, 2018,~~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., as administrative agent, swing line lender and letter of credit issuer. The Amendment extended the maturity date from April 2023 to November 2024. The Amendment reduced the aggregate principal amount available under Credit Agreement's five-year revolving credit facility (the "Revolving Credit Facility") from $1.8 billion to $1.2 billion, added a $500 million sub-limit for multi-currency borrowings, increased the letter of credit sub-limit from $50.0 million to $225 million, and reduced the commitment fee. In addition, there is a sub-limit for swing line loans of up to $25 million. Under the Revolving Credit Facility, the Company has the right to (i) request to increase the aggregate commitments by an aggregate amount for all such requests of up to $100.0 million and (ii) request an additional increase in the commitments or establish one or more term loans, provided that, in each case, the lenders are willing to provide such new or increased commitments and certain other conditions are met. The proceeds of the Revolving Credit Facility may be used for working capital, capital expenditures, Company share repurchases, permitted acquisitions and other corporate purposes.

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

Fiscal Years: Remaining Amortization Expense
Remainder of 2019 $ 16.3
2020 19.3
2021 15.5
2022 14.1
2023 13.3
Thereafter 10.0
Total remaining amortization for intangible assets $ 88.5
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, the Sumitomo Credit Facility was extended and will expire in February 2020. 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, the Company did not have an outstanding principal balance on its Sumitomo Credit Facility.

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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


		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.

Cash Flow Hedging Activities

~~As of December 28, 2018 and September 28, 2018,~~The Company had the ~~Company did not have any~~following outstanding foreign currency forward contracts that were entered into to hedge forecasted revenues and designated as cash flow hedges. During the three months ended December 29, 2017, the Company recognized an unrealized loss of $0.3 million on foreign currency forward contracts designated as cash flow hedges in other comprehensive earnings.hedges:


	January 3, 2020		September 27, 2019
(In millions)	Notional Value Sold
Euro	$	52.9	$	76.5
Japanese Yen	46.2		56.7
	$	99.1	$	133.2

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)
	Three Months Ended
(In millions)	January 3, 2020		December 28, 2018
Foreign currency forward contracts	$	(0.1)	$	—

As of January 3, 2020, the net unrealized gain on derivatives, before tax, of $1.9 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 ~~(Loss)~~ was as follows:

Location and Amount Recognized in Earnings on Cash Flow Hedging Relationships
Three Months Ended
December 29, 2017
(In millions) Revenues
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings (Loss) in which the effects of fair value and cash flow hedges are recorded $ 678.5
Loss on cash flow hedge relationships:
Foreign currency forward contracts:
Amount of gain reclassified from accumulated other comprehensive loss into earnings $ 0.1


	Location and Amount Recognized in Earnings on Cash Flow Hedging Relationships
		Three Months Ended
		January 3, 2020		December 28, 2018
(In millions)		Revenues
Total amounts of income and expense line items presented in the Condensed Consolidated Statements of Earnings in which the effects of fair value and cash flow hedges are recorded		$	828.9	$	741.0
Gain on cash flow hedge relationships:
Foreign currency forward contracts:
Amount of gain reclassified from accumulated other comprehensive loss into net earnings		$	0.8	$	—

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, ~~(expense),~~ net in the Condensed Consolidated Statements of ~~Earnings (Loss).~~Earnings. Changes in the values of these hedging instruments are offset by changes in the values of foreign-currency-denominated assets and liabilities. ~~At December 28, 2018, and September 28, 2018, the fair value~~

The notional amount of the Company's ~~derivatives not designated as hedging instruments was not material.~~

~~The Company had the following~~ 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

December 28, 2018
(In millions) Notional
Value Sold Notional
Value Purchased
Australian Dollar $ 24.3
$ —
Brazilian Real 10.9
—
British Pound 30.0
0.8
Chinese Yuan —
3.7
Canadian Dollar 2.7
—
Danish Krone —
4.8
Euro 194.0
1.8
Indian Rupee 20.3
—
Japanese Yen 72.5
—
Polish Zloty 21.5
—
South African Rand 8.7
—
Swedish Krona 6.9
—
Swiss Franc —
56.7
Taiwan Dollar 12.9
—
Thai Baht 6.5
—
Totals $ 411.2
$ 67.8

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

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

~~(Unaudited)~~

The following table presents the gains (losses) recognized in the Condensed Consolidated Statements of Earnings ~~(Loss)~~ 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 Gain (Loss) Recognized in Net Earnings on Derivative Instruments

Amount of Gain (Loss) Recognized in Net Earnings on Derivative Instruments

Three Months Ended

(In millions)

December 28,
2018

December 29,
2017

(In millions)

January 3,
2020

December 28,
2018

Other income (expense), net

2.8

(4.7

)

Other income, net

(5.0)

2.8

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)	December 28, 2018			December 29, 2017			(In millions)	January 3, 2020		December 28, 2018
Accrued product warranty, at beginning of period	$	44.8		$	41.3		Accrued product warranty, at beginning of period	$	43.2	$	44.8
Charged to cost of revenues	13.3			14.4			Charged to cost of revenues	20.8		13.3
Actual product warranty expenditures	(11.8		)	(8.6		)	Actual product warranty expenditures	(17.8)		(11.8)
Accrued product warranty, at end of period	$	46.3		$	47.1		Accrued product warranty, at end of period	$	46.2	$	46.3

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

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

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


(In millions)	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

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


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

Weighted average discount rate
Operating leases	4.8	%
Finance leases	1.5	%

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


(In millions)	Operating Leases		Finance leases
Remainder of 2020	$	21.5	$	2.9
2021	25.8		3.5
2022	20.3		2.9
2023	15.4		2.9
2024	11.8		1.1
Thereafter	51.4		1.1
Total minimum lease payments	$	146.2	$	14.4
Less: imputed interest	28.1		0.5
Total operating lease liability	$	118.1	$	13.9

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)

leased to customers. The Company recorded income of $2.5 million and $2.1 million during the three months ended 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 ~~December 28, 2018,~~January 3, 2020 and September 27, 2019, the Company had accrued ~~$5.3~~$4.7 million and $4.8 million, respectively, net of third parties' indemnification obligations, for environmental remediation liabilities. The Company believes its reserve is adequate; however, as the scope of the Company’s obligations becomes more clearly defined, the Company may modify the reserve, and charge or credit future earnings accordingly. Based on information currently known to management, management believes the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company in any one fiscal year.

The Company also reimburses certain third parties for cleanup activities. The amount the Company spent on environmental cleanup costs, third-party claim costs, project management costs and legal costs in the three months ~~ended~~January 3, 2020 and December 28, 2018, ~~and December 29, 2017, were~~was not material.

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

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

~~(Unaudited)~~

Other Matters

On October 16, 2018, Best Medical International, Inc. sued the Company in U.S. District Court in the District of Delaware, alleging infringement of ~~four~~4 patents related to treatment planning. The Company intends to defend the suit vigorously. This lawsuit is in the initial stages, and at this time, the Company is unable to predict the ultimate outcome of this matter or estimate a range of possible exposure. Therefore, no0 amounts have been ~~accrued.~~accrued as of January 3, 2020.

From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss (including, among other things, probable settlement value). A loss or a range of loss is disclosed when it is reasonably possible that a material loss will be incurred and can be estimated or when it is reasonably possible that the amount of a loss, when material, will exceed the recorded provision.

In addition to the above, the Company is involved in other legal matters. However, such matters are subject to many uncertainties, and outcomes are not predictable with assurance. The Company is unable to estimate a loss or a range of reasonably possible losses with respect to such matters. There can be no assurances as to whether the Company will become subject to significant additional claims and liabilities with respect to ongoing or future proceedings. If actual liabilities significantly exceed the estimates made, the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected. Legal expenses relating to legal matters are expensed as incurred.

9. RETIREMENT PLANS

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

~~The components of net defined benefit costs were as follows:~~

Three Months Ended
(In millions) December 28,
2018 December 29,
2017
Defined Benefit Plans
Service cost $ 1.8
$ 1.6
Interest cost 0.9
0.8
Expected return on plan assets (1.6 ) (2.0 )
Amortization of prior service cost (0.2 ) (0.1 )
Recognized actuarial loss 0.6
0.7
Net periodic benefit cost $ 1.5
$ 1.0

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

10. INCOME TAXES

The Company’s effective tax rate was ~~24.4%~~21.0% and ~~191.5%~~24.4% for the three months ended January 3, 2020 and December 28, 2018, ~~and December 29, 2017,~~ respectively. The ~~decrease in the~~ Company’s effective tax rate ~~for~~is lower in the three months ended ~~December 28, 2018,~~January 3, 2020 as compared to the year-ago period, ~~was~~ primarily because the prior period included the tax effect of a change in law due to the enactment of the Tax Cuts and Jobs Act, ~~(the "Act"),~~ which was signed into law on December 22, 2017. The current period also includes the impact of several provisions of the Act that take effect for the Company for the first time in the fiscal year ending September 27, 2019, including a new minimum tax on certain foreign earnings (the Global Intangible Low-taxed Income, or "GILTI"), a new tax on certain payments to foreign related parties (the Base Erosion and Anti-avoidance Tax), a new incentive for foreign-derived intangible income, changes to the limitation on the deductibility of certain executive compensation, and new limitations on the deductibility of interest expense. The Company has elected to account for GILTI as a period cost rather than on a deferred basis. The current period also reflects the fact that, as the Company has a September fiscal year end, the lower 21% federal rate is now fully phased in; that is, it is applicable to our domestic earnings for the full fiscal year ending September 27, 2019.

As part of the transition to a modified territorial system, the Act imposed a one-time transition tax on the unremitted earnings of the Company's foreign subsidiaries. The Company recorded a discrete tax expense related to the one-time transition tax of $2.3 million during the three months ended December 28, 2018, bringing the cumulative amount to $166.9 million. The Company intends to elect to pay this tax over the eight-year period allowed for in the Act.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). This guidance allowed registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Act. The Company relied on this guidance to refine its estimates of the impact of the Act during the measurement period. The measurement period ended during our period ended December 28, 2018. As a result, the Company considers its accounting for the tax effects of the Act to be complete based on its interpretation of the law and subsequent guidance that has been issued. However, it is expected that the U.S. Treasury will continue to issue regulations and other guidance on the application of certain provisions of the Act that may impact our interpretation of the rules and our calculation of the tax impact of the transition tax or other provisions of the Act.

The Company adopted the FASB guidance related to intra-entity transfers of assets other than inventory in the first quarter of fiscal year 2019. This standard changes the treatment of the tax effect of transfers of property other than inventory among the entities within a registrant's consolidated group. Under the prior standard, the tax effect related to the transfer of property other than inventory from one member of the group to another was recorded to prepaid income taxes, which is included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. Under the new standard, the tax effect related to the transfer of property other than inventory from one member of the group to another is recorded as a discrete item to taxes on earnings in the Condensed Consolidated Statements of Earnings (Loss). The Company recorded a cumulative effect of a change in accounting principle of $0.2 million as of September 29, 2018, as a result of adopting the new standard. The Company expects that the new standard may cause its effective tax rate to be less predictable and more volatile going forward.

The Company’s effective income tax rate differs from the U.S. federal statutory rate primarily because the Company’s foreign earnings are taxed at rates that are, on average, lower than the U.S. federal rate, and because the Company’s domestic earnings are subject to state income taxes. The total amount of unrecognized tax benefits did not materially change during the three months ended ~~December 28, 2018;~~January 3, 2020; however, the amount of unrecognized tax benefits has increased as a result of positions taken during the current and prior years and has decreased as the result of the expiration of the statutes of limitation in various jurisdictions.

~~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 ~~December 28, 2018,~~January 3, 2020, approximately ~~3.3~~1.9 million shares of VMS common stock remained available for repurchase under the November 2016 authorization.

