VARIAN MEDICAL SYSTEMS, INC. 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 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," 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 theSEC , or other reasons. For this purpose, statements concerning: the impact of the COVID-19 pandemic on our business, including but not limited to, the impact on our workforce, operations, supply chain, demand for our products and services, and our financial results and condition; and the value of our assets; our ability to successfully manage the challenges associated with the COVID-19 pandemic; expected savings from restructuring activities; 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 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; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the failure to obtain the approval of the Company's stockholders; the failure to obtain certain required regulatory approvals or the failure to satisfy any of the other closing conditions to the completion of the Merger; risks related to disruption of management's attention from the Company's ongoing business operations due to the Merger; the effect of the announcement of the Merger on the ability of the Company to retain and hire key personnel and maintain relationships with its customers, suppliers, distributors and others with whom it does business, or on its operating results and business generally; the ability to meet expectations regarding the timing and completion of the Merger; 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 the 2019 Annual Report, as well as the information contained under Part I, Item 1A "Risk Factors" of the 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 theSEC . Overview We,Varian Medical Systems, Inc. , are aDelaware corporation originally incorporated in 1948 asVarian 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 inIndia andSri Lanka ; provide cancer care professional services to healthcare providers worldwide; and are a supplier of a broad portfolio of interventional solutions. Our vision is a world without fear of cancer. Our mission is to combine the ingenuity of people with the power of data and technology to achieve new victories against cancer. Our long-term growth and value creation strategy is to transform our company from the global leader in radiation therapy (also referred to as radiotherapy) to the global leader in multi-disciplinary, integrated cancer care solutions that leverages our clinical experience and strengths in technology development and new product innovation. To achieve these long-term objectives, we are focused on driving growth through strengthening our leadership in radiation therapy, extending our global footprint and expanding into new markets and therapies. We have two reportable operating segments: Oncology Systems and Proton Solutions. Our Interventional Solutions business is reflected in the Other category because it does not meet the criteria for a reportable operating segment. The operating segments were determined based on how our Chief Executive Officer, who is our Chief Operating Decision Maker ("CODM"), views and 36 -------------------------------------------------------------------------------- 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. TheAmericas region includesNorth America (primarilyUnited States andCanada ) andLatin America . The EMEA region includesEurope ,Russia , theMiddle East ,India andAfrica . The APAC region primarily includes East andSoutheast Asia andAustralia . Proposed Acquisition by Siemens Healthineers OnAugust 2, 2020 , the Company,Siemens Healthineers Holding I GmbH , a company organized under the laws ofGermany ("Siemens Healthineers"),Falcon Sub Inc. , aDelaware corporation and a direct wholly-owned subsidiary of Siemens Healthineers ("Merger Sub"), and, with respect to certain provisions,Siemens Medical Solutions USA, Inc. , aDelaware corporation, entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Siemens Healthineers. Under the terms of the Merger Agreement, which has been unanimously approved by the Company's Board of Directors, Siemens Healthineers will acquire all outstanding shares of the Company for$177.50 per share in cash, in a transaction valued at approximately$16.4 billion on a fully diluted basis. The Merger is expected to close in the first half of calendar year 2021, subject to approval by the Company's stockholders, receipt of specified regulatory approvals and other customary closing conditions. Under the terms of the Merger Agreement, if the Merger Agreement is terminated by the Company or Siemens Healthineers under certain specified circumstances, a termination fee of$450 million in cash may be payable by the Company to Siemens Healthineers. The Merger Agreement also provides that a reverse termination fee of$450 million or$925 million in cash may be payable by Siemens Healthineers to the Company if the Merger Agreement is terminated by the Company or Siemens Healthineers under certain specified circumstances.
COVID-19 Impact
The COVID-19 pandemic has impacted our day-to-day operations and the operations of the vast majority of our customers, suppliers and distributors globally. The COVID-19 response by hospitals and healthcare professionals has placed a severe strain on healthcare systems. Many of our hospital customers have prioritized their efforts on their COVID-19 response and have diverted focus and resources away from their normal operations and restricted access to their sites in efforts to contain the spread of the virus. The global nature of the pandemic has resulted in authorities implementing numerous measures designed to contain the virus, including travel bans and restrictions, border closures, quarantines, shelter-in-place orders, business limitations and shutdowns. The prioritization of COVID-19 treatment and containment have presented us with unique operational challenges, including delays in capital equipment purchasing decisions by customers, obstacles to our ability to market, deliver, install and service our products, and disruptions and delays in our logistics and supply chain.
Revenues and Orders Trends
The impact of COVID-19 on our operations has varied by region, with mixed impacts based on the geographical spread, stage of containment, and recurrence of the pandemic in each region. Our operations inChina were impacted first, beginning early in our second quarter of fiscal year 2020, followed by other parts of ourAsia Pacific geography, with our EMEA andAmericas geographies experiencing the initial impacts of the pandemic late in our second quarter. Our second quarter revenues were trending higher than the comparable second quarter fiscal 2019 period, untilMarch 2020 when we started to experience a decline in hardware product revenues in our EMEA andAmericas geographies due to the spread of COVID-19. These trends in declining revenues continued across all of our geographies, both in comparison to our second quarter of fiscal year 2020 and in comparison to our third quarter of fiscal 2019, with the exception of revenues from theChina region, which increased with respect to both comparison periods, driven by recovery inChina , which began at the end of our second quarter of fiscal year 2020. We have experienced adverse impacts to revenues for both our hardware and software products, primarily resulting from customer capital constraints, site access challenges and delays to pre-installation activities. We have experienced minimal impact to our services revenues and expect that our services revenues will continue to be reasonably insulated from COVID-19 given the long-term nature of the underlying contracts and our current installed base; however, installation and commissioning service revenues linked to hardware installation have trended downward, consistent with delays to hardware installations. If treatment volumes decline materially and impact hospitals' operating costs, it may impact our service contract renewals, pricing and service revenues. We have experienced similar negative trends in orders as we have in revenues. We began to experience delays in orders, primarily for capital equipment, during our second quarter of fiscal year 2020. Orders continued to decline across most regions during our third fiscal quarter, with our EMEA geography experiencing the most severe negative impact to orders and ourAmericas geography also experiencing significant negative impacts. However, our APAC geography experienced an increase in 37 --------------------------------------------------------------------------------
orders both in comparison to our second quarter of fiscal 2020, driven by
recovery in
We are not able to accurately predict the full impact that COVID-19 will have on our future results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and the effectiveness of the containment measures being deployed in different geographies. However, we believe that lockdowns restricting access to customer sites and vault construction delays will continue to have an adverse impact on our revenues during the remainder of our fiscal year 2020 and into our fiscal year 2021. In addition, we believe that customer financial constraints, foreign currency headwinds, and uncertainty around the pandemic may lead our customers to defer capital equipment purchases during the remainder of our fiscal year 2020 and into our fiscal year 2021, which will have a corresponding adverse impact on our revenues and orders. However, we believe that we will experience sequential improvement in both our revenues and orders beginning in our fiscal fourth quarter 2020 and that COVID-19 impacts to our operations will continue to decrease over the course of our fiscal year 2021. In addition, we believe that our existing orders backlog should soften the impact of order delays on our revenues during the remainder of our fiscal year 2020 and into our fiscal year 2021. Based on regional machine utilization trends that we are closely monitoring, volume levels appear to be returning to historical averages in certain regions that have experienced recovery from the pandemic, which should have a corresponding positive impact on hospital operating budgets. We expect to continue to experience some logistical, manufacturing and shipment delays, and some increased logistics-related costs for so long as COVID-19 related travel and customer site access restrictions remain in place.
