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 ofVarian 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 theSecurities and Exchange Commission ("SEC"), 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; our ability to successfully manage the challenges associated with the COVID-19 pandemic; 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; 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 endedSeptember 27, 2019 (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 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 . 36 --------------------------------------------------------------------------------
COVID-19 Impact
The outbreak of the COVID-19 virus inWuhan, China in late 2019, and subsequent spread of the virus throughout the world, has impacted our day-to-day operations globally, and the operations of the vast majority of our customers, suppliers, and distributors. The COVID-19 response by hospitals and healthcare professionals has placed a severe strain on healthcare systems globally. TheWorld Health Organization's March 2020 declaration of the COVID-19 outbreak as a global pandemic has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, border closures, quarantines, shelter-in-place orders, and business limitations and shutdowns. Many of our hospital customers have prioritized their efforts on COVID-19 response, diverting focus and resources away from their normal operations, and have restricted access to their sites in efforts to contain the spread of the virus. The prioritization of COVID-19 treatment and containment and travel restrictions have, in turn, presented us with unique operational challenges, including delays in decisions on new contracts by some customers and delays in our ability to market, deliver, install and service our systems. We have also experienced some disruptions and delays in our logistics and supply chains. To support the health and well-being of our employees, customers, distributors, partners and communities, as ofMay 12, 2020 , approximately 65% of our employees are working remotely, whereas typically only 15% of our employees, such as field service employees, work remotely. The impact of COVID-19 on our operations has varied by region, in parallel with the geographical spread and stage of containment of the pandemic. Our operations inChina were impacted first, beginning early in our fiscal second quarter 2020, followed by other parts of ourAsia Pacific geography, with EMEA and theAmericas geographies being impacted later in the quarter. Our revenues in the quarter were trending higher than our revenues in the comparable period in our fiscal second quarter 2019 untilMarch 2020 , when we started to experience a decline in product revenues in EMEA and theAmericas due to COVID-19 spread. By the end of the quarter, signs of recovery were noted inChina andSouth Korea . These trends continued intoApril 2020 . The adverse impact to revenues primarily resulted from delays in installation and acceptance of our hardware products and solutions. We experienced minimal impact to our services revenues during the quarter 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. Our software revenues during the quarter increased compared to software revenues in our fiscal second quarter 2019. In addition to these revenue impacts, we experienced delays in orders, primarily for capital equipment, during the quarter and this trend continued, with some geographic variation, intoApril 2020 . To date, we have not experienced any order cancellations due to COVID-19. We incurred some idle capacity costs due to factory shutdowns during a portion of the quarter; however, we also had reduced costs of sales as a result of the operational slow down. We also incurred some COVID-19 operational expenses, which were offset by reduced travel costs. The net impact of COVID-19 related expenses on our operating earnings during the quarter was not material.
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 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 reduce the financial strain on our employees and their families, we implemented continuity of pay benefits in March that will continue as needed through fiscal 2020.
•We implemented new programs aimed at educating our employees on how to operate in virtual, social-distancing environments.