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

Three Months Ended
(In millions, except per share amounts) December 28,
2018 December 29,
2017
Number of shares 0.3
0.5
Average repurchase price per share $ 108.90
$ 108.16
Total cost $ 34.8
$ 56.7

~~Other Comprehensive Earnings~~

~~The changes in accumulated other comprehensive loss by component and related tax effects are summarized 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

(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 )

(In millions) Net Unrealized Gains
(Losses) Defined
Benefit Pension and
Post-Retirement
Benefit Plans Net
Unrealized
Gains
(Losses)
Cash Flow
Hedging
Instruments Cumulative
Translation
Adjustment Accumulated
Other
Comprehensive Loss
Balance at September 29, 2017 $ (44.1 ) $ —
$ (24.7 ) $ (68.8 )
Other comprehensive earnings (loss) before reclassifications —
(0.3 ) 3.1
2.8
Amounts reclassified out of other comprehensive earnings (loss) 0.4
(0.1 ) —
0.3
Tax (expense) benefit (0.1 ) 0.1
—
—
Balance at December 29, 2017 $ (43.8 ) $ (0.3 ) $ (21.6 ) $ (65.7 )

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

Accumulated Other Comprehensive Loss

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


(In millions)	Net Unrealized Gains (Losses) Defined Benefit Pension and Post-Retirement Benefit Plans		Net Unrealized Gains 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	—		(0.1)		5.1		5.0
Amounts reclassified out of other comprehensive earnings (loss)	0.9		(0.8)		—		0.1
Tax (expense) benefit	(0.2)		0.2		—		—
Balance at January 3, 2020	$	(61.0)	$	1.4	$	(37.4)	$	(97.0)


(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, ~~(Loss),~~ with line item location, during each period were as follows:

Three Months Ended
(In millions)
December 28,
2018 December 29,
2017
Comprehensive Earnings Components Loss Before Taxes Line Item in Statements of Earnings
Unrealized loss on defined benefit pension and post-retirement benefit plans $ (0.4 ) $ (0.4 ) Other income (expense), net
Unrealized gain on cash flow hedging instruments —
0.1
Revenues
Total amounts reclassified out of other comprehensive earnings (loss) $ (0.4 ) $ (0.3 )


(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)

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

12. EMPLOYEE STOCK PLANS

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


	Three Months Ended
(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) December 28,
2018 December 29,
2017
Cost of revenues - Product $ 0.7
$ 0.7
Cost of revenues - Service 1.1
1.0
Research and development 1.1
1.2
Selling, general and administrative 7.6
7.8
Total share-based compensation expense $ 10.5
$ 10.7
Income tax benefit for share-based compensation $ (2.3 ) $ (2.1 )

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
December 28,
2018 December 29,
2017
Employee Stock Option Plans
Expected term (in years) 3.77
3.82
Risk-free interest rate 2.9 % 1.9 %
Expected volatility 22.2 % 18.7 %
Expected dividend — % — %
Weighted average fair value at grant date $ 25.87
$ 19.45
⁽¹⁾Excludes the fair value of the market condition based on a relative total shareholder return for the performance stock options granted during the period.

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


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

Three Months Ended
December 28,
2018 December 29,
2017
Employee Stock Purchase Plan
Expected term (in years) 0.50
0.50
Risk-free interest rate 2.5 % 1.2 %
Expected volatility 18.6 % 17.9 %
Expected dividend — % — %
Weighted average fair value at grant date $ 22.82
$ 20.97

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

~~Activity under the Company’s employee~~The activity for stock ~~plans related to~~options and performance stock options is ~~presented below:~~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 September 28, 2018 2.3
$ 85.82

Granted 0.2
118.44

Cancelled or expired ⁽²⁾
—
98.38

Exercised (0.2 ) 69.96

Balance at December 28, 2018 2.3
$ 89.95
4.8 $ 51.8
Exercisable at December 28, 2018 1.1
$ 75.10
3.7 $ 42.3
⁽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 as of January 3, 2020, the last trading date of the first quarter of fiscal year 2020, and which represents the amount that would have been received by the option holders had all option holders exercised their options and sold the shares received upon exercise as of that date..

⁽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 $111.99 as of December 28, 2018, the last trading date of the first quarter of fiscal year 2019, 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.


⁽²⁾	~~The cancelled and expired shares were not material for disclosure.~~

As of ~~December 28, 2018,~~January 3, 2020, there was ~~$18.2~~$20.7 million of total unrecognized compensation expense related to stock options and performance stock options granted under the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.1 years.

As of January 3, 2020 there was $0.6 million of total unrecognized compensation expense related to cash-settled stock appreciation rights granted outside the Company's employee stock plans. This unrecognized compensation expense is expected to be recognized over a weighted average period of 2.2 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)	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 28, 2018	0.8		$	89.17
Balance at September 27, 2019					Balance at September 27, 2019	0.7	$	108.35
Granted	0.1		117.44		Granted	0.1	140.74

Vested	(0.1	)	74.77		Vested	(0.1)	84.99
Cancelled or expired	(0.1	)	79.74		Cancelled or expired	(0.1)	117.11
Balance at December 28, 2018	0.7		$	94.66
Balance at January 3, 2020					Balance at January 3, 2020	0.6	$	115.82

As of ~~December 28, 2018,~~January 3, 2020, unrecognized compensation expense totaling ~~$40.2~~$43.7 million was related to awards of restricted stock units, deferred stock units and performance units granted under the Company's employee stock plans. This unrecognized share-based compensation expense is expected to be recognized over a weighted average period of ~~2.1~~2.0 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 ~~(loss)~~ per share:


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

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

Three Months Ended
(In millions, except per share amounts) December 28,
2018 December 29,
2017
Net earnings (loss) $ 103.9
$ (112.2 )
Less: Net earnings attributable to noncontrolling interests 0.7
0.1
Net earnings (loss) attributable to Varian $ 103.2
$ (112.3 )

Denominator:
Weighted average shares outstanding - basic 91.0
91.6
Dilutive effect of potential common shares 1.0
—
Weighted average shares outstanding - diluted 92.0
91.6
Net earnings (loss) per share attributable to Varian - basic $ 1.13
$ (1.22 )
Net earnings (loss) per share attributable to Varian - diluted $ 1.12
$ (1.22 )
Anti-dilutive employee share-based awards, excluded 0.9
3.2

~~For the three months ended December 29, 2017, the diluted net loss per share is the same as the basic net loss per share as the effects of all potential common stock equivalents are anti-dilutive.~~

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

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

~~(Unaudited)~~

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, ~~NYPC, GPTC~~the New York Proton Center ("NYPC"), the Georgia Proton Treatment Center and ~~DRTC.~~the Delray Radiation Therapy Center.

The following table lists the Company's ~~outstanding loans,~~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
(In millions)	Balance		Commitment		Balance		Commitment
Notes Receivable and Secured Debt: ⁽¹⁾
NYPC loan	$	32.3	$	—	$	31.8	$	—
RPTC senior secured debt	24.0		—		23.5		—
Proton International LLC loan	1.8		—		1.8		—
	$	58.1	$	—	$	57.1	$	—
Available-For-Sale Securities: ⁽¹⁾
MPTC Series B-1 Bonds	$	27.6	$	—	$	27.1	$	—
MPTC Series B-2 Bonds	25.7		—		25.1		—

APTC securities	6.7		—		6.6		—
	$	60.0	$	—	$	58.8	$	—

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

	$	49.3	$	1.9	$	49.3	$	1.9

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

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

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

December 28, 2018 September 28, 2018
(In millions) Balance Commitment Balance Commitment
Notes receivable and secured debt:
NYPC loan⁽¹⁾
$ 28.9
$ —
$ 28.0
$ —
RPTC senior secured debt⁽²⁾
24.6
—
24.9
—
Proton International LLC loan⁽¹⁾
1.7
—
1.7
—
$ 55.2
$ —
$ 54.6
$ —
Available-for-sale Securities:
MPTC Series B-1 Bonds⁽²⁾
$ 25.6
$ —
$ 25.1
$ —
MPTC Series B-2 Bonds ⁽¹⁾
23.6
—
23.1
—
GPTC securities⁽²⁾
8.3
—
7.9
—
APTC securities ⁽²⁾
6.2
—
6.4
—
$ 63.7
$ —
$ 62.5
$ —
CPTC Loans and Investment:
Short-term revolving loan ⁽²⁾
$ 4.2
$ 3.0
$ 3.7
$ 3.5
Term loan ⁽¹⁾
44.0
—
44.0
—
Equity investment in CPTC⁽¹⁾
—
—
2.2
—
$ 48.2
$ 3.0
$ 49.9
$ 3.5

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES


⁽¹⁾ NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (Unaudited)	~~Included in other assets at December 28, 2018 and September 28, 2018 on the Company's Condensed Consolidated Balance Sheets.~~


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

Alabama Proton Therapy Center ("APTC") Securities

In December 2017, the Company purchased $6.0 million in Subordinate Revenue Bonds, which financed the APTC. The Subordinate Revenue Bonds carry an interest rate of 8.5% and pay interest semi-annually. The Company is scheduled to start receiving annual principal payments on the Subordinate Revenue Bonds beginning on November 1, 2022. The Subordinate Revenue Bonds will mature on October 1, 2047.

At January 3, 2020 and September 27, 2019, the Company had $3.9 million and $2.1 million, respectively, in long-term unbilled receivables from APTC.

RineckerProton 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~~€21.5 million ~~Euros~~ or $24.5 million. By purchasing the senior secured debt, the Company has a right to 89approximately 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 ~~upon~~in December 2019 the center closed for clinical operations and decommissioning began. Upon finalization of bankruptcy proceedings, the Company believes it is probable it will recover the outstanding senior secured debt balance and trade accounts receivable, net. The Company classified its senior secured debt as long-term other assets because it expects the bankruptcy proceedings to be complete in greater than one year.

At ~~both December 28, 2018~~January 3, 2020 and September ~~28, 2018,~~27, 2019, the Company had ~~$4.5~~$4.2 million and $4.6 million, respectively, in long-term trade receivables, net, ~~for~~from RPTC, which does not include any unbilled receivables.

~~Georgia Proton Treatment Center ("GPTC") Security~~

In July 2017 and July 2018, the Company purchased a total of $16.1 million in Senior Capital Appreciation Bonds ("Senior Bonds"), which financed the GPTC. In September 2018, the Company sold $8.5 million, including accrued interest, of its current carrying value of its Senior Bonds for $8.3 million in cash. The Senior Bonds carry an interest rate of 8.0% per annum

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

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

~~(Unaudited)~~

with interest accruing up to the Senior Bonds face amount of $11.3 million on January 1, 2023 and then will pay cash interest semi-annually. The Company is scheduled, based upon the original terms, to start receiving annual principal payments on the Senior Bonds beginning on January 1, 2024. The Senior Bonds will mature on January 1, 2028.

In addition to the Senior Bonds, the Company had $8.6 million and $12.5 million as of December 28, 2018 and September 28, 2018, respectively, in trade and unbilled receivables, which included $8.4 million and $11.7 million, respectively, in unbilled receivables from GPTC.

New York Proton Center ("NYPC") Loan

In July 2015, the Company committed to loan up to $91.5 million to MM Proton I, LLC. 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, the Subordinate Loan is $32.3 million, including accrued interest. The principal balance and accrued interest on the Subordinate Loan are due in full at maturity in January 2022.

~~In addition to the outstanding loan,~~At January 3, 2020 and September 27, 2019, the Company had ~~$26.6~~$18.0 million and ~~$24.1~~$16.6 million, ~~as of December 28, 2018 and September 28, 2018,~~ respectively, in trade and unbilled receivables, which included $6.4 million and $6.0 million in unbilled receivables, respectively, from NYPC.

Maryland Proton Treatment Center ("MPTC") Securities

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, theThe Company ~~received $22.9 million in~~has Subordinate Revenue Bonds ("MPTC Series B-2 Bonds") that carry an interest rate of 8.5% per annum with interest accruing up to the MPTC Series B-2 Bonds face amount of $33.9 million until January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-2 Bonds will mature on January 1, 2049. ~~In exchange for its outstanding notes receivable, the~~The Company also ~~received $6.0 million in cash and $25.0 million in~~has Subordinate Revenue Bonds ("MPTC Series B-1 Bonds") that carry an interest rate of 7.5% with interest accruing up to the MPTC Series B-1 Bonds face amount of $32.0 million on January 1, 2022 and then will pay cash interest semi-annually. The MPTC Series B-1 Bonds will mature on January 1, 2048. The MPTC Series B-1 Bonds are senior in right and time to the MPTC Series B-2 Bonds.