General Increase in Risks
While we believe that orders trends and our revenues will return to historical norms over time as the pandemic is controlled, if the COVID-19 pandemic proliferates for an extended period, capital expenditure delays could be prolonged and have a material impact on revenues and orders beyond the second half of our fiscal year 2020. Capital markets and worldwide economies have been significantly impacted by the COVID-19 pandemic, and onJune 8, 2020 , theNational Bureau of Economic Research announced thatthe United States was in recession. An extended economic recession inthe United States or elsewhere could have a material adverse effect on our business over the longer term if hospitals reduce or curtail capital and overall spending. Some of our hospital customers may decide to no longer purchase our products or services, and certain of our customers, suppliers and distributors may become insolvent.
For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.
Our Response
Since the outbreak of the pandemic, our focus has been on keeping our employees safe, supporting our customers and their patients, and ensuring supply chain stability and business continuity.
•Our employees are crucial to our mission, and we have taken the following actions to ensure their safety and well-being.
•We have instituted work-from-home policies and workplace safety measures and protocols, including strict site access guidelines and ensuring the availability of personal protective equipment. To support the health and well-being of our employees, customers, distributors, partners and communities, as ofAugust 3, 2020 , approximately 53% of our employees are working remotely, whereas typically only 15% of our employees, such as field service employees, work remotely.
•We have implemented new programs aimed at educating our employees on how to operate in virtual, social-distancing environments.
•During our second quarter of fiscal 2020, we closed our manufacturing facility inBeijing for approximately four weeks and placed ourU.S. manufacturing and logistics facilities, including ourPalo Alto manufacturing facility, in critical operations mode for approximately three weeks. SinceMay 2020 , all of our manufacturing facilities have been fully operational. We have implemented stringent safety protocols at all of our manufacturing facilities, including rigorous health and safety training for all manufacturing employees and the institution of new workplace spacing requirements.
•Our customers are facing unique challenges, and we are taking actions to support their priorities. Among other efforts, we are taking actions to ensure that all of our customers can continue to deliver radiation therapy, a non-elective
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procedure, to their patients, and we are actively deploying remote tools across
our training, installation and field service teams to ensure continued access to
our products and solutions.
•Despite certain logistical and manufacturing challenges, to date, we have been
successful in our efforts to secure and stabilize our global supply chain, and
we are actively coordinating with our suppliers and distributors to maintain
adequate inventory to fulfill our customer commitments.
•We have a solid balance sheet with approximately $1.4 billion in accessible
liquidity, including approximately $769 million in cash and cash equivalents and
approximately $600 million available under our $1.2 billion revolving credit
facility. To date, we have not experienced a significant decline in customer
credit quality or a significant increase in requests for changes or extension of
payment terms as a result of COVID-19, although we will continue to closely
monitor these metrics going forward. While our capital allocation priorities
remain unchanged, as a precautionary measure we have paused our share buybacks
to preserve liquidity and are focused on reducing costs to bolster our financial
flexibility in light of the broad range of potential outcomes over the
foreseeable future. In addition, in our third quarter of fiscal year 2020, we
implemented several cost cutting measures designed to preserve liquidity,
including a reduction in force that will impact approximately 3% of our work
force, a temporary reduction in certain employee benefits, and requiring our
employees to take mandatory paid personal leave days during a set week in each
of our third quarter and fourth quarters of fiscal year 2020 and in our first
quarter of our fiscal year 2021.
Despite the challenges that we are facing due to the COVID-19 pandemic, we
remain confident that the actions that we are taking to manage such challenges,
combined with our strong liquidity, position us well to navigate through the
current economic environment and continue to execute on our long-term value
creation strategy.