•In compliance with government mandates, we closed our manufacturing facility inBeijing for approximately four weeks during the quarter. As part of our workforce safety measures, we proactively placed ourU.S. manufacturing and logistics facilities, including ourPalo Alto manufacturing facility, in critical operations mode for approximately 3 weeks during the quarter. After implementing stringent safety protocols, which included rigorous health and safety training for all manufacturing employees returning to work and the institution of new workplace spacing requirements, we recommenced operations at these facilities and they are all currently fully operational. Existing inventory allowed us to continue shipments and honor customer commitments during the shutdowns. 37 -------------------------------------------------------------------------------- •Our customers are facing unique challenges, and we are taking actions to support their priorities. Among other efforts, we are taking actions to ensure that all of our customers can continue to deliver radiation therapy, a non-elective procedure, to their patients, and we are actively deploying remote tools across our training, installation, and field service teams to ensure continued access to our products and solutions. •Despite certain logistical and manufacturing challenges, to date we have been successful in our efforts to secure and stabilize our global supply chain and we are actively coordinating with our suppliers and distributors to maintain adequate inventory to fulfill our customer commitments. •We have a solid balance sheet, with$1.3 billion in accessible liquidity, including$668 million in cash and cash equivalents and$661 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. 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 containment measures 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 second half of our fiscal year 2020 and that customer financial constraints, foreign currency headwinds, and uncertainty around the pandemic may lead our customers to defer capital equipment purchases during the second half of our fiscal year 2020 which will have a corresponding adverse impact on our orders. For both revenues and orders, we believe that there will be a higher impact in our fiscal third quarter 2020 followed by sequential improvement in our fiscal fourth quarter 2020, assuming there is no second wave of infections or lockdowns. In addition, we believe that our existing orders backlog should soften the impact of order delays on our revenues in our fiscal year 2020. We expect to continue to experience some logistical, manufacturing and shipment delays and some increased logistics-related costs. We expect that our services revenues will continue to be reasonably insulated from the impacts of COVID-19 and should be reasonably predictable given the long-term nature of the underlying contracts and our current installed base. However, if treatment volumes decline materially and impact hospitals' operating costs, it may impact our service contract renewals, pricing and service revenues. 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 begun to recover from the pandemic, which should have a corresponding positive impact on hospital operating budgets. While we believe that orders trends and our revenues will return to historical norms over time as the pandemic is controlled, if COVID-19 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 an extended economic recession 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 or use our products or services and certain of our customers, suppliers and distributors may become insolvent. 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.
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.
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Highlights for the Three Months Ended April 3, 2020
Financial Summary
Three Months Ended
April 3, March 29,
(In millions, except per share amounts) 2020 2019 Change
Gross Orders $ 845.9 $ 770.9 10 %
Oncology Systems 773.4 766.2 1 %
Proton Solutions 60.8 4.7 1,206 %
Other 11.7 - n/m
Backlog $ 3,286.0 $ 3,117.9 5 %
Revenues $ 794.5 $ 779.4 2 %
Oncology Systems 760.5 746.8 2 %
Proton Solutions 22.3 32.6 (32) %
Other 11.7 - n/m
Gross margin as a percentage of revenues 42.5 % 40.8 % 160 bps
Effective tax rate 18.5 % 21.7 %
Net earnings attributable to Varian $ 43.2 $ 88.6 (51) %
Diluted net earnings per share $ 0.47 $ 0.96 (51) %
Net cash (used in) provided by operating activities $ 21.9 $ (13.4) n/m
Number of shares repurchased 0.3 0.4 (25) %
Total cost of shares repurchased $ 39.8 $ 50.8 (22) %
n/m - not meaningful
Tariff Measures. Between July 2018 and May 2019 , the Trump Administration
imposed a series of tariffs, ranging from 5% to 25%, on numerous products
imported into the United States from China , including Varian's radiotherapy
systems manufactured in China and certain components used in our manufacturing
and service activities. In July and August 2018 , China retaliated against the
U.S. tariffs by imposing its own series of tariffs, ranging from 10% to 25%, on
certain products imported into China from the United States , including Varian's
radiotherapy systems and certain manufacturing and service components.
We participated in the Office of the U.S. Trade Representative ("USTR") process
to seek product-specific exclusions from the U.S. tariffs on Chinese imports. To
date, USTR has granted tariff exclusions for four products: certain radiotherapy
systems manufactured in China , as well as three key components of the radiation
therapy systems that we manufacture in the United States : multi-leaf
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 exclusion for radiotherapy systems.
In June and July 2019 , we submitted formal requests to the Chinese government
for exclusions from the Chinese retaliatory tariffs for manufacturing inputs,
service parts and radiotherapy systems imported into China from the United
States . In September 2019 , the Chinese government granted a tariff exclusion for
medical linear accelerators, including our radiotherapy systems, with
retroactive effect. The other exclusion requests are still pending. The U.S. and
Chinese government tariff exclusions are for one-year periods, with anticipated
renewal processes. In the aggregate, these tariffs will be referred to as
"U.S. /China tariffs."