~~In addition to the bonds,~~At January 3, 2020 and September 27, 2019, the Company had ~~$0.3 million~~0 net trade and ~~$0.5 million as of December 28, 2018, and September 28, 2018, respectively, in trade~~unbilled receivables ~~net,~~ 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”~~(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~~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 (“Practice”).~~Corporation. As a result of these events, the Company recorded an impairment charge of $51.4 million to its Original CPTC Loans in fiscal year 2017.

Pursuant to an order of the Bankruptcy Court, the California Proton Treatment Center ("Original CPTC") conducted an auction of the Scripps Proton Therapy Center. On December 6, 2017 (“Closing Date”), the Bankruptcy Court approved the sale of

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

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

~~(Unaudited)~~

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.~~CPTC, which it sold for a nominal amount in March 2019. Original CPTC has assigned all its Former Loans to CPTC at an amount of $112.0 million, the partially satisfied loan balance. Per the terms of the Credit Agreement, the Company's portion of the $112.0 million is $53.5 million; the remainder is allocated between ORIX and J.P. Morgan. The $53.5 million is composed of ~~four~~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 maturity date of the Term Loan is three years from the Closing Date. The Term Loan is secured by the assets of CPTC.

In addition, the Lenders have committed to lend up to $15.0 million in a Revolving Loan with a maturity date of one year from the Closing Date. In the first quarters of fiscal 2019, fiscal 2020 and subsequent to the end of the first quarter of fiscal ~~2019,~~2020, as provided in the initial agreement, the Lenders have granted ~~a one year extension~~extensions to the term of the Revolving ~~Loan.~~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 ~~December 28, 2018,~~January 3, 2020, the Company has funded ~~$4.2~~$5.3 million.

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%.

~~Considering Original~~The Company believes it is probable that it will collect the amounts owed under the Term Loan and Revolving Loan when due based on CPTC’s ~~financial difficulties,~~current operating plan. This plan includes an increase in patient volume, partnership with a significant clinical partner, and maintenance of its current reimbursement structure. In July 2019, the ~~modification~~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 the reimbursement to CPTC for its services. CPTC's inability to execute its operating plan, as well as finalization of the ~~original terms~~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 Former Loans, and the Lenders agreement to grant a concession on the Original CPTC Loans, the Company classified the transaction above as a troubled debt restructuring (“TDR”). The Company does not have any unamortized fees from the Former Loans and any prepayment penalties.loan receivable; this impairment could be material.

The Company, using a discounted cash flow approach, determined that the fair value of CPTC's equity as of Closing Date was $20.1 million. The Company's 47.08% ownership percentage amounts to a $9.5 million equity interest in CPTC. Since the common stock received was in addition to a loan receivable partially satisfied through the bankruptcy proceedings, in accordance with the TDR accounting guidance, the Company recorded the equity interest at fair value and as an offset to the reinstated loan balance. The equity investment in CPTC is accounted for under the equity method of accounting, and the Company accounts for its equity method share of the income or loss of CPTC on a quarter lag basis. The Company recorded a loss from its equity investment in CPTC of $2.2 million in the three months ended December 28, 2018 in selling, general and administrative expenses on the Condensed Consolidated Statements of Earnings (Loss).

~~As of December 28, 2018~~At January 3, 2020, and September ~~28, 2018,~~27, 2019, the Company had ~~recorded $1.5~~$2.9 million and ~~$1.8~~$2.6 million, respectively, in ~~accounts receivable,~~trade receivables, net, from CPTC.

Further, the Company has determined that CPTC is a variable interest entity because of the Company's participation in the loan facilities, ~~equity ownership~~ and its operations and maintenance agreement. The Company ~~has one board seat out of five,~~ has no special approval authority or veto rights for CPTC’s budget, and does not have the power to direct patient recruitment, clinical operations and management of CPTC, which the Company believes are the matters that most significantly affect their economic performance. Therefore, the Company does not have majority voting rights and no power to direct activities at CPTC, and as a result it is not the primary beneficiary of CPTC.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

15. SEGMENT INFORMATION

The Company has ~~two~~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.

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

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

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

~~(Unaudited)~~

(“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. ~~Products~~

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 ~~information management,~~solutions include treatment planning, ~~and image processing,~~informatics, clinical knowledge exchange, patient care management, ~~decision-making support and~~ practice management ~~software.~~ 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, ~~as well as to~~and treat patients using brachytherapy techniques, which involve ~~temporarily implanting~~the introduction or temporary insertion of radioactive sources. The ~~Company’s~~ Oncology ~~Systems~~Systems' products are also used by surgeons and radiation oncologists to perform stereotactic radiosurgery and by medical oncology departments to manage ~~chemotherapy~~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 10 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, aanother 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 ~~Proton~~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 ~~benefits.~~in process research and development. Although the Company excludes these amounts from segment operating earnings, they are included in the condensed consolidated operating earnings and included in the reconciliation below.

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

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


	Three Months Ended							Three Months Ended
(In millions)	December 28, 2018			December 29, 2017			(In millions)	January 3, 2020		December 28, 2018
Revenues							Revenues
Oncology Systems	$	702.5		$	649.4		Oncology Systems	$	782.4	$	702.5
Proton Solutions	38.5			29.1			Proton Solutions	27.6		38.5
Total reportable segments							Total reportable segments	810.0		741.0
Other							Other	18.9		—
Total Company	$	741.0		$	678.5		Total Company	$	828.9	$	741.0
Earnings before taxes
Earnings from continuing operations before taxes							Earnings from continuing operations before taxes
Oncology Systems	$	124.1		$	138.2		Oncology Systems	$	136.4	$	124.1
Proton Solutions	(8.8		)	(15.2		)	Proton Solutions	(14.3)		(8.8)
Total reportable segments	115.3			123.0			Total reportable segments	122.1		115.3
Other							Other	2.8		—
Unallocated corporate	(3.6		)	(1.4		)	Unallocated corporate	(14.9)		(3.6)
Operating earnings	111.7			121.6			Operating earnings	110.0		111.7
Interest income, net	2.7			1.1
Other income (expense), net	23.0			(0.2		)
Interest income (expense), net							Interest income (expense), net	(1.7)		2.7
Other income, net							Other income, net	4.4		23.0
Total Company	$	137.4		$	122.5		Total Company	$	112.7	$	137.4

Disaggregation of Revenues

The Company disaggregates its revenues from contracts by major product categories, geographic region, and by ~~geographic region~~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
Total Revenues by Product Type	January 3,		December 28,
(In millions)	2020		2018
Hardware
Oncology Systems	$	320.0	$	313.6
Proton Solutions	20.1		33.6
Other	18.9		—
Total Hardware	359.0		347.2
Software ⁽¹⁾
Oncology Systems	148.8		131.2
Proton Solutions	—		—
Total Software	148.8		131.2
Service
Oncology Systems	313.6		257.7
Proton Solutions	7.5		4.9
Total Service	321.1		262.6
Total Revenues	$	828.9	$	741.0

⁽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 Product Type~~

Three Months Ended
December 28, 2018
(In millions) Oncology Systems Proton Solutions Total
Hardware $ 313.6
$ 33.6
$ 347.2
Software ⁽¹⁾
131.2
—
131.2
Service 257.7
4.9
262.6
Total Revenues $ 702.5
$ 38.5
$ 741.0

Three Months Ended
December 29, 2017
(In millions) Oncology Systems Proton Solutions Total
Hardware $ 293.1
$ 27.3
$ 320.4
Software ⁽¹⁾
115.1
—
115.1
Service 241.2
1.8
243.0
Total Revenues $ 649.4
$ 29.1
$ 678.5


⁽¹⁾	~~Includes software support agreements that are recorded in revenues from service in the Condensed Consolidated Statements of Earnings (Loss).~~

Revenues by Geographical Region


	Three Months Ended
Total Revenues by Geographical Region	January 3,		December 28,
(In millions)	2020		2018
Americas
Oncology Systems	$	378.9	$	330.8
Proton Solutions	16.9		19.6
Other	6.4		—
Total Americas	402.2		350.4
EMEA
Oncology Systems	259.8		234.5
Proton Solutions	10.3		16.5
Other	2.8		—
Total EMEA	272.9		251.0
APAC
Oncology Systems	143.7		137.2
Proton Solutions	0.4		2.4
Other	9.7		—
Total APAC	153.8		139.6
Total Revenues	$	828.9	$	741.0
North America ⁽¹⁾
Oncology Systems	$	355.2	$	309.1
Proton Solutions	16.9		19.6
Other	6.4		—
Total North America	378.5		328.7
International
Oncology Systems	427.2		393.4
Proton Solutions	10.7		18.9
Other	12.5		—
Total International	450.4		412.3
Total Revenues	$	828.9	$	741.0

Three Months Ended
December 28, 2018
(In millions) Oncology Systems Proton Solutions Total
Americas $ 330.8
$ 19.6
$ 350.4
EMEA 234.5
16.5
251.0
APAC 137.2
2.4
139.6
Total Revenues $ 702.5
$ 38.5
$ 741.0

North America⁽¹⁾
$ 309.1
$ 19.6
$ 328.7
International 393.4
18.9
412.3
Total Revenues $ 702.5
$ 38.5
$ 741.0
⁽¹⁾North America primarily includes the United States and Canada.

Revenues by Timing of Revenue Recognition


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

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

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

Three Months Ended
December 29, 2017
(In millions) Oncology Systems Proton Solutions Total
Americas $ 337.4
$ 19.3
$ 356.7
EMEA 183.5
9.5
193.0
APAC 128.5
0.3
128.8
Total Revenues $ 649.4
$ 29.1
$ 678.5

North America⁽¹⁾
$ 326.3
$ 19.3
$ 345.6
International 323.1
9.8
332.9
Total Revenues $ 649.4
$ 29.1
$ 678.5


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

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

(Unaudited)

16. BUSINESS COMBINATIONS

~~Timing~~Business Combinations in Fiscal Year 2020

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

Three Months Ended
December 28, 2018
(In millions) Products transferred at a point in time Products and Services transferred over time Total
Oncology Systems $ 366.6
$ 335.9
$ 702.5
Proton Solutions —
38.5
38.5
Total Revenues $ 366.6
$ 374.4
$ 741.0
Business Combinations in Fiscal Year 2019

Assets acquired from Boston Scientific

Three Months Ended
December 29, 2017
(In millions) Products Transferred at a Point in Time Products and Services Transferred Over Time Total
Oncology Systems $ 338.3
$ 311.1
$ 649.4
Proton Solutions —
29.1
29.1
Total Revenues $ 338.3
$ 340.2
$ 678.5

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

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~Cancer Treatment Services International

ToIn June 2019, the ~~Board~~Company acquired CTSI, a privately-held company for a purchase price of ~~Directors and~~

~~Stockholders~~$277.0 million, consisting of ~~Varian Medical Systems, Inc.:~~

~~Results of Review of Interim Financial Statements~~

We have reviewed the accompanying condensed consolidated balance sheet of Varian Medical Systems, Inc. and its subsidiaries (the “Company”) as of December 28, 2018, and the related condensed consolidated statements of earnings (loss), of comprehensive earnings (loss), of equity and$262.8 million of cash ~~flows for~~consideration, $8.2 million of contingent consideration, and $6.0 million of other consideration. The undiscounted range of the ~~three-month periods ended December 28, 2018~~contingent consideration payments is 0 to $58 million and ~~December 29, 2017, including~~is based on actual revenues over the ~~related notes (collectively referred to as~~18 months following the ~~“interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made~~acquisition date. There have been 0 changes this quarter to the ~~accompanying interim financial statements for them to be in conformity with accounting principles generally accepted~~fair value of the contingent consideration included in the ~~United States~~initial purchase price. The Company has included this acquisition in its Oncology Systems business. The purchase accounting from this transaction is not yet finalized. The Company recorded a measurement period adjustment in the first quarter of ~~America.~~fiscal year 2020 that was not material.