Highlights for the Three Months Ended July 3, 2020
Financial Summary
Three Months Ended
July 3, June 28,
(In millions, except per share amounts) 2020 2019 Change
Gross Orders $ 682.2 $ 891.6 (23) %
Oncology Systems 665.4 778.3 (14) %
Proton Solutions 9.7 111.3 (91) %
Other 7.1 2.0 255 %
Backlog $ 3,213.6 $ 3,118.4 3 %
Revenues $ 694.3 $ 825.8 (16) %
Oncology Systems 654.5 792.9 (17) %
Proton Solutions 32.7 30.9 6 %
Other 7.1 2.0 255 %
Gross margin as a percentage of revenues 43.0 % 42.5 % 50 bps
Effective tax rate 28.2 % 50.9 %
Net earnings attributable to Varian $ 61.2 $ 29.4 109 %
Diluted net earnings per share $ 0.67 $ 0.32 110 %
Net cash provided by operating activities
Number of shares repurchased - 0.4 n/m
Total cost of shares repurchased $ - $ 48.6 n/m n/m - not meaningful Tariff Measures. BetweenJuly 2018 andMay 2019 , theTrump Administration imposed a series of tariffs, ranging from 5% to 25%, on numerous products imported intothe United States fromChina , including Varian's radiotherapy systems manufactured inChina and certain components used in our manufacturing and service activities. In July andAugust 2018 ,China retaliated against theU.S. tariffs by imposing its own series of tariffs, ranging from 10% to 25%, on certain products imported intoChina fromthe United States , including Varian's radiotherapy systems and certain manufacturing and service components. 39 -------------------------------------------------------------------------------- We participated in theOffice of the U.S. Trade Representative ("USTR") process to seek product-specific exclusions from theU.S. tariffs on Chinese imports. To date, USTR has granted tariff exclusions for four products: certain radiotherapy systems manufactured inChina , as well as three key components of the radiation therapy systems that we manufacture inthe United States : multi-leaf collimators, certain printed circuit board assemblies and tungsten shielding. We submitted an additionalU.S. exclusion request inSeptember 2019 , in relation to a manufacturing component, which was ultimately not granted. In 2019, USTR granted a one-year extension to our exclusion for radiotherapy systems throughDecember 28, 2020 . An additional component exclusion extension, for multi-leaf collimators, has been granted throughDecember 31, 2020 and two additional renewal applications for components are pending, one of which received objections. In June andJuly 2019 , we submitted formal requests to the Chinese government for exclusions from the Chinese retaliatory tariffs for manufacturing inputs, service parts and radiotherapy systems imported intoChina fromthe United States . InSeptember 2019 , the Chinese government granted a tariff exclusion for medical linear accelerators, including our radiotherapy systems, with retroactive effect and valid throughSeptember 16, 2020 . Varian is in the process of requesting an extension to that exclusion. The otherChina exclusion requests are still pending. In the aggregate, these tariffs will be referred to as "U.S. /China tariffs." " Impairment Charges. In the three months endedJuly 3, 2020 , the Company'sMaryland Proton Treatment Center ("MPTC") Series B-1 and B-2 bonds ( collectively "MPTC" bonds) and theAlabama Proton Treatment Center ("APTC") securities were determined to be other-than-temporarily impaired due to a decrease in trade prices of comparable bonds. We believe that it is more likely than not that we will not recover the losses before these bonds are sold. In the three months endedJuly 3, 2020 , we recorded impairment charges of$8.3 million on our MPTC bonds and$0.9 million on our APTC securities. The impairment charges are included in restructuring and impairment charges in the Condensed Consolidated Statements of Earnings. See Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed Consolidated Financial Statements for further information. Restructuring Charges. In the three months endedJuly 3, 2020 , we implemented a global workforce reduction, as part of our plan to enhance operational performance through productivity initiatives, in response to the impact of the COVID-19 pandemic. We incurred$13.9 million in restructuring charges, which primarily consisted of employee-related expenses, during the three months endedJuly 3, 2020 . As ofJuly 3, 2020 , we expect to incur additional restructuring charges under this plan; however, these costs are not expected to be material. We expect to substantially complete this restructuring program by the end of fiscal year 2020. The restructuring charges are included in restructuring and impairment charges in the Condensed Consolidated Statements of Earnings. Currency Fluctuation. In order to assist with the assessment of how our underlying businesses performed, we compare the percentage change in revenues and Oncology Systems gross orders from one period to another, excluding the effect of foreign currency fluctuations (i.e., using constant currency exchange rates). To present this information on a constant currency basis, we convert current period revenues and gross orders in currencies other thanU.S. Dollars intoU.S. Dollars using the comparable prior period's average exchange rate. Percentage changes in revenues and gross orders are not adjusted for constant currency unless indicated. Currency fluctuations had approximately a$7.1 million and$5.6 million unfavorable impact for total revenues and Oncology Systems gross orders, respectively, for the three months endedJuly 3, 2020 , compared to the year-ago period. We expect that fluctuations of non-U.S. Dollar currencies against theU.S. Dollar may continue to cause variability in our financial performance. Oncology Systems. Our Oncology Systems business designs, manufactures, sells and services hardware and software products for treating cancer with conventional radiotherapy, and advanced treatments such as fixed field intensity-modulated radiation therapy ("IMRT"), image-guided radiation therapy ("IGRT"), volumetric modulated arc therapy ("VMAT"), stereotactic radiosurgery, stereotactic body radiotherapy and brachytherapy as well as associated quality assurance equipment. Our software solutions include treatment planning, informatics, clinical knowledge exchange, patient care management, practice management and decision support for comprehensive cancer clinics, radiotherapy centers and medical oncology practices. We offer services ranging from hardware phone support, break/fix repair of linear accelerators, obsolescence protection of hardware, software support, software upgrades, hosting as a service, as well as clinical consulting services. We have expanded our services offerings to include clinical practice services that assist within the clinical workflow. These services focus on decision support and/or cancer care knowledge augmentation aimed to facilitate improved accessibility and affordability to care while maintaining a fundamental level of clinical quality. Further, we operate 12 multi-disciplinary cancer centers and one specialty hospital inIndia and one multi-disciplinary cancer center inSri 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. 