Impairment Charges. In March 2020 , we recorded a $40.5 million impairment charge
to our California Proton Therapy Center ("CPTC") term loan ("Term Loan") due to
material negative impacts to CPTC's operating plan, including declines in
current and projected patient volume and delays in partnership with a
significant clinical partner primarily driven by the impact of COVID-19. See
Note 14, "Proton Solutions Loans and Investments," of the Notes to the Condensed
Consolidated Financial Statements for further information.
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Currency Fluctuation. In order to assist with the assessment of how our
underlying businesses performed, we compare the percentage change in revenues
and Oncology Systems gross orders from one period to another, excluding the
effect of foreign currency fluctuations (i.e., using constant currency exchange
rates). To present this information on a constant currency basis, we convert
current period revenues and gross orders in currencies other than U.S. Dollars
into U.S. Dollars using the comparable prior period's average exchange
rate. Percentage changes in revenues and gross orders are not adjusted for
constant currency unless indicated.
Currency fluctuations had approximately a $6.5 million unfavorable impact for
both total revenues and Oncology Systems gross orders, respectively, for the
three months ended April 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. 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 in India and one multi-disciplinary cancer center in Sri
Lanka . We also expect to innovate and incubate new solutions such as
technology-enabled services, and to develop additional technologies that
incorporate artificial intelligence and machine learning capabilities, in an
environment of data security and patient privacy integrity.
Our primary goal in the Oncology Systems business is to promote the adoption of
more advanced and effective cancer treatments. In our view, the fundamental
market forces that drive long-term growth in our Oncology Systems business are
the rise in cancer cases; technology advances and product developments that are
leading to improvements in patient care and outcomes; customer demand for the
more advanced and effective cancer treatments that we enable; competitive
conditions among hospitals and clinics to offer such advanced treatments;
continued improvement in safety and cost efficiency in delivering radiation
therapy; and underserved medical needs outside of the United States .
Approximately half of Oncology Systems gross orders and revenues come from
international markets, within which certain emerging markets typically can have
lower gross margins and longer installation cycles since many of these purchases
are for new sites where treatment vaults need to be constructed. We have also
been investing a higher portion of our Oncology Systems research and development
budget in software and software-related products, which have a higher gross
margin than our hardware products.
Subject to the potential impact of COVID-19, we believe international markets
will be our fastest growing markets. The radiation oncology market in North
America is largely characterized by replacements of older machines, with
periodic increases in demand driven by the introduction of new technologies.
Reimbursement rates in the United States have generally supported a favorable
return on investment for the purchase of new radiotherapy equipment and
technologies. While we believe that improved product functionality, greater
cost-effectiveness and prospects for better clinical outcomes with new
capabilities, such as IMRT, IGRT and VMAT, tend to drive demand for radiotherapy
products, large changes in reimbursement rates or reimbursement structure can
affect customer demand and cause market shifts. We believe that growth of the
radiation oncology market in the United States could be impacted as customers'
decision-making processes are complicated by the uncertainties surrounding
reimbursement rates and new models for radiotherapy and radiosurgery, such as
the 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 and could impact transaction size, timing and
purchasing processes, and also contribute to increased quarterly business
variability.
In the radiation oncology markets outside of North America , we expect the EMEA
and Latin America markets to grow over the long term with varying growth rates
across the regions. In APAC, we expect China to lead longer-term regional
growth. Overall, we believe the global radiation oncology market can grow over
the long term, in constant currencies, in the mid-single-digit range.
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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 of April 3, 2020 , we had a carrying value of $128.5 million of notes
receivable, including accrued interest, senior secured debt, available-for-sale
securities, and loans outstanding to Proton Solutions customers. See Note 14,
"Proton Solutions Loans and Investments," of the Notes to the Condensed
Consolidated Financial Statements for further information.