~~We have previously audited, in accordance with~~Endocare and Alicon

In June 2019, the ~~standards~~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 ~~Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company~~contingent consideration payments is 0 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 of September 28, 2018, and the related consolidated statements of earnings, of comprehensive earnings, of equity and of cash flows for the year then ended (not presented herein), and in our report dated November 26, 2018, which included a paragraph describingwell as a change in the ~~manner~~expected mix of ~~accounting for revenue from contracts with customers~~products, the Company recorded an $8.8 million increase in the ~~2018~~fair value of contingent consideration in the first quarter of fiscal year 2020, in addition to a $18.6 million increase in the fair value of the contingent consideration recorded in the fourth quarter of fiscal year 2019. The Company has recorded a total of $40.0 million in contingent consideration related to the Endocare and Alicon acquisitions, which is expected to be paid in fiscal year 2020. These acquisitions are included in the Company's Interventional Solutions business, which is included in the Other category. The purchase accounting from this transaction is not yet finalized. The Company has not recorded any measurement period adjustments this quarter.

Other Acquisitions in Fiscal Year 2019

In the third quarter of fiscal year 2019, the Company purchased a privately-held company for a cash purchase price of $15.2 million, including a holdback of $3.6 million and contingent consideration. At the closing date, the value of the contingent consideration was 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, the Company acquired a privately-held software company for a purchase price of $28.5 million. The acquisition primarily consisted of $21.9 million in goodwill and $6.5 million in finite-lived intangible assets. The Company integrated this acquisition into its Oncology Systems reporting unit.

Other Information

The 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 ~~we expressed an unqualified opinion on those~~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. ~~In our opinion,~~

The Company incurred acquisition transaction costs of $3.9 million and $2.4 million during the ~~information set forth in the accompanying condensed consolidated balance sheet as of September~~three months ended January 3, 2020 and December 28, 2018, ~~is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.~~respectively.

~~Basis for Review Results~~

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

~~/s/ PRICEWATERHOUSE~~C~~OOPERS~~ ~~LLP~~

~~PricewaterhouseCoopers LLP~~

~~San Jose, California~~

~~February 5, 2019~~

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”). 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”), 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”), or other reasons. For this purpose, statements concerning: growth strategies; industry or market segment outlook; economic and market conditions; domestic and global trends; development, market acceptance of or transition to new products, technologies, solutions or technology such as fixed field intensity-modulated radiation therapy, image-guided radiation therapy, stereotactic radiosurgery, volumetric modulated arc therapy, brachytherapy, software, treatment techniques, and proton therapy;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 future tariffs and exclusions therefrom or cross-border trade restrictions; currency fluctuation, changes in political, regulatory, safety or economic conditions; 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 Annual Report on Form 10-K for the fiscal year ended September ~~28, 2018~~27, 2019 (the ~~“2018~~“2019 Annual Report”), as well as the information contained under Part I, Item 1A "Risk Factors" of the ~~2018~~2019 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 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 ~~meet this challenge,~~achieve these long-term objectives, we ~~offer comprehensive solutions for fighting cancer.~~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.

~~Long-term growth and value creation strategy~~

We are focused on cancer care solutions and are well-positioned to positively influence more and more patients globally every day by bringing smarter and simpler solutions to healthcare providers. Our long-term growth and value creation strategy is to transform our company from the global leader in radiation therapy to the global leader in multi-disciplinary, integrated cancer care solutions. We intend to leverage our deep customer relationships, human-centered design, scale and financial strength to selectively broaden our capabilities to help cancer patients. 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 other addressable markets.

Highlights for the ~~first three months ended December 28, 2018~~Three Months Ended January 3, 2020

Financial Summary


	For the three months ended									Three Months Ended
(In millions, except per share amounts)	December 28, 2018			December 29, 2017			Change		(In millions, except per share amounts)	January 3, 2020			December 28, 2018			Change
Gross Orders	$	721.7		$	666.1		8	%	Gross Orders	$	818.6		$	721.7		13	%
Oncology Systems	$	716.5		$	619.9		16	%	Oncology Systems	773.8			716.5			8	%
Proton Solutions	$	5.2		$	46.2		(89	)%	Proton Solutions	25.9			5.2			399	%
Other									Other	18.9			—			n/m
Backlog	$	3,174.7		$	3,020.8		5	%	Backlog	$	3,305.3		$	3,174.7		4	%
Revenues	$	741.0		$	678.5		9	%	Revenues	$	828.9		$	741.0		12	%
Oncology Systems	$	702.5		$	649.4		8	%	Oncology Systems	782.4			702.5			11	%
Proton Solutions	$	38.5		$	29.1		32	%	Proton Solutions	27.6			38.5			(28)	%
Other									Other	18.9			—			n/m
Gross margin as a percentage of revenues	42.7		%	44.6		%	(197) bps		Gross margin as a percentage of revenues	44.2		%	42.7		%	160 bps
Effective tax rate	24.4		%	191.5		%			Effective tax rate	21.0		%	24.4		%
Net earnings (loss)	$	103.9		$	(112.2	)	n/m
Diluted net earnings (loss) per share	$	1.12		$	(1.22	)	n/m
Net earnings attributable to Varian									Net earnings attributable to Varian	$	88.2		$	103.2		(14)	%
Diluted net earnings per share									Diluted net earnings per share	$	0.96		$	1.12		(14)	%
Net cash provided by operating activities	$	140.9		$	179.0		(21	)%	Net cash provided by operating activities	$	112.6		$	140.9		(20)	%
Number of shares repurchased	0.3			0.5			(39	)%	Number of shares repurchased	0.3			0.3			4	%
Total cost of shares repurchased	$	34.8		$	56.7		(39	)%	Total cost of shares repurchased	$	46.4		$	34.8		33	%

n/m - not meaningful

Tariff Measures. OnBetween July 6, 2018 and May 2019, the Trump Administration imposed ~~25%~~a series of tariffs, ranging from 5% to 25%, on ~~a variety of imports~~numerous products imported into the United States from China, including Varian’s radiotherapy systems manufactured in China and certain components ~~imported into the U.S. for~~used in our manufacturing and service activities. ~~The Administration subsequently imposed tariffs on two additional lists of products from China; the first of these additional lists involves 25% tariffs~~In July and ~~the second list imposes 10% tariffs increasing to 25% on March 2, 2019. We expect our imports into~~August 2018, China retaliated against the U.S. tariffs by imposing its own series of tariffs, ranging from 10% to ~~be impacted less by these two tariff lists than by the initial tariff list.~~

25%, on certain products imported into China ~~responded to the multiple U.S. tariff lists by announcing several lists of products~~ from the U.S. that are subject to additional tariffs upon import to China. The first round of Chinese retaliatory tariffs went into effect on July 6, 2018. Our products are not impacted by these tariffs. Our exports of U.S. manufactured radiotherapy systems to China are impacted by the second Chinese list, implemented on August 23, 2018, which is subject to a 25% tariff. A third group of items, including certain of our manufacturing inputs and services, is subject to 5 to 10% tariffs which went into effect on September 24, 2018. Any tariffs imposed by the United States, including Varian’s radiotherapy systems and ~~China that include Varian technology could increase the cost of our products~~certain manufacturing and ~~adversely impact the competitiveness of our products and/or our operational results in the future.~~service components.

We ~~are participating~~participated in the Office of the U.S. Trade Representative ~~("USTR"~~(“USTR”) process to ~~consider~~seek product-specific exclusions from ~~these tariffs. On December 21, 2018,~~the U.S. tariffs on Chinese imports. To date, USTR ~~announced its approval of our request to exclude~~has granted tariff exclusions for four products: certain radiotherapy systems manufactured in China, and this decision was later published on December 28, 2018. This exclusion means Varian’s imports of radiotherapy systems from China into the U.S. will not be subject to the China tariffs. While we are uncertainas well as three key components of the ~~outcome of~~radiation therapy systems that we manufacture in the United 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. In December 2019, USTR granted a one-year extension to our ~~remaining three~~ exclusion for radiotherapy systems.

In June and July 2019, we submitted formal requests to the USTR relating to certain components imported from China, if we are successful, we could be provided relief from these tariffs retroactive to the date of their enactment. We also are engaged in advocatingChinese government for ~~exemption of similar products~~exclusions from the Chinese retaliatory ~~tariffs.~~tariffs for manufacturing inputs, service parts and radiotherapy systems imported into China from the United States. In ~~addition, we continue to engage in ongoing planning in~~

September 2019, the Chinese government granted a tariff exclusion for medical linear accelerators, including our radiotherapy systems, with retroactive effect. The other exclusion requests are still pending. The U.S. and ~~optimization of our global manufacturing and supply chain operations in light of the long-term uncertainty of these~~Chinese government tariff ~~measures and to have a more resilient business disruption and continuity plan.~~

exclusions are for one-year periods, with anticipated renewal processes. In the aggregate, these tariffs will be referred to as "U.S./China tariffs."

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.~~(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 ~~revenue~~revenues and gross orders are not adjusted for constant currency unless indicated.

Currency fluctuations ~~did not have~~had approximately a ~~material~~$5.4 million and $3.6 million unfavorable impact on total revenues and Oncology Systems gross orders, respectively, for the three months ended ~~December 28, 2018,~~January 3, 2020, 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.

Oncology Systems. OurOncology 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"~~(“IMRT”), image-guided radiation therapy ~~("IGRT"~~(“IGRT”), volumetric modulated arc therapy ~~("VMAT"~~(“VMAT”), stereotactic ~~radiotherapy,~~radiosurgery, stereotactic body radiotherapy and ~~brachytherapy.~~brachytherapy as well as associated quality assurance equipment. Our software solutions ~~also~~ include treatment planning, informatics, ~~software for information management,~~ clinical knowledge exchange, patient care management, practice management and ~~decision-making~~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 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;~~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 ~~seen an increased portion of gross orders and revenues coming from services and software licenses, both of which have higher gross margin percentages than our hardware products. 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.

We believe international markets will be our fastest growing markets. The radiation oncology market in North America is largely characterized by 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 ~~the medical device tax,~~reimbursement rates and ~~reimbursement rates~~new models for radiotherapy and radiosurgery, such as the alternative payment model pilot program for radiation oncology that was proposed by the Centers for Medicare and Medicaid Services in July 2019. This pilot program 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. We believe this uncertainty~~years and could impact transaction size, timing and purchasing processes, and also contribute to increased quarterly business variability. ~~Given all the dynamic elements affecting this market, as outlined above, we believe the North America market will continue to grow in the low to mid-single digit range.~~

In the radiation oncology markets outside of North America, we expect the EMEA ~~market~~and Latin America markets to grow over the long term with varying growth rates across the ~~region.~~regions. In APAC, we expect China to lead longer-term regional ~~growth, with slower growth in the Japanese market. Latin America is currently experiencing volatility; however, our long-term outlook is cautiously optimistic.~~growth. Overall, we believe the global radiation oncology market can grow over the long term, in constant currencies, in the mid-single-digit range.

Proton Solutions. Our Proton Solutions business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam ~~radiotherapy~~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 ~~substantial~~ resources to ~~grow~~drive growth and innovation in this business. Proton therapy facilities are large-scale construction projects that ~~are time consuming~~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 funding environment for large capital projects, such as proton therapy projects, is still challenging. Our current focus is bringing our expertise in traditional radiation therapy to proton therapy to improve its clinical utility, ~~and to~~ reduce its cost of treatment per patient and drive innovation, so that it is more widely accepted and deployed.

As of ~~December 28, 2018,~~January 3, 2020, we had a total of ~~$167.1~~$167.4 million of ~~loans outstanding and~~notes receivable, including accrued interest, ~~available-for-sale securities, notes receivable and short-term~~ 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 procedures and treatments, including cryoablation, microwave ablation and embolization. We also provide software for post treatment, image-guided dosimetry 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.

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 ~~December 28, 2018,~~January 3, 2020, there were no significant changes 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 ~~2018~~2019 Annual Report.