40 -------------------------------------------------------------------------------- Our primary goal in the Oncology Systems business is to promote the adoption of more advanced and effective cancer treatments. In our view, the fundamental market forces that drive long-term growth in our Oncology Systems business are the rise in cancer cases; technology advances and product developments that are leading to improvements in patient care and outcomes; customer demand for the more advanced and effective cancer treatments that we enable; competitive conditions among hospitals and clinics to offer such advanced treatments; continued improvement in safety and cost efficiency in delivering radiation therapy; and underserved medical needs outside ofthe United States . Approximately half of Oncology Systems gross orders and revenues come from international markets, within which certain emerging markets typically can have lower gross margins and longer installation cycles since many of these purchases are for new sites where treatment vaults need to be constructed. We have also been investing a higher portion of our Oncology Systems research and development budget in software and software-related products, which have a higher gross margin than our hardware products. Subject to the potential impact of COVID-19, we believe international markets will be our fastest growing markets. The radiation oncology market inNorth America is largely characterized by the replacements of older machines, with periodic increases in demand driven by the introduction of new technologies. Reimbursement rates inthe 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 inthe United States could be impacted as customers' decision-making processes are complicated by the uncertainties surrounding reimbursement rates and new models for radiotherapy and radiosurgery, such as the alternative payment model pilot program for radiation oncology that was proposed by theCenters for Medicare and Medicaid Services inJuly 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 and could impact transaction size, timing and purchasing processes, and also contribute to increased quarterly business variability. Global demand for oncology equipment varies by geography and size of cancer burden. Overall new cancer cases are forecasted to increase from approximately 18 million in 2018 to 25 million in 2030. Markets such asNorth America , developedEurope andJapan are primarily replacement markets with growth consistent with the aging cycle of the installed base and the aging of populations. Emerging markets such asBrazil ,Russia ,India ,China andAfrica have large gaps in access to care and are expected to grow faster to address this gap. Variations in spend on oncology equipment will occur over time based on economic factors in individual countries. Proton Solutions. Our Proton Solutions business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, another form of external beam therapy using proton beams, for the treatment of cancer. Proton therapy is a preferred option for treating certain cancers, particularly tumors near critical structures such as the base of the skull, spine, optic nerve and most pediatric cancers. Although proton therapy has been in clinical use for more than four decades, it has not been widely deployed due to the high capital cost. We are investing resources to drive growth and innovation in this business. Proton therapy facilities are large-scale construction projects that have long lead times and involve significant customer investment and often complex project financing. Consequently, this business is vulnerable to general economic and market conditions, as well as reimbursement rates. Customer decision-making cycles tend to be very long, and orders generally involve many contingencies. Credit markets for proton therapy projects have improved in recent years but the funding environment for large capital projects, such as proton therapy projects, is still challenging and volatile. Our current focus is bringing our expertise in traditional radiation therapy to proton therapy to improve its clinical utility, reduce its cost of treatment per patient and drive innovation, so that it is more widely accepted and deployed. As ofJuly 3, 2020 , we had a carrying value of$124.1 million of notes receivable, including accrued interest, senior secured debt, available-for-sale securities, and loans outstanding to Proton Solutions customers. See Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed Consolidated Financial Statements for further information. Other. The Other category includes our Interventional Solutions business that offers products for interventional oncology 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 inthe United States ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets, 41 -------------------------------------------------------------------------------- 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 nine months endedJuly 3, 2020 , there were no significant changes, except as noted below to our critical accounting policies and estimates as described in the financial statements contained in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report.Goodwill , Intangible Assets and Impairment AssessmentGoodwill represents the excess of the purchase price in a business over the fair value of net tangible and intangible assets acquired. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate discount weighted-average cost of capital ("WACC"). Each period we evaluate the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization.Goodwill is allocated to reporting units expected to benefit from the business combination. We evaluate our reporting units when changes in our operating structure occur, and if necessary, reassign goodwill using a relative fair value allocation approach.Goodwill is tested for impairment at the reporting unit level on an annual basis or whenever events or changes in circumstances indicate its carrying value may not be recoverable. We can opt to perform a qualitative assessment to test a reporting unit's goodwill for impairment or we can directly perform a quantitative assessment. Various factors are considered in the qualitative assessment, including macroeconomic conditions, industry and market considerations, financial performance and other relevant events affecting the reporting unit. Based on our qualitative assessment, if we determine that the fair value of a reporting unit is more likely than not (i.e., a likelihood of more than 50 percent) to be less than its carrying amount, the quantitative assessment will be performed. The quantitative assessment compares the fair value of a reporting unit against its carrying amount, including the goodwill allocated to each reporting unit. We determine the fair value of our reporting units based on a combination of income and market valuation approaches. The income approach is based on the present value of estimated future cash flows that the reporting unit is expected to generate, and the market approach is based on a market multiple calculated for each reporting unit based on market data of other companies engaged in similar business. Any excess of the reporting unit's carrying value over its fair value will be recorded as an impairment loss. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, operating margins and working capital requirements, WACC, future economic and market conditions, estimation of the long-term rate of growth for our business and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are inherently uncertain. Actual future results related to assumed variables could differ from these estimates. In addition, we make certain judgments and assumptions in allocating assets and liabilities to determine the carrying values for each reporting unit. As ofJuly 3, 2020 , we have two reporting units with goodwill: Oncology Systems and Interventional Solutions, with balances of$440.6 million and$166.8 million , respectively. Due to certain indicators identified related to our Interventional Solutions reporting unit in the second quarter of fiscal year 2020, including a significant decrease in near term revenue projections due to COVID-19, we identified a triggering event and performed an interim impairment test on our$164.3 million of goodwill in our Interventional Solutions reporting unit, within the Other reportable operating segment. The fair value of the Interventional Solutions' reporting unit was in excess of its carrying value by approximately$20 million , or 7%. Management believes the methodology and assumptions used to calculate the fair value to be reasonable as ofJuly 3, 2020 . However, the Interventional Solutions reporting unit could be at risk for a future goodwill impairment if there are adjustments to certain assumptions used in the fair value calculation, including revenue growth rates, operating margins, WACC and/or working capital requirements. Given the uncertain impact of COVID-19 and/or other market factors on our business, our cash flow projections for this business could decrease in the future, which could lead to an impairment of goodwill. In the third quarter of fiscal year 2019, we recorded a goodwill impairment charge of$50.5 million for the full value of the Proton Solutions reporting unit goodwill. See Note 5, "Goodwill and Intangible Assets," of the Notes to the Condensed Consolidated Financial Statements for more information. 42 -------------------------------------------------------------------------------- Results of Operations Fiscal Year Our fiscal year is the 52- or 53-week period ending on the Friday nearestSeptember 30 . Fiscal year 2020 is the 53-week period endingOctober 2, 2020 , and fiscal year 2019 was the 52-week period that endedSeptember 27, 2019 . The fiscal quarters endedJuly 3, 2020 andJune 28, 2019 were both 13-week periods. Discussion of Results of Operations for the Three and Nine Months EndedJuly 3, 2020 Compared to the Three and Nine Months EndedJune 28, 2019 Total Revenues Revenues by sales classification Three Months Ended Nine Months Ended July 3, June 28, Percent July 3, June 28, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Product$ 320.2 $ 461.3 (31) %$ 1,148.5 $ 1,292.0 (11) % Service 374.1 364.5 3 % 1,169.2 1,054.2 11 % Total Revenues$ 694.3 $ 825.8 (16) %$ 2,317.7 $ 2,346.2 (1) % Product as a percentage of total revenues 46 % 56 % 50 % 55 % Service as a percentage of total revenues 54 % 44 % 50 % 45 % Total product revenues decreased in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, mostly driven by a sharp decline in hardware and software product revenues from Oncology Systems due to COVID-19 and, to a lesser extent, a decrease in product revenues from Proton Solutions, partially offset by an increase in revenues from the Other category. Total service revenues increased in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, primarily due to an increase in service revenues from Oncology Systems, which included increases of approximately$11 million and$46 million , respectively, in service revenues from CTSI, and, increases in service revenues from Proton Solutions of$4.2 million and$9.8 million , respectively. The nine months endedJuly 3, 2020 , included approximately$19 million in additional service revenues due to the first quarter of fiscal year 2020 being a 14-week period. Revenues by geographical region Three Months Ended Nine Months Ended July 3, June 28, Percent Constant July 3, June 28, Percent Constant (Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency Americas$ 337.5 $ 401.2 (16) % (16) %$ 1,127.6 $ 1,122.9 - % 1 % EMEA 217.2 271.3 (20) % (18) % 741.0 783.8 (5) % (3) % APAC 139.6 153.3 (9) % (9) % 449.1 439.5 2 % 2 % Total Revenues$ 694.3 $ 825.8 (16) % (15) %$ 2,317.7 $ 2,346.2 (1) % - % North America (1)$ 324.2 $ 378.7 (14) % (14) %$ 1,064.9 $ 1,050.8 1 % 1 % International 370.1 447.1 (17) % (16) % 1,252.8 1,295.4 (3) % (2) % Total Revenues$ 694.3 $ 825.8 (16) % (15) %$ 2,317.7 $ 2,346.2 (1) % - % North America as a percentage of total revenues 47 % 45 % 46 % 45 % International as a percentage of total revenues 53 % 55 % 54 % 55 %
(1)
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Revenues across all regions were negatively impacted by a sharp decline in
hardware and software product revenues from Oncology Systems in the third
quarter of fiscal year 2020 due to the COVID-19 pandemic.
The Americas region revenues decreased in the three months ended July 3, 2020 ,
compared to the year-ago period, primarily due to the decrease in revenues from
Oncology Systems, partially offset by an increase in revenues from the Other
category. The Americas region revenues were flat in the nine months ended
July 3, 2020 , compared to the year-ago period, primarily due to an increase in
revenues from the Other category, mostly offset by decreases in revenues from
Oncology Systems and Proton Solutions.
The EMEA region revenues decreased in the three and nine months ended July 3,
2020 , compared to the year-ago periods, primarily due to the decrease in
revenues from Oncology Systems and, to a lesser extent, a decrease in revenues
from Proton Solutions. The revenues from Oncology Systems in the three and nine
months ended July 3, 2020 , compared to the year-ago periods, include increases
of approximately $8 million and $35 million , respectively, in service revenues
from CTSI.
The APAC region revenues decreased in the three months ended July 3, 2020 , as
compared to the prior period, primarily due to the decrease in revenues from
Oncology Systems, partially offset by an increase in revenues from Proton
Solutions. The APAC region revenues increased in the nine months ended July 3,
2020 , as compared to the prior period, primarily due to an increase in revenues
from the Other Category, partially offset by a decrease in revenues from
Oncology Systems.
Oncology Systems Revenues
Revenues by sales
classification Three Months Ended Nine Months Ended
July 3, June 28, Percent Constant July 3, June 28, Percent Constant
(Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency
Product $ 290.0 $ 433.8 (33) % (33) % $ 1,053.0 $ 1,203.0 (12) % (12) %
Service 364.5 359.1 1 % 3 % 1,144.4 1,039.2 10 % 11 %
Total Oncology Systems
Revenues $ 654.5 $ 792.9 (17) % (17) % $ 2,197.4 $ 2,242.2 (2) % (1) %
Product as a percentage
of total Oncology
Systems revenues 44 % 55 % 48 % 54 %
Service as a percentage
of total Oncology
Systems revenues 56 % 45 % 52 % 46 %
Oncology Systems
revenues as a percentage
of total revenues 94 % 96 % 95 % 96 %
Oncology Systems product revenues decreased in the three and nine months ended
July 3, 2020 , compared to the year-ago periods, driven by a sharp decline in
hardware and software product revenues due to COVID-19 related delays, including
site access restrictions and delays to customer installation readiness in the
third quarter of fiscal year 2020.
Oncology Systems service revenues, which include performance obligations for
installation, training and warranty, increased in the three and nine months
ended July 3, 2020 , compared to the year-ago periods, primarily due to the
ongoing customer adoption of service contracts as the warranty periods on our
systems expire and an increase in the number of customers as the installed base
of our products continues to grow. Oncology Systems service revenues were
negatively impacted in the third quarter of fiscal year 2020 by a decline in
installation and commissioning services due to the COVID-19 pandemic. Oncology
Systems service revenues also include increases of approximately $11 million and
$46 million in service revenues from CTSI in the three and nine months ended
July 3, 2020 . The nine months ended July 3, 2020 include approximately $19
million in additional service revenues due to the first quarter of fiscal year
2020 being a 14-week period.