Results of Operations

Fiscal Year

Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year ~~2019 is~~2020 was the ~~52-week~~53-week period ending ~~September 27, 2019,~~October 2, 2020, and fiscal year ~~2018~~2019 was the 52-week period that ended September ~~28, 2018.~~27, 2019. The fiscal ~~quarters~~quarter ended January 3, 2020 was a 14-week period and the fiscal quarter ended December 28, 2018 ~~and December 29, 2017 were both~~was a 13-week ~~periods.~~period.

Discussion of Results of Operations for the Three Months Ended ~~December 28, 2018~~January 3, 2020 Compared to the Three Months Ended December ~~29, 2017~~28, 2018

Total Revenues


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

Revenues by sales classification Three Months Ended
(Dollars in millions) December 28,
2018 December 29,
2017 Percent Change
Product $ 400.2
$ 365.6
9 %
Service 340.8
312.9
9 %
Total Revenues $ 741.0
$ 678.5
9 %
Product as a percentage of total revenues 54 % 54 %
Service as a percentage of total revenues
46 % 46 %

Total product revenues increased in the three months ended January 3, 2020, compared to the year-ago period, due to $18.9 million in 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 ~~December 28, 2018,~~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, compared to the year-ago period, primarily due to an increase in revenues from Oncology Systems and, to a lesser extent, an increase in revenues from the Other category, partially offset by a decrease in revenues from Proton Solutions.

Revenues by geographical region Three Months Ended
(Dollars in millions) December 28,
2018 December 29,
2017 Percent Change
Constant Currency (1)
Americas $ 350.4
$ 356.7
(2 )% (2 )%
EMEA 251.0
193.0
30 % 33 %
APAC 139.6
128.8
8 % 10 %
Total Revenues $ 741.0
$ 678.5
9 % 10 %

North America $ 328.7
$ 345.6
(5 )% (5 )%
International 412.3
332.9
24 % 26 %
Total Revenues $ 741.0
$ 678.5
9 % 10 %
North America as a percentage of total revenues 44 % 51 %
International as a percentage of total revenues 56 % 49 %

~~The Americas~~ EMEA revenues ~~decreased~~increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to an increase from Oncology Systems, which included approximately $14 million in revenues from CTSI and, to a lesser extent, an increase in revenues from the Other category, partially offset by a decrease in revenues from ~~Oncology Systems. EMEA and~~Proton Solutions. APAC revenues ~~both~~ increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to an increase in revenues from the Other category and Oncology Systems, ~~and to~~partially offset by a ~~lesser extent, an increase~~decrease in revenues from Proton Solutions.

Oncology Systems Revenues


Revenues by sales classification	Three Months Ended										Revenues by sales classification	Three Months Ended
(Dollars in millions)	December 28, 2018			December 29, 2017			Percent Change		Constant Currency		(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change		Constant Currency
Product	$	366.6		$	338.3		8	%	9	%	Product	$	382.0		$	366.6		4	%	5	%
Service	335.9			311.1			8	%	9	%	Service	400.4			335.9			19	%	20	%
Total Oncology Systems Revenues	$	702.5		$	649.4		8	%	9	%	Total Oncology Systems Revenues	$	782.4		$	702.5		11	%	12	%
Product as a percentage of total Oncology Systems revenues	52		%	52		%					Product as a percentage of total Oncology Systems revenues	49		%	52		%
Service as a percentage of total Oncology Systems revenues	48		%	48		%					Service as a percentage of total Oncology Systems revenues	51		%	48		%
Oncology Systems revenues as a percentage of total revenues	95		%	96		%					Oncology Systems revenues as a percentage of total revenues	95		%	95		%

Oncology Systems product revenues increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to ~~an increase in~~higher software sales. In the three months ended December 28, 2018, revenues from ~~higher volumes~~hardware products included a negative impact of ~~hardware shipments and an increase in revenues from software products, partially offset by an~~ approximately $8 million ~~impact~~ from the U.S./China ~~tariffs.~~Tariffs, as compared to a benefit of approximately $3 million related to tariff refunds in the three months ended January 3, 2020.

Oncology Systems service revenues, which include performance obligations for installation, training and warranty, increased in the three months ended ~~December 28, 2018,~~January 3, 2020, 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 was a 14-week period, which resulted

Revenues by geographical region Three Months Ended
(Dollars in millions) December 28,
2018 December 29,
2017 Percent Change Constant Currency
Americas $ 330.8
$ 337.4
(2 )% (2 )%
EMEA 234.5
183.5
28 % 31 %
APAC 137.2
128.5
7 % 8 %
Total Oncology Systems Revenues $ 702.5
$ 649.4
8 % 9 %

North America $ 309.1
$ 326.3
(5 )% (5 )%
International 393.4
323.1
22 % 24 %
Total Oncology Systems Revenues $ 702.5
$ 649.4
8 % 9 %
North America as a percentage of total Oncology Systems revenues 44 % 50 %
International as a percentage of total Oncology Systems revenues 56 % 50 %

~~Americas~~in approximately $19 million in additional service revenues being recorded. Also, Oncology Systems service revenues ~~decreased~~include approximately $18 million in revenues from CTSI in the three months ended December 28, 2018, compared to the year-ago period, primarily due to a decrease in revenues from hardware products and software licenses in North America, partially offset by an increase in revenues from Latin America.January 3, 2020.

~~EMEA~~


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 ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to an increase in revenues from services and hardware products ~~and~~in North America.

EMEA Oncology Systems revenues increased in the three months ended January 3, 2020, compared to ~~a lesser extent,~~the year-ago period, primarily due to an increase in revenues from services and software licenses. EMEA Oncology Systems revenues from services include approximately $14 million from CTSI.

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

Variations of higher and lower revenues between the North America and international regions are impacted by regional factors influencing our gross orders, which include government spending, philanthropy/donations, 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, 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	Three Months Ended								Revenues by sales classification	Three Months Ended
(Dollars in millions)	December 28, 2018			December 29, 2017			Percent Change		(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change
Product	$	33.6		$	27.3		23	%	Product	$	20.1		$	33.6		(40)	%
Service	4.9			1.8			172	%	Service	7.5			4.9			54	%
Total Proton Solutions Revenues	$	38.5		$	29.1		32	%	Total Proton Solutions Revenues	$	27.6		$	38.5		(28)	%
Proton Solutions revenues as a percentage of total revenues	5		%	4		%			Proton Solutions revenues as a percentage of total revenues	3		%	5		%

Revenues from Proton Solutions ~~increased~~decreased in the three months ended ~~December 28, 2018,~~January 3, 2020, 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, ~~made on centers under construction and~~partially offset by an increase in service revenues resulting from the increase in proton centers transitioned to service contracts.

Other Revenues

Revenues from the Other category was $18.9 million for the three months ended January 3, 2020. Revenues from the Other category are allocated to product revenues and are related to our Interventional Solutions business.

Gross Margin


Dollars by segment	Three Months Ended
(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change
Oncology Systems	$	353.0		$	309.8		14	%
Proton Solutions	—			6.3			n/m
Other	13.8			—			n/m
Gross margin	$	366.8		$	316.1		16	%
Percentage by segment
Oncology Systems	45.1		%	44.1		%
Proton Solutions	n/m			16.9		%
Other	72.8		%	—		%
Total Company	44.2		%	42.7		%
Percentage by sales classification
Total Company - Product	35.4		%	33.4		%
Total Company - Service	53.4		%	53.6		%
Oncology Systems - Product	36.1		%	35.8		%
Oncology Systems - Service	53.7		%	53.2		%

Dollars by segment Three Months Ended
(Dollars in millions) December 28,
2018 December 29,
2017 Percent Change
Oncology Systems $ 309.8
$ 300.5
3 %
Proton Solutions 6.3
2.3
179 %
Gross margin $ 316.1
$ 302.8
4 %
Percentage by segment
Oncology Systems 44.1 % 46.3 %
Proton Solutions 16.9 % 8.0 %
Total Company 42.7 % 44.6 %
Percentage by sales classification
Total Company - Product 33.4 % 38.8 %
Total Company - Service 53.6 % 51.5 %
Oncology Systems - Product 35.8 % 40.8 %
Oncology Systems - Service 53.2 % 52.2 %
n/m - not meaningful

Oncology Systems product gross margin percentage ~~decreased~~increased in the three months ended ~~December 28, 2018~~January 3, 2020, compared to the year-ago period, primarily due to ~~an approximately $11 million impact from~~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 ~~the~~a negative impact of $8 million in revenues and $3 million in cost of revenues, ~~and an increase~~compared to a total negative impact of approximately $0.8 million in ~~revenues from regions with lower margins.~~ the three months ended January 3, 2020.

Oncology Systems service gross margin percentage increased in the three months ended ~~December 28, 2018 compared to the year-ago period, primarily due to an improvement in margins from service contracts.~~

~~Proton Solutions gross margin percentage increased in the three months ended December 28, 2018~~January 3, 2020, compared to the year-ago period, primarily due to an increase in ~~revenues from services.~~service revenues.

Proton Solutions gross margin percentage decreased in the three months ended January 3, 2020, compared to the year-ago period, primarily due to project mix and increased project costs.

Research and Development


	Three Months Ended									Three Months Ended
(Dollars in millions)	December 28, 2018			December 29, 2017			Percent Change		(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change
Research and development	$	60.9		$	55.9		9	%	Research and development	$	67.1		$	60.9		10	%
Research and development as a percentage of total revenues	8		%	8		%			Research and development as a percentage of total revenues	8		%	8		%

Research and development expenses increased ~~$5.0~~$6.2 million in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to an increase in investments in ~~new product development projects~~software, Flash technology, adaptive radiotherapy and ~~the enhancement of existing products in Oncology Systems.~~other strategic programs.

Selling, General and Administrative and Acquisition-related expenses


	Three Months Ended									Three Months Ended
(Dollars in millions)	December 28, 2018			December 29, 2017			Percent Change		(Dollars in millions)	January 3, 2020			December 28, 2018			Percent Change
Selling, general and administrative	$	143.5		$	125.3		15	%	Selling, general and administrative	$	177.0		$	141.1		25	%

Acquisition-related expenses									Acquisition-related expenses	$	12.7		$	2.4		419	%
Selling, general and administrative as a percentage of total revenues	19		%	18		%			Selling, general and administrative as a percentage of total revenues	21		%	19		%

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

Selling, general and administrative expenses increased ~~$18.2~~$35.9 million in the three months ended ~~December 28, 2018,~~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 an $8.8 million increase in the fair value of contingent consideration related to the Endocare and Alicon acquisitions.

Other Income, Net


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

Interest income decreased in the three months ended January 3, 2020, compared to the year-ago period, primarily due to a decrease in interest income from loans to our Proton Solution customers and available-for-sale securities. Interest expense increased in the three months ended January 3, 2020, compared to the year-ago period, primarily due to an increase in employee-related costs, largely due to an increase in headcount in Oncology Systems, a $2.7 million increase related to the ASTRO trade show held in the first quarter of fiscal year 2019, and a $2.2 million loss on our equity investment in CPTC.

borrowings. Other ~~Income, Net~~

Three Months Ended
(Dollars in millions) December 28,
2018 December 29,
2017 Percent Change
Interest income $ 3.9
$ 3.2
24 %
Interest expense (1.2 ) (2.1 ) (38 )%
Other income (expense), net 23.0
(0.2 ) n/m
Total Other income, net $ 25.7
$ 0.9

~~n/m - not meaningful~~

~~Interest~~ income, increased in the three months ended December 28, 2018, compared to the year-ago period, primarily due to an increase in interest income generated from our cash holdings due to higher interest rates as compared to the prior period.

~~Interest expense~~net, decreased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to a ~~decrease in borrowings from our credit facility.~~

~~Other income (expense), net, increased~~$22.0 million gain on the sale of an equity investment in the three months ended December 28, ~~2018, compared to the year-ago period, primarily due to the $22.0 million gain on the sale of a privately-held company in the first quarter of fiscal year 2019.~~2018.

Taxes on Earnings


										Three Months Ended
	Three Months Ended
	December 28, 2018			December 29, 2017			Change
(Dollars in millions)									(Dollars in millions)	January 3, 2020			December 28, 2018			Change
Taxes on earnings	$	33.5		$	234.7		(86.0	)%	Taxes on earnings	$	23.8		$	33.5		(29.0)	%
Effective tax rate	24.4		%	191.5		%			Effective tax rate	21.0		%	24.4		%

Our effective tax rate ~~decreased~~is lower in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily because the prior year-ago period included the tax effect of a change in law due to the enactment of the Tax Cuts and Jobs Act, ~~(the "Act"),~~ which was signed into ~~U.S.~~ law on December 22, 2017.

Our effective tax rate is impacted by the percentage of our total earnings that comes from our international ~~region,~~regions, the mix of particular tax jurisdictions within our international ~~region,~~regions, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws or interpretations of those laws. We ~~also~~ expect that our effective tax rate may experience increased fluctuations from period to period. See Note ~~12, "Taxes on Earnings,~~10, "Income Taxes," of the Notes to the Consolidated Financial Statements in our ~~2018~~2019 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)	%

Three Months Ended
December 28,
2018 December 29,
2017 Percent Change
Diluted net earnings (loss) per share $ 1.12
$ (1.22 ) 192 %
n/m - not meaningful

Diluted net earnings ~~(loss)~~ per share ~~increased~~decreased in the three months ended January 3, 2020, 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, partially offset by a decrease in the effective tax rate in the three months ended January 3, 2020, as compared to the year-ago period, primarily due to an increase in income tax expense as a result of the Act in first quarter of fiscal year 2018 and the $22.0 million gain on the sale of a privately-held company in the first quarter of fiscal year 2019.

prior period.

Gross Orders


Total Gross Orders by segment	Three Months Ended
Gross orders by segment							Gross orders by segment	Three Months Ended
(Dollars in millions)	December 28, 2018		December 29, 2017		Percent Change		(Dollars in millions)	January 3, 2020		December 28, 2018		Percent Change
Oncology Systems	$	716.5	$	619.9	16	%	Oncology Systems	$	773.8	$	716.5	8	%
Proton Solutions	5.2		46.2		(89	)%	Proton Solutions	25.9		5.2		399	%
Other							Other	18.9		—		n/m
Total Gross Orders	$	721.7	$	666.1	8	%	Total Gross Orders	$	818.6	$	721.7	13	%

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 ~~the revenues~~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 ~~major~~ 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 ~~be converted~~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. 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 ~~shipment and/or~~ 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.

Oncology Systems Gross Orders


Gross Orders by geographical region	Three Months Ended
Gross orders by geographical region									Gross orders by geographical region	Three Months Ended
(Dollars in millions)	December 28, 2018		December 29, 2017		Percent Change		Constant Currency		(Dollars in millions)	January 3, 2020		December 28, 2018		Percent Change		Constant Currency
Americas	$	335.9	$	299.5	12	%	12	%	Americas	$	359.5	$	335.9	7	%	7	%
EMEA	218.3		190.4		15	%	17	%	EMEA	236.7		218.3		8	%	11	%
APAC	162.3		130.0		25	%	26	%	APAC	177.6		162.3		9	%	9	%
Total Oncology Systems Gross Orders	$	716.5	$	619.9	16	%	17	%	Total Oncology Systems Gross Orders	$	773.8	$	716.5	8	%	9	%

North America	$	313.5	$	278.7	12	%	13	%	North America	$	326.8	$	313.5	4	%	4	%
International	403.0		341.2		18	%	20	%	International	447.0		403.0		11	%	12	%
Total Oncology Systems Gross Orders	$	716.5	$	619.9	16	%	17	%	Total Oncology Systems Gross Orders	$	773.8	$	716.5	8	%	9	%

The Americas Oncology Systems gross orders increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to ~~the growth~~an increase in gross orders ~~for our hardware products, software licenses and~~from services in North ~~America.~~America, partially offset with a decrease in gross orders from hardware products.

EMEA Oncology Systems gross orders increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to ~~the growth~~an increase in gross orders from ~~across the region, particularly~~services, partially offset by a decrease in ~~emerging markets, for our~~gross orders from hardware ~~products,~~products. EMEA Oncology Systems gross orders from services ~~and software licenses.~~include approximately $14 million from CTSI.

APAC Oncology Systems gross orders increased in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to ~~the~~a growth in orders across the region, primarily in Greater China, Southeast Asia, and South Korea, for our ~~hardware~~ products and ~~services.~~

services, partially offset by a decrease in hardware product orders in Japan.

The trailing 12 months' growth in gross orders for Oncology Systems at the end of the first quarter of fiscal year ~~2019~~2020 and at the end of each of the previous three fiscal quarters was:


	Trailing 12 Months Ended					Trailing 12 Months Ended
	December 28, 2018	September 28, 2018	June 29, 2018	March 30, 2018		January 3, 2020	September 27, 2019	June 28, 2019	March 29, 2019
Americas	7%	5%	2%	1%	Americas	6%	7%	6%	8%
EMEA	16%	17%	20%	15%	EMEA	11%	12%	13%	18%
APAC	13%	9%	(3)%	2%	APAC	6%	9%	22%	20%
North America	5%	3%	4%	2%	North America	6%	8%	6%	9%
International	16%	15%	9%	8%	International	9%	10%	15%	17%
Total Oncology Systems Gross Orders	11%	9%	6%	5%	Total Oncology Systems Gross Orders	8%	9%	11%	13%

Consistent with the historical pattern, we expect that Oncology Systems gross orders will continue to experience regional fluctuations. Over the long-term, we expect international gross orders, specifically from emerging markets, ~~will~~to 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 ~~decreased~~increased $20.7 million in the three months ended ~~December 28, 2018,~~January 3, 2020, compared to the year-ago period, primarily due to ~~recording no~~one proton therapy system order in the three months ended January 3, 2020, as compared to none in the prior year period. Also contributing to the increase in gross orders was an increase in service orders.

Other Gross Orders

Other gross orders were $18.9 million in the ~~first quarter of fiscal year 2019~~three months ended January 3, 2020, and ~~recording two orders in the first quarter of fiscal year 2018.~~was related to our Interventional Solutions business.

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. ~~Backlog at December 28, 2018~~At January 3, 2020, total Company backlog was ~~$3.2~~$3.3 billion, ~~which includes approximately $199 million in Proton Solutions backlog, which was~~ an increase of ~~5% over~~4% compared to the backlog at December ~~29, 2017.~~28, 2018. Our Oncology Systems backlog at ~~December 28, 2018~~January 3, 2020 was ~~11%~~4% higher than the backlog at December ~~29, 2017,~~28, 2018, which reflected an increase of ~~11%~~4% for the both ~~the~~ international ~~regions~~ and North America regions, respectively. Proton Solutions backlog was $220 million at January 3, 2020.

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 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 net reductions of $74.5 million in the three months ended January 3, 2020, compared to a net addition of $11.0 million in the ~~three months ended December 28, 2018, compared to a net reduction of $50.0 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)	December 28, 2018		September 28, 2018		Increase		(In millions)	January 3, 2020		September 27, 2019		Increase
Cash and cash equivalents	$	616.0	$	504.8	$	111.2	Cash and cash equivalents	$	721.9	$	531.4	$	190.5
Restricted cash	12.7		11.6		1.1		Restricted cash	20.3		12.7		7.6
Total cash, cash equivalents and restricted cash	$	628.7	$	516.4	$	112.3
Total cash, cash equivalents, and restricted cash							Total cash, cash equivalents, and restricted cash	$	742.2	$	544.1	$	198.1

The increase in cash, cash equivalents, and restricted cash in the three months ended ~~December 28, 2018~~January 3, 2020 was primarily due to ~~$140.9~~$132.0 million in net borrowings from our credit facility, $112.6 million of cash provided by operating activities, ~~$29.9 million in proceeds from the sale of a privately-held company and $22.0~~$19.7 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 ~~$34.8~~$43.8 million used for the repurchase of shares of VMS common stock, ~~$25.5 million used for acquisitions, $14.0~~$22.6 million used for purchases of property, plant, and equipment, and ~~$4.4~~$3.6 million used for tax withholdings on vesting of equity awards.

At ~~December 28, 2018,~~January 3, 2020, we had approximately ~~$137~~$29 million, or ~~22%~~4%, of cash and cash equivalents in the United States, which ~~included~~includes approximately ~~$77~~$18 million ~~held as~~in money market funds, and approximately ~~$479~~$693 million, or ~~78%~~96%, of cash and cash equivalents was held abroad. In light of the ~~recent~~ changes to the U.S. federal taxation of foreign earnings, 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 ~~December 28, 2018,~~January 3, 2020, most of our cash and cash equivalents that ~~was~~were held abroad ~~was~~were in U.S. Dollars and ~~was~~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.

Cash Flows


	Three Months Ended							Three Months Ended
(In millions)	December 28, 2018			December 29, 2017			(In millions)	January 3, 2020		December 28, 2018
Net cash flow provided by (used in):							Net cash flow provided by (used in):
Operating activities	$	140.9		$	179.0		Operating activities	$	112.6	$	140.9
Investing activities	(13.1		)	(25.6		)	Investing activities	(15.1)		(13.1)
Financing activities	(17.2		)	(42.8		)	Financing activities	103.4		(17.2)
Effects of exchange rate changes on cash, cash equivalents and restricted cash	1.7			(4.0		)	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	$	112.3		$	106.6		Net increase in cash, cash equivalents and restricted cash	$	198.1	$	112.3

Our primary cash inflows and outflows ~~for the three months ended December 28, 2018, as compared to the three months ended December 29, 2017,~~ were as follows:

•In the three months ended ~~December 28, 2018,~~January 3, 2020, net cash provided by operating activities was ~~$140.9~~$112.6 million compared to ~~$179.0~~$140.9 million in the three months ended December ~~29, 2017.~~28, 2018. The ~~$38.1~~$28.3 million decrease in net cash from operating activities was driven by a ~~$188.5~~$53.8 million decrease in the net change from operating assets and liabilities and a ~~$65.7~~$15.0 million decrease ~~from non-cash items~~in net earnings, partially offset by a ~~$216.1~~$40.5 million increase ~~in net earnings.~~from 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 ~~December 28, 2018~~January 3, 2020 were as follows:


◦	~~Inventory increased $32.4 million primarily to support a higher volume of orders in Oncology Systems.~~


◦	~~Prepaid expenses and other assets decreased $8.6 million primarily due to a decrease in prepaid income taxes.~~


◦	~~Accounts payable increased $13.5 million primarily due to timing of payments.~~


◦	Accrued liabilities and other long-term liabilities decreased $12.5 million primarily due to the payment of compensation costs accrued in fiscal year 2018, partially offset by an increase in income tax accruals.


◦	~~Deferred revenues increased $47.2 million primarily due to an increase in billing ahead of revenue recognition due to changes in the mix of contractual billing terms.~~

◦Trade and unbilled receivables decreasing $29.5 million primarily due to a decrease in unbilled receivables in Oncology Systems.

◦Inventory increasing $44.9 million primarily to support a higher volume of orders in Oncology Systems.

◦Accounts payable decreasing $32.7 million primarily due to timing of payments.

◦Accrued liabilities and other long-term liabilities decreasing $42.1 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.

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 receivable collections, inventory management, contracts with extended payment terms, and the timing and amount of ~~tax~~taxes and other payments. For additional discussion, please refer to the “Risk Factors” in Item 1A herein and in Part I, Item 1A of our ~~2018~~2019 Annual Report.

•In the three months ended ~~December 28, 2018,~~January 3, 2020, cash used in investing activities was ~~$13.1~~$15.1 million, compared to ~~$25.6~~$13.1 million in the three months ended December ~~29, 2017.~~28, 2018. In the three months ended January 3, 2020, cash used in investing activities primarily included $22.6 million 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 ~~received~~in proceeds from the sale of ~~a privately-held company.~~ an equity investment.

•In the three months ended ~~December 29, 2017,~~January 3, 2020, cash used in investing activities primarily included $9.3 million for the purchases of property, plant and equipment, a $6.0 million investment in an available-for-sale security, $4.6 million in loans to CPTC, a $2.6 million deposit in an escrow account related to an acquisition that occurred in the second quarter of fiscal year 2018, and $2.5 million in investments in privately-held companies.