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Revenues by
geographical region Three Months Ended Nine Months Ended
July 3, June 28, Percent Constant July 3, June 28, Percent Constant
(Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency
Americas $ 318.1 $ 385.6 (18) % (17) % $ 1,066.7 $ 1,073.5 (1) % - %
EMEA 204.1 256.4 (20) % (18) % 704.8 736.2 (4) % (2) %
APAC 132.3 150.9 (12) % (12) % 425.9 432.5 (2) % (1) %
Total Oncology Systems
Revenues $ 654.5 $ 792.9 (17) % (17) % $ 2,197.4 $ 2,242.2 (2) % (1) %
North America $ 304.8 $ 363.1 (16) % (16) % $ 1,004.0 $ 1,001.4 - % - %
International 349.7 429.8 (19) % (17) % 1,193.4 1,240.8 (4) % (2) %
Total Oncology Systems
Revenues $ 654.5 $ 792.9 (17) % (17) % $ 2,197.4 $ 2,242.2 (2) % (1) %
North America as a
percentage of total
Oncology Systems
revenues 47 % 46 % 46 % 45 %
International as a
percentage of total
Oncology Systems
revenues 53 % 54 % 54 % 55 %
Oncology Systems revenues decreased across all regions in the three and nine
months ended July 3, 2020 , compared to the year-ago periods, driven by a sharp
decline in hardware and software product revenues due to COVID-19 related
delays, including site access restrictions and delays to customer installation
readiness in the third quarter of fiscal year 2020. Service revenues were also
negatively impacted in the third quarter of fiscal year 2020 by a decline in
installation and commissioning services due to the COVID-19 pandemic. EMEA
Oncology Systems revenues in the three and nine months ended July 3, 2020 ,
compared to the year-ago periods, include increases of approximately $8 million
and $35 million in service revenues from CTSI. In the three and nine months
ended June 28, 2019 , APAC revenues from hardware products were negatively
impacted by approximately $10 million and $27 million from the U.S. /China
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 the impact of COVID-19, 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 Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Product $ 23.1 $ 25.5 (9) % $ 57.8 $ 87.0 (34) %
Service 9.6 5.4 78 % 24.8 15.0 65 %
Total Proton Solutions Revenues $ 32.7 $ 30.9 6 % $ 82.6 $ 102.0 (19) %
Proton Solutions revenues as a
percentage of total revenues 5 % 4 % 4 % 4 %
Proton Solutions revenues increased in the three months ended July 3, 2020 ,
compared to the year-ago period, primarily due to an increase in service
revenues resulting from the increase in proton centers transitioned to service
contracts. Proton Solutions revenues decreased in the nine months ended July 3,
2020 , compared to the year-ago period, primarily due to the timing of project
completion and stage of progress and fewer orders in fiscal year 2018 and the
first half of fiscal year 2019, partially offset by an increase in service
revenues resulting from the increase in proton centers transitioned to service
contracts. The estimated impact of the COVID-19 pandemic on Proton Solution
revenues was not material in the three and nine months ended July 3, 2020 .
45
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Other Revenues
Revenues from the Other category increased $5.1 million and $35.7 million for
the three and nine months ended July 3, 2020 . Revenues from the Other category
are allocated to product revenues and are related to our Interventional
Solutions business. The estimated impact of the COVID-19 pandemic on
Interventional Solutions revenues was not material in the three and nine months
ended July 3, 2020 .
Gross Margin
Dollars by segment Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Oncology Systems $ 291.2 $ 346.3 (16) % $ 972.8 $ 978.5 (1) %
Proton Solutions 2.7 5.0 (43) % 2.3 7.1 (67) %
Other 4.6 0.1 n/m 27.4 0.1 n/m
Gross margin $ 298.5 $ 351.4 (15) % $ 1,002.5 $ 985.7 2 %
Percentage by segment
Oncology Systems 44.5 % 43.7 % 44.3 % 43.7 %
Proton Solutions 8.4 % 15.6 % 2.8 % 6.9 %
Other 63.1 % 5.3 % 72.5 % 5.3 %
Total Company 43.0 % 42.5 % 43.3 % 42.0 %
Percentage by sales classification
Total Company - Product 29.7 % 35.4 % 33.8 % 33.5 %
Total Company - Service 54.4 % 51.6 % 52.5 % 52.4 %
Oncology Systems - Product 32.5 % 37.1 % 35.3 % 36.0 %
Oncology Systems - Service 54.1 % 51.7 % 52.6 % 52.5 %
n/m - not meaningful
Oncology Systems product gross margin percentage decreased in the three and nine
months ended July 3, 2020 , compared to the year-ago periods, primarily due to
manufacturing overhead under absorption due to the COVID-19 pandemic, as well as
a geographical mix shift to emerging markets. In the three months ended June 28,
2019 , the U.S. /China tariffs had a negative impact of approximately $15 million ,
comprised of a negative impact of approximately $10 million in revenues and
approximately $5 million in cost of revenues. In the nine months ended June 28,
2019 , the U.S. /China tariffs had a negative impact of approximately $39 million ,
comprised of a negative impact of approximately $27 million in revenues and
approximately $12 million in cost of revenues.
Oncology Systems service gross margin percentage increased in the three months
and nine months ended July 3, 2020 , compared to the year-ago periods, primarily
due to lower variable service costs due to COVID-19 in the third quarter of
fiscal year 2020, partially offset by an increase in service revenues from CTSI,
which have a lower margin than our traditional services.
Proton Solutions gross margin percentage decreased in the three and nine months
ended July 3, 2020 , compared to the year-ago periods, primarily due to the mix
of projects and increased project costs, partially offset by an increase in
service revenues.
Other category gross margin percentage increased in the three and nine months
ended July 3, 2020 , compared to the year-ago periods, primarily due to the
amortization of the inventory step-up after the acquisition of Endocare and
Alicon in the prior period.
46
--------------------------------------------------------------------------------Research and Development
Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Research and development $ 65.3 $ 62.1 5 % $ 203.4 $ 182.4 11 %
Research and development as a
percentage of total revenues 9 % 8 % 9 % 8 %
Research and development expenses increased $3.2 million and $21.0 million in
the three and nine months ended July 3, 2020 , compared to the year-ago periods,
primarily due to an increase in investments in software, Flash technology,
adaptive radiotherapy and other strategic programs.
Selling, General and Administrative, Impairment and Restructuring Charges, and
Acquisition-related expenses
Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Selling, general and administrative $ 145.0 $ 153.6 (6) % $ 497.3 $ 441.5 13 %
Impairment and restructuring charges $ 23.1 $ 50.6 (54) % $ 63.6 $ 50.6 26 %
Acquisition-related expenses and in-process
research and development $ 5.2 $ 31.2 (83) % $ 13.4 $ 35.8 (62) %
Selling, general and administrative as a
percentage of total revenues 21 % 19 % 21 % 19 %
Impairment and restructuring charges as a
percentage of total revenues 3 % 6 % 3 % 2 %
Acquisition-related expenses and in-process
research and development as a percentage of
total revenues 1 % 4 % 1 % 2 %
n/m - not meaningful
Selling, general and administrative expenses decreased $8.6 million in the three
months ended July 3, 2020 , compared to the year-ago period, primarily due to
cost-saving measures that were put in place in the third quarter of fiscal year
2020 due to the COVID-19 pandemic. Selling, general and administrative expenses
increased $55.8 million in the nine months ended July 3, 2020 , compared to the
year-ago period, primarily due to increases in 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, partially offset by cost-saving measures that were put in
place in the third quarter of fiscal year 2020 due to the COVID-19 pandemic.
Selling, general and administrative expenses in the three and nine months ended
July 3, 2020 , also includes increases of $3.4 million and $12.7 million ,
respectively, due to additional intangible asset amortization primarily related
to our fiscal year 2019 acquisitions.
Impairment and restructuring charges in the three months ended July 3, 2020 ,
were due to $13.9 million in restructuring charges and a $9.2 million impairment
to our available-for-sale investments. In the three months ended July 3, 2020 ,
the Company recorded an $8.3 million impairment on its MPTC bonds, and a $0.9
million impairment on its APTC bonds. Impairment charges in the nine months
ended July 3, 2020 also includes a $40.5 million impairment to the CPTC Term
Loan. As a result of the COVID-19 pandemic, during March and April 2020 , CPTC
suffered material negative impacts to its operating plan, including declines in
current and projected patient volume and delays in partnership with a
significant clinical partner. Therefore, we concluded it was no longer probable
that we will collect the amounts owed under the CPTC Term Loan when due. See
Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed
Consolidated Financial Statements for further information. In the three months
ended June 28, 2019 , we recorded a $50.5 million goodwill impairment charge to
the Proton Solutions reporting unit.
Acquisition-related and in-process research and development expenses decreased
in the three and nine months ended July 3, 2020 , compared to the year-ago
periods, primarily due to a $20.8 million charge in the third quarter of fiscal
year 2019
47
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associated with a write-off of in-process R&D related to an acquisition and
increased costs in the prior year due to the CTSI, Endocare and Alicon
acquisitions.
Other Income, Net
Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Interest income $ 2.7 $ 3.7 (29) % $ 8.8 $ 11.6 (25) %
Interest expense $ (2.9) $ (1.8) 64 % $ (11.9) $ (4.0) 195 %
Other income, net $ 25.1 $ 4.2 504 % $ 28.6 $ 27.4 5 %
Interest income decreased in the three and nine months ended July 3, 2020 ,
compared to the year-ago periods, 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 and nine months ended July 3, 2020 ,
compared to the year-ago periods, primarily due to an increase in borrowings on
our Credit Facility. Other income, net, increased in the three and nine months
ended July 3, 2020 , compared to the year-ago periods, primarily due to $25.7
million in gains on our equity investments in the third quarter of fiscal year
2020, which included a $20.9 million gain related to an investment that went
public in the third quarter of fiscal year 2020.
Taxes on Earnings
Three Months Ended Nine Months Ended
July 3, June 28, July 3, June 28,
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Taxes on earnings $ 23.9 $ 30.5 (22.0) % $ 57.4 $ 88.6 (35.0) %
Effective tax rate 28.2 % 50.9 % 22.9 % 28.5 %
Our effective tax rate is lower in the three and nine months ended July 3, 2020 ,
compared to the year-ago periods, primarily because the prior period included a
goodwill impairment charge and an in-process research and development expense,
neither of which generated a tax benefit for the Company. This decrease was
partially offset by an unfavorable shift in the geographic mix of earnings in
fiscal year 2020.
Our effective tax rate is impacted by the percentage of our total earnings that
comes from our international regions, the mix of particular tax jurisdictions
within our international regions, changes in the valuation of our deferred tax
assets or liabilities, and changes in tax laws or interpretations of those laws.
We expect that our effective tax rate may experience increased fluctuations from
period to period. See Note 10, "Income Taxes," of the Notes to the Consolidated
Financial Statements in our 2019 Annual Report.
Diluted Net Earnings Per Share
Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
2020 2019 Change 2020 2019 Change
Diluted net earnings per share $ 0.67 $ 0.32 110 % $ 2.11 $ 2.41 (12) %
Diluted net earnings per share increased in the three months ended July 3, 2020 ,
compared to the year-ago period, primarily due to higher impairment charges,
acquisition-related expenses, and a higher effective tax rate in the prior year.
Diluted net earnings per share decreased in the nine months ended July 3, 2020 ,
compared to the year-ago period, primarily due to higher operating expenses in
fiscal year 2020, partially offset by a decrease in the effective tax rate.
48
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Gross Orders
Gross orders by segment Three Months Ended Nine Months Ended
July 3, June 28, Percent July 3, June 28, Percent
(Dollars in millions) 2020 2019 Change 2020 2019 Change
Oncology Systems $ 665.4 $ 778.3 (14) % $ 2,212.6 $ 2,261.0 (2) %
Proton Solutions 9.7 111.3 (91) % 96.4 121.2 (20) %
Other 7.1 2.0 255 % 37.7 2.0 n/m
Total Gross Orders $ 682.2 $ 891.6 (23) % $ 2,346.7 $ 2,384.2 (2) %
n/m - not meaningful
Gross orders are defined as new orders recorded during the period and revisions
to previously recorded orders. New orders are recorded for the total contractual
amount, excluding certain pass-through items and service items, which are
recognized as revenue is recognized, once a written agreement for the delivery
of goods or provision of services is in place and, other than Proton Solutions,
when shipment of the product is expected to occur within two years, so long as
any contingencies are deemed perfunctory. For our Proton Solutions business, we
record orders when construction of the related proton therapy treatment center
is reasonably expected to start within two years, but only if any contingencies
are deemed perfunctory. We will not record Proton Solutions orders if there are
financing contingencies, if a substantial portion of the financing for the
project is not reasonably assured or if customer board approval contingencies
are pending. We perform a quarterly review to verify that outstanding orders
remain valid. If an order is no longer expected to ultimately convert to
revenue, we record a backlog adjustment, which reduces backlog but does not
impact gross orders for the period.
Gross orders in any period may not be directly correlated to the level of
revenues in any particular future quarter or period since the timing of revenue
recognition will vary significantly based on the delivery requirements of
individual orders, acceptance schedules and the readiness of individual customer
sites for installation of our products, all of which was impacted by COVID-19.