~~In the three months ended December 28, 2018, cash used in~~provided by financing activities was ~~$17.2~~$103.4 million, compared to ~~$42.8~~cash used of $17.2 million in the three months ended December ~~29, 2017.~~28, 2018. 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 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 ~~the issuance of common~~ stock ~~to employees. In the three months ended December 29, 2017, cash used in financing activities primarily included $56.7 million for the repurchase of VMS common~~option exercises and employee stock ~~$10.0 million in debt repayments, net of borrowings, under our credit facility agreements, partially offset by $24.2 million in proceeds from the issuance of common stock to employees.~~purchases.

We expect our total fiscal year 2019 capital expenditures, which typically represent construction and/or purchases of facilities, manufacturing equipment, office equipment and furniture and fixtures, as well as capitalized costs related to the implementation of software applications, will be approximately 2% of revenues in fiscal year 2019.

~~2018~~ Revolving Credit Facility

AsThe following table summarizes our short-term borrowings:


(Dollars in millions)	January 3, 2020					September 27, 2019
	Amount		Weighted-Average Interest Rate	Amount		Weighted-Average Interest Rate
Revolving Credit Facility	$	542.0	2.80%	$	410.0	3.05	%


Total short-term borrowings	$	542.0		$	410.0

See Note 6, "Borrowings," of ~~December 28, 2018 and September 28, 2018, we did not have any outstanding borrowings under~~ the ~~2018 Revolving Credit Facility.~~

~~On April 3, 2018, we entered into~~Notes to the ~~2018~~Condensed Consolidated Financial Statements for further information about our Credit Agreement with certain lenders and Bank of America, N.A. as administrative agent. The 2018 Credit Agreement provides for a five-year revolving credit facility ("2018 Revolving Credit Facility") in an aggregate principal amount of up to $1.8 billion. The 2018 Revolving Credit Facility also includes a $50.0 million sub-facility for the issuance of letters of credit and permits swing line loans of up to $25 million. Under the 2018 Revolving Credit Facility, we have 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 2018 Revolving Credit Facility may be used for working capital, capital expenditures, share repurchases, permitted acquisitions and other ~~corporate purposes.~~

Borrowings under the 2018 Revolving Credit Facility accrue interest based on either (i) the Eurodollar Rate plus a margin of 1.000% to 1.375% based on a net leverage ratio involving funded indebtedness and EBITDA, or (ii) a base rate of (a) the federal funds rate plus 0.50%, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus 1.00%, whichever is highest, plus a margin of 0.000% to 0.375% based on the same leverage ratio, depending upon instructions from us. Borrowings under the 2018 Revolving Credit Facility have a contract repayment date of twelve months, or less, and a final maturity of five years if based on the Eurodollar Rate and all overnight borrowings on the base rate would also have a final maturity of five years.

We must pay a commitment fee on the unused portion of the 2018 Revolving Credit Facility at a rate from 0.125% to 0.25% based on a net leverage ratio. We may prepay, reduce or terminate the commitments without penalty. Swing line loans under the 2018 Revolving Credit Facility will bear interest at the base rate plus the then applicable margin for base rate loans.

The 2018 Credit Agreement contains affirmative and negative covenants applicable to us and our subsidiaries that are typical for credit facilities of this type, and that are subject to materiality and other qualifications, carve-outs, baskets and exceptions. We agreed to maintain a financial covenant which requires a maximum consolidated net leverage ratio. We were in compliance with all financial covenants under the 2018 Credit Agreement for all periods within these condensed consolidated financial statements.

In addition, our Japanese subsidiary (“VMS KK”) has an unsecured uncommitted credit agreement with Sumitomo Mitsui Banking Corporation 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”). The Sumitomo Credit Facility will expire in February 2019.

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.

~~The ratio of current assets to current liabilities increased to 1.73 to 1 at December 28, 2018 from 1.63 to 1 at September 28, 2018, primarily due to an increase in current assets.~~

Days Sales Outstanding

Our Oncology Systems trade and unbilled receivables days sales outstanding (“DSO”) ~~increased~~was 112 days at January 3, 2020, as compared to 111 days at December 28, ~~2018 from 107 days at December 29, 2017.~~2018. 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. As of ~~December 28, 2018,~~January 3, 2020, approximately 5%4% 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 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

Three Months Ended
(In millions, except per share amounts) December 28,
2018 December 29,
2017
Number of shares 0.3
0.5
Average repurchase price per share $ 108.90
$ 108.16
Total cost $ 34.8
$ 56.7

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 ~~December 28, 2018,~~January 3, 2020, approximately ~~3.3~~1.9 million shares of VMS common stock remained available for repurchase under the November 2016 authorization.

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 ~~December 28, 2018,~~ January 3, 2020,

our liability for uncertain tax positions was ~~$48.4~~$45.6 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. ~~The Act allows taxpayers to elect~~We have elected to pay the one-time transition tax over a period of 8 years as follows: 8% per year for each of the first five years and 15%, 20%, and 25%, in years 6 through 8, respectively. As of ~~December 28, 2018,~~January 3, 2020, the noncurrent portion of the one-time transition tax on unremitted foreign earnings was ~~$143.9~~$135.2 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 ~~2018~~2019 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.

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 ~~December 28, 2018,~~January 3, 2020, we have not incurred any significant costs ~~since the spin-off of Varian, Inc. and Varian Semiconductor Equipment Associates, Inc. in 1999 or the distribution of Varex Imaging Corporation~~ 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 Annual Report.

Recent Accounting Standards or Updates Not Yet Effective

See Note 1, "Summary of Significant Accounting Policies," of the Notes to the ~~Condensed Consolidated Financial Statements~~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.

~~Credit~~ Our exposures to the three market risks have not changed materially since September 27, 2019. For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk, ~~and Counterparty Risk~~

We are exposed to credit loss in the event of nonperformance by counterparties on the foreign currency forward contracts used in hedging activities. These counterparties are large international and regional financial institutions and to date, no such counterparty has failed to meet its financial obligation to us under such contracts.

~~We are also exposed to credit loss in the event of default by counterparties~~” of our financing receivables and our loans to Proton Solutions customers. As of December 28, 2018, we had a total of $48.2 million in loans outstanding to CPTC and $118.9 million carrying value of loans outstanding to Proton Solutions customers, including accrued interest, available-for-sale securities, notes receivable and short-term senior secured debt. See Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed Consolidated Financial Statements for further information.2019 Annual Report.

In addition, cash and cash equivalents held with financial institutions may exceed the Federal Deposit Insurance Corporation insurance limits or similar limits in foreign jurisdictions. We also may need to rely on our credit facilities as described below under “Interest Rate Risk.” Our access to our cash and cash equivalents or ability to borrow could be reduced if one or more financial institutions with which we have deposits or from which we borrow should fail or otherwise be adversely impacted by conditions in the financial or credit markets. Conditions such as those we experienced as a result of the last economic downturn

and accompanying contraction in the credit markets heighten these risks. Concerns over economic instability could make it more difficult for us to collect outstanding receivables and could adversely impact our liquidity.

~~Foreign Currency Exchange Rate Risk~~

As a global entity, we are exposed to movements in foreign currency exchange rates. These exposures may change over time as business practices evolve. Adverse foreign currency rate movements could have a material negative impact on our financial results. Our primary exposures related to foreign currency denominated sales and purchases are in Europe, Asia, Australia and Canada.

We have many transactions denominated in foreign currencies and address certain of those financial exposures through a risk management program that includes the use of derivative financial instruments. We sell products throughout the world, often in the currency of the customer’s country, and may hedge certain of these larger foreign currency sale transactions when they are not transacted in the subsidiaries’ functional currency or in U.S. Dollars. The foreign currency transactions that fit our risk management policy criteria are hedged with foreign currency forward contracts. We may use other derivative instruments in the future. We enter into foreign currency forward contracts primarily to reduce the effects of fluctuating foreign currency exchange rates. We do not enter into foreign currency forward contracts for speculative or trading purposes. The forward contracts outstanding as of December 28, 2018 range from one to thirteen months in maturity.

We also hedge the balance sheet exposures from our various foreign subsidiaries and business units. We enter into foreign currency forward contracts to minimize the short-term impact of currency fluctuations on assets and liabilities denominated in currencies other than the subsidiaries' functional currency or the U.S. Dollar.

The notional values of our sold and purchased foreign currency forward contracts outstanding as of December 28, 2018 were $411.2 million and $67.8 million, respectively. The notional amounts of foreign currency forward contracts are not a measure of our exposure. The fair value of forward contracts generally reflects the estimated amounts that we would receive or pay to terminate the contracts at the reporting date, thereby taking into account and approximating the current unrealized and realized gains or losses of the open contracts. A move in foreign currency exchange rates would change the fair value of the contracts, and the fair value of the underlying exposures hedged by the contracts would change in a similar offsetting manner.

~~Interest Rate Risk~~

Our market risk exposure to changes in interest rates depends primarily on our investment portfolio and borrowings. Our investment portfolio primarily consisted of cash and cash equivalents and available-for-sale investments as of December 28, 2018. The principal amount of cash and cash equivalents at December 28, 2018 totaled $616.0 million with a weighted average interest rate of 0.98%. Cash and cash equivalents at December 28, 2018 include $77.1 million of money market funds with a weighted average interest rate of 2.29%.

~~Our available-for-sale securities are carried at fair value. At December 28, 2018, our available-for-sale securities, which include accrued interest are as follows:~~

(In millions, except for percentages) Fair Value Interest Rate
MPTC Series B-1 Bonds $ 25.6
7.5 %
MPTC Series B-2 Bonds $ 23.6
8.5 %
GPTC securities $ 8.3
8.0 %
APTC securities $ 6.2
8.5 %

To date, we have not used derivative financial instruments to hedge the interest rate within our investment portfolio, borrowings, but may consider the use of derivative instruments in the future. In addition, although payments under certain of our operating leases for our facilities are tied to market indices, these operating leases do not expose us to material interest rate risk.

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”))~~

(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 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(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 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 ~~28, 2018,~~27, 2019, except as follows:

~~Tariffs~~

Economic, political and other risks associated with international sales and operations could adversely affect our sales or ~~cross-border trade restrictions could increase the cost~~make them less predictable.

Revenues outside of ~~our products.~~

On July 6, 2018, the Trump Administration imposed 25% tariffs on a variety of imports from China, including Varian’s radiotherapy systems manufactured in China and certain components imported into the U.S. for our manufacturing and service activities. The Administration subsequently imposed tariffs on two additional lists of products from China; the first of these additional lists involves 25% tariffs and the second list imposes 10% tariffs increasing to 25% on March 2, 2019. We expect our imports into the U.S. to be impacted less by these two additional tariff lists than by the initial tariff list.

China responded to the multiple U.S. tariff lists by announcing several lists of products from the U.S. that are subject to additional tariffs upon import to China. The first round of Chinese retaliatory tariffs went into effect on July 6, 2018. Our products are not impacted by these tariffs. Our exports of U.S. manufactured radiotherapy systems to China are impacted by the second Chinese list, implemented on August 23, 2018, which is subject to a 25% tariff. A third group of items, including certain of our manufacturing inputs and services, is subject to 5 to 10% tariffs, which went into effect on September 24, 2018. Any tariffs imposed by the United States accounted for approximately 57%, 55%, and ~~China that include Varian technology could increase the cost~~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 ~~adversely impact the competitiveness~~conduct a significant portion of our ~~products and/or our operational results in the future.~~

~~We are participating in the Office~~research and development outside of the ~~U.S. Trade Representative (“USTR”) process~~United States. We intend to ~~consider product-specific exclusions from these tariffs. On December 21, 2018, USTR announced its approval of~~continue to expand our ~~request~~presence in international markets and expect to ~~exclude certain radiotherapy systems manufactured~~expend significant resources in China, and this decision was later published on December 28, 2018. This exclusion means Varian’s imports of radiotherapy systems from China into the U.S. will not be subject to the China tariffs. While we have been successful in our request to exclude radiotherapy systems there can be no assurancedoing so. We cannot assure you that we will be ~~successful~~able to recover these investments in ~~obtaining~~international markets.