Moreover, certain types of orders, such as orders for software or newly
introduced products in our Oncology Systems segment, typically take more time
from order to completion of installation and acceptance than hardware or older
products. Because an order for a proton therapy system can be relatively large,
an order in one fiscal period will cause gross orders in our Proton Solutions
business to vary significantly, making comparisons between fiscal periods more
difficult.
Oncology Systems Gross Orders
Gross orders by
geographical region Three Months Ended Nine Months Ended
July 3, June 28, Percent Constant July 3, June 28, Percent Constant
(Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency
Americas$ 329.1 $ 357.4 (8) % (8) %$ 1,044.0 $ 1,059.4 (1) % (1) % EMEA 191.1 281.1 (32) % (30) % 687.1 732.7 (6) % (4) % APAC 145.2 139.8 4 % 4 % 481.5 468.9 3 % 3 % Total Oncology Systems Gross Orders$ 665.4 $ 778.3 (14) % (14) %$ 2,212.6 $ 2,261.0 (2) % (1) % North America$ 316.5 $ 338.4 (6) % (6) %$ 981.2 $ 994.4 (1) % (1) % International 348.9 439.9 (21) % (19) % 1,231.4 1,266.6 (3) % (1) % Total Oncology Systems Gross Orders$ 665.4 $ 778.3 (14) % (14) %$ 2,212.6 $ 2,261.0 (2) % (1) % Oncology Systems gross orders were negatively impacted across regions in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, mostly driven by a sharp decline in hardware and software product orders due to the COVID-19 pandemic in the third quarter of fiscal year 2020. The Americas Oncology Systems gross orders decreased in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, primarily due to a decrease in hardware product orders, partially offset by an increase in service orders. EMEA Oncology Systems decreased in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, primarily due to a decrease in hardware and software product orders, partially offset by an increase in service orders from CTSI. 49 -------------------------------------------------------------------------------- APAC Oncology Service gross orders increased in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods, primarily due to an increase in service orders, partially offset by a decrease in hardware product orders. The trailing 12 months' growth in gross orders for Oncology Systems at the end of the third quarter of fiscal year 2020 and at the end of each of the previous three fiscal quarters was: Trailing 12 Months Ended July 3, April 3, January 3, September 27, 2020 2020 2020 2019 Americas 2% 4% 6% 7% EMEA (1)% 9% 11% 12% APAC (1)% (2)% 6% 9% North America 2% 3% 6% 8% International (1)% 5% 9% 10% Total Oncology Systems Gross Orders 1% 5% 8% 9% Consistent with the historical pattern, we expect that Oncology Systems gross orders will continue to experience regional fluctuations. We expect that the COVID-19 pandemic will have an adverse effect on Oncology Systems gross orders for the remainder of our fiscal year 2020. Over the long-term, we expect international gross orders, specifically from emerging markets, 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$101.6 million and$24.8 million in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods. The decrease in the three months endedJuly 3, 2020 , was due to no system orders in the third quarter of fiscal year 2020, compared to the prior year period. The decrease in the nine months endedJuly 3, 2020 , was mostly due to a smaller order size of proton therapy systems in fiscal year 2020 compared to the prior year period. The decreases in gross orders for proton therapy systems was partially offset by an increase in service orders. The COVID-19 pandemic may result in order delays for the remainder of fiscal year 2020. Other Category Gross Orders The Other category gross orders increased$5.1 million and$35.7 million in the three and nine months endedJuly 3, 2020 , compared to the year-ago periods. Gross orders from the Other category are related to our Interventional Solutions business. The COVID-19 pandemic may result in order delays for the remainder of fiscal year 2020. 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. AtJuly 3, 2020 , total Company backlog was$3.2 billion , an increase of 3% compared to the backlog atJune 28, 2019 . Our Oncology Systems backlog atJuly 3, 2020 was 4% higher than the backlog atJune 28, 2019 , which reflected an increase of 4% for both of our international andNorth America regions, respectively. Proton Solutions backlog was approximately$235 million atJuly 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$60.3 million and$205.5 million in the three and nine months endedJuly 3, 2020 , compared to net reductions of$65.3 million and$102.5 million in the year-ago periods. Liquidity and Capital Resources Liquidity is the measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, acquire businesses or make other investments or loans, repurchase shares of VMS common stock, and fund 50 -------------------------------------------------------------------------------- continuing operations and capital expenditures. Our sources of cash have included operations, borrowings, stock option exercises, and employee stock purchases. Cash, Cash Equivalents, and Restricted Cash The following table summarizes our cash, cash equivalents, and restricted cash: July 3, September 27, (In millions) 2020 2019 Increase Cash and cash equivalents$ 769.2 $ 531.4 $ 237.8 Restricted cash 21.3 12.7 8.6
Total cash, cash equivalents, and restricted cash
The increase in cash, cash equivalents, and restricted cash in the nine months endedJuly 3, 2020 was primarily due to$217.5 million of cash provided by operating activities,$170.0 million in net borrowings from our credit facility,$51.4 million in proceeds from the issuance of common stock to employees, and$9.2 million in proceeds from the sale of an equity investment, partially offset by$86.2 million used for the repurchase of shares of VMS common stock,$55.0 million used for purchases of property, plant, and equipment,$21.3 million in investments of equity and notes receivable in privately-held companies,$11.7 million used for tax withholdings on vesting of equity awards, and$11.2 million used for the payment of contingent consideration. AtJuly 3, 2020 , we had approximately$236 million , or 31%, of cash and cash equivalents inthe United States , which includes approximately$124 million in money market funds, and approximately$533 million , or 69%, of cash and cash equivalents was held abroad. In light of the changes to theU.S. federal taxation of foreign earnings under the Tax Cuts and Jobs Act, which was signed into law onDecember 22, 2017 , 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 ofJuly 3, 2020 , most of our cash and cash equivalents that were held abroad were inU.S. Dollars and were primarily held as bank deposits. In addition to cash flows generated from operations, a significant portion of which are generated inthe United States , we have used our credit facilities to meet our cash needs from time to time and expect to continue to do so in the future. Borrowings under our credit facilities may be used for working capital, capital expenditures, VMS share repurchases, acquisitions and other corporate purposes.
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