Our results of operation could be adversely affected by a variety of factors, including, among other things:


•			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;



•			difficulties in interpreting or enforcing agreements and collecting receivables through the legal systems of many foreign countries;

•			unstable regional political and economic conditions or changes in restrictions on trade between the United States and other countries;

•			changes in the political, regulatory, safety or economic conditions in a country or region, including as a result of the United Kingdom (the “U.K.”) exit from the European Union (“E.U.”) (“Brexit”);

•			the imposition by governments, including the United States, of additional taxes, tariffs, global economic sanctions programs or other restrictions on foreign trade;

•			any inability to obtain required export or import licenses or approvals;

•			any inability to comply with export or import laws and requirements or any violation of sanctions regulations, which may result in enforcement actions, civil or criminal penalties and restrictions on exportation;

•			any increase in the cost of trade compliance functions to comply with changes to regulatory requirements;

•			failure to obtain proper business licenses or other documentation, or to otherwise comply with local laws and requirements to conduct business in a foreign jurisdiction;

•			the possibility that it may be more difficult to protect our intellectual property in foreign countries;

•			natural disasters, outbreaks of pandemic disease, climate change or the fear of such events; and

•			difficulties in staffing and managing international operations.

Currently, we provide customer services, manufacture products and conduct research in China. We also sell a significant amount of equipment and services to customers located in China. In December 2019, a novel strain of the coronavirus was first identified in Wuhan, China and has resulted in an ~~exclusion for~~outbreak of respiratory illness. While our ~~additional requests relating to certain components imported from~~operations in China ~~nor~~are not based in Wuhan, it is ~~there an assurance~~possible that the ~~Chinese government will~~spread of the coronavirus in China could adversely impact our business by, among other things, disrupting or restricting our ability to travel, provide ~~reciprocal relief~~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, the extent to which the coronavirus may impact our business is uncertain.

The U.K.'s exit from the ~~retaliatory tariffs.~~

~~The decision by British voters to exit the European Union~~E.U. may negatively impact our operations.

The ~~United Kingdom (“~~U.K.~~”) is currently negotiating the terms of its~~’s exit from the European Union (“Brexit”) scheduled for March 29, 2019. In November 2018, the U.K. and the European Union agreed upon a draft Withdrawal Agreement that sets out the terms of the U.K.’s departure, including a transition period from March 29, 2019 through DecemberE.U. on January 31, 2020, commonly referred to ~~allow time for a future trade deal~~as Brexit, has caused, and may continue to ~~be agreed. On January 15, 2019, the draft Withdrawal Agreement was rejected by the U.K. Parliament creating significant~~cause, uncertainty ~~about the terms (and timing) under which the U.K. will leave the European Union.~~

If the U.K. leaves the European Union with no agreement, it will likely have an adverse impact on labor and trade and will create further short-term currency volatility. In the absence of a future trade deal, the U.K.’s trade with the European Union and the rest of the world would be subject to tariffs and duties set by the World Trade Organization, which could result in higher importation costs for our products. In addition, the movement of goods between the U.K. and the remaining member states of the European Union will be subject to additional inspections and documentation checks, leading to possible delays at ports of entry and departure. Moreover, currency volatility could drive a weaker pound which could result in a decrease in the ~~profitability~~global markets.Political and regulatory responses to the withdrawal are still developing, and we are in the process of ~~our U.K. operations. Any adjustments we make to~~assessing the impact that the withdrawal may have on our business ~~and operations~~ as ~~a result of Brexit could result in significant expense and take significant time to complete.~~

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 4%3% of our total revenues in fiscal year ~~2018~~2019, and we cannot predict ~~its~~the future ~~implications.~~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 2019 (in millions, except per share amounts):~~

(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):

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 29, 2018 - October 26, 2018 0.3
$ 108.90
0.3
3.3
October 27, 2018 - November 23, 2018 —
$ —
—
3.3
November 24, 2018 - December 28, 2018 —
$ —
—
3.3
Total 0.3
$ 108.90
0.3
3.3


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⁾

⁽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.

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

~~Exhibit~~ ~~No.~~ 10.1*		~~Description~~

15.1*	~~Letter Regarding Unaudited Interim Financial Information.~~Form of Registrant’s Non-Employee Director Restricted Stock Unit Agreement under the Registrant’s Fifth Amended and Restated 2005 Omnibus Stock Plan.

31.1*10.2			Amendment No. 2 to Credit Agreement, dated 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 (incorporated by reference to Exhibit 10.41 to the Registrants Annual Report on Form 10-K filed as of November 25, 2019, 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.INS101			~~XBRL Instance Document~~The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended January 3, 2020: (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 Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

101.SCH*			~~XBRL Taxonomy Extension Schema Document~~

101.CAL*			~~XBRL Taxonomy Extension Calculation Linkbase Document~~

101.DEF*			~~XBRL Taxonomy Extension Definition Linkbase Document~~

101.LAB*			~~XBRL Taxonomy Extension Label Linkbase Document~~

101.PRE*			~~XBRL Taxonomy Extension Presentation Linkbase Document~~
104*			The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended January 3, 2020, 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 ~~5, 2019~~11, 2020

By:

/s/ ~~GARY E. BISCHOPING JR.~~J. MICHAEL BRUFF

~~Gary E. Bischoping Jr.~~J. Michael Bruff

Senior Vice President, Finance and

Chief Financial Officer

(Duly Authorized Officer and

Principal Financial Officer)



	Three Months Ended
	December 28,			December 29,
(In millions, except per share amounts)	2018			2017
Revenues:
Product	$	400.2		$	365.6
Service	340.8			312.9
Total revenues	741.0			678.5
Cost of revenues:
Product	266.6			223.9
Service	158.3			151.8
Total cost of revenues	424.9			375.7
Gross margin	316.1			302.8
Operating expenses:
Research and development	60.9			55.9
Selling, general and administrative	143.5			125.3
Total operating expenses	204.4			181.2
Operating earnings	111.7			121.6
Interest income	3.9			3.2
Interest expense	(1.2		)	(2.1		)
Other income (expense), net	23.0			(0.2		)
Earnings before taxes	137.4			122.5
Taxes on earnings	33.5			234.7
Net earnings (loss)	103.9			(112.2		)
Less: Net earnings attributable to noncontrolling interests	0.7			0.1
Net earnings (loss) attributable to Varian	$	103.2		$	(112.3	)
Net earnings (loss) per share - basic	$	1.13		$	(1.22	)
Net earnings (loss) per share - diluted	$	1.12		$	(1.22	)
Shares used in the calculation of net earnings per share:
Weighted average shares outstanding - basic	91.0			91.6
Weighted average shares outstanding - diluted	92.0			91.6



	December 28,			September 28,
(In millions, except par values)	2018			2018
Assets
Current assets:
Cash and cash equivalents	$	616.0		$	504.8
Trade and unbilled receivables, net of allowance for doubtful accounts of $42.9 at December 28, 2018, and $41.1 at September 28, 2018	989.5			1,009.9
Inventories	469.6			438.1
Prepaid expenses and other current assets	223.5			233.3
Current assets of discontinued operations	2.3			2.3
Total current assets	2,300.9			2,188.4
Property, plant and equipment, net	270.1			274.6
Goodwill	310.7			293.6
Intangible assets	97.3			101.1
Deferred tax assets	102.5			102.2
Other assets	289.3			292.8
Total assets	$	3,370.8		$	3,252.7
Liabilities and Equity
Current liabilities:
Accounts payable	$	198.1		$	190.3
Accrued liabilities	396.3			419.7
Deferred revenues	738.6			729.7
Total current liabilities	1,333.0			1,339.7
Other long-term liabilities	355.8			324.3
Total liabilities	1,688.8			1,664.0
Commitments and contingencies (Note 8)
Equity:
Varian stockholders' equity:
Preferred stock of $1 par value: 1.0 shares authorized; none issued and outstanding	—			—
Common stock of $1 par value: 189.0 shares authorized; 91.2 and 91.2 shares issued and outstanding at December 28, 2018, and at September 28, 2018, respectively	91.2			91.2
Capital in excess of par value	799.3			778.1
Retained earnings	855.5			780.4
Accumulated other comprehensive loss	(69.0		)	(65.3		)
Total Varian stockholders' equity	1,677.0			1,584.4
Noncontrolling interest	5.0			4.3
Total equity	1,682.0			1,588.7
Total liabilities and equity	$	3,370.8		$	3,252.7



	Three Months Ended December 29, 2017
(In millions)	As previously reported			Adjustments		As Adjusted
Cash used in investing activities	$	(25.8	)	$	0.2	$	(25.6	)
Cash, cash equivalents, and restricted cash at beginning of period	$	716.2		$	2.3	$	718.5
Cash, cash equivalents, and restricted cash at end of period	$	822.6		$	2.5	$	825.1



(In millions)	Oncology Systems			Proton Solutions			Total
Balance at September 28, 2018	$	242.1		$	51.5		$	293.6
Business combination	22.5			—			22.5
Measurement period adjustment to a business combination in prior year	(4.7		)	—			(4.7		)
Foreign currency translation adjustments	—			(0.7		)	(0.7		)
Balance at December 28, 2018	$	259.9		$	50.8		$	310.7



	December 28, 2018							September 28, 2018
(In millions)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Technologies and patents	$	141.6	$	(77.2	)	$	64.4	$	139.6	$	(73.9	)	$	65.7
Customer contracts and supplier relationship	44.4		(20.6		)	23.8		44.9		(19.1		)	25.8
Other	6.1		(5.8		)	0.3		6.6		(5.8		)	0.8
Total intangible with finite lives	192.1		(103.6		)	88.5		191.1		(98.8		)	92.3
In-process research and development with indefinite lives	8.8		—			8.8		8.8		—			8.8
Total intangible assets	$	200.9	$	(103.6	)	$	97.3	$	199.9	$	(98.8	)	$	101.1



	December 28, 2018
(In millions)	Notional Value Sold		Notional Value Purchased
Australian Dollar	$	24.3	$	—
Brazilian Real	10.9		—
British Pound	30.0		0.8
Chinese Yuan	—		3.7
Canadian Dollar	2.7		—
Danish Krone	—		4.8
Euro	194.0		1.8
Indian Rupee	20.3		—
Japanese Yen	72.5		—
Polish Zloty	21.5		—
South African Rand	8.7		—
Swedish Krona	6.9		—
Swiss Franc	—		56.7
Taiwan Dollar	12.9		—
Thai Baht	6.5		—
Totals	$	411.2	$	67.8



(In millions)	Net Unrealized Gains (Losses) Defined Benefit Pension and Post-Retirement Benefit Plans			Net Unrealized Gains (Losses) Cash Flow Hedging Instruments			Cumulative Translation Adjustment			Accumulated Other Comprehensive Loss
Balance at September 29, 2017	$	(44.1	)	$	—		$	(24.7	)	$	(68.8	)
Other comprehensive earnings (loss) before reclassifications	—			(0.3		)	3.1			2.8
Amounts reclassified out of other comprehensive earnings (loss)	0.4			(0.1		)	—			0.3
Tax (expense) benefit	(0.1		)	0.1			—			—
Balance at December 29, 2017	$	(43.8	)	$	(0.3	)	$	(21.6	)	$	(65.7	)



	Three Months Ended December 28, 2018
(In millions)	Oncology Systems		Proton Solutions		Total
Hardware	$	313.6	$	33.6	$	347.2
Software ⁽¹⁾	131.2		—		131.2
Service	257.7		4.9		262.6
Total Revenues	$	702.5	$	38.5	$	741.0



	Three Months Ended December 29, 2017
(In millions)	Oncology Systems		Proton Solutions		Total
Hardware	$	293.1	$	27.3	$	320.4
Software ⁽¹⁾	115.1		—		115.1
Service	241.2		1.8		243.0
Total Revenues	$	649.4	$	29.1	$	678.5




(In millions, except for percentages)	Fair Value		Interest Rate
MPTC Series B-1 Bonds	$	25.6	7.5	%
MPTC Series B-2 Bonds	$	23.6	8.5	%
GPTC securities	$	8.3	8.0	%
APTC securities	$	6.2	8.5	%