Other. The Other category includes our Interventional Solutions business that
offers products for interventional oncology 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 six months ended April 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 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 41 -------------------------------------------------------------------------------- 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 ofApril 3, 2020 , we have two reporting units with goodwill: Oncology Systems and Interventional Solutions, with balances of$450.4 million and$164.3 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. 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$50.5 million for the full value of the Proton Solutions reporting unit goodwill. See Note 5, "Goodwill and Intangible Assets," of the Notes to the Condensed Consolidated Financial Statements for more information. Results of Operations Fiscal Year Our fiscal year is the 52- or 53-week period ending on the Friday nearestSeptember 30 . Fiscal year 2020 is the 53-week period endingOctober 2, 2020 , and fiscal year 2019 was the 52-week period that endedSeptember 27, 2019 . The fiscal quarters endedApril 3, 2020 andMarch 29, 2019 were both 13-week periods. Discussion of Results of Operations for the Three and Six Months EndedApril 3, 2020 Compared to the Three and Six Months EndedMarch 29, 2019 Total Revenues Revenues by sales classification Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Product$ 407.3 $ 430.5 (5) %$ 828.3 $ 830.7 - % Service 387.2 348.9 11 % 795.1 689.7 15 % Total Revenues$ 794.5 $ 779.4 2 %$ 1,623.4 $ 1,520.4 7 % Product as a percentage of total revenues 51 % 55 % 51 % 55 % Service as a percentage of total revenues 49 % 45 % 49 % 45 % Total product revenues decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to decreases from Oncology Systems and Proton Solutions, offset by$11.7 million in revenues from the Other category. Total product revenues were flat in the six months endedApril 3, 2020 , primarily due to a decrease from Proton Solutions and, to a lesser extent, a decrease from Oncology Systems, partially offset by$30.6 million in revenues from the Other Category. 42 -------------------------------------------------------------------------------- Total service revenues increased in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to Oncology Systems, which included approximately$17 million and$35 million , respectively, in service revenues from CTSI. The six months endedApril 3, 2020 included approximately$19 million in additional service revenues due to the first quarter of fiscal year 2020 being a 14-week period. Revenues by geographical region Three Months Ended Six Months Ended April 3, March 29, Percent Constant April 3, March 29, Percent Constant (Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency Americas$ 387.9 $ 371.3 4 % 5 %$ 790.1 $ 721.7 9 % 10 % EMEA 250.9 261.5 (4) % (2) % 523.8 512.5 2 % 4 % APAC 155.7 146.6 6 % 7 % 309.5 286.2 8 % 8 % Total Revenues$ 794.5 $ 779.4 2 % 3 %$ 1,623.4 $ 1,520.4 7 % 8 % North America (1)$ 362.2 $ 343.4 5 % 5 %$ 740.7 $ 672.1 10 % 10 % International 432.3 436.0 (1) % 1 % 882.7 848.3 4 % 5 % Total Revenues$ 794.5 $ 779.4 2 % 3 %$ 1,623.4 $ 1,520.4 7 % 8 % North America as a percentage of total revenues 46 % 44 % 46 % 44 % International as a percentage of total revenues 54 % 56 % 54 % 56 % (1)North America primarily includesthe United States andCanada . TheAmericas revenues increased in the three months and six months endedApril 3, 2020 , compared to the year-ago periods, 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. EMEA revenues decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to decreases in revenues from Proton Solutions and Oncology Systems. EMEA revenues increased in the six months endedApril 3, 2020 , primarily due to an increase in revenues from Oncology Systems, and to a lesser extent, an increase in revenue from the Other category, partially offset by a decrease in revenues from Proton Solutions. Oncology Systems revenues in the three and six months endedApril 3, 2020 included approximately$13 million and$27 million , respectively, in revenues from CTSI. APAC revenues increased in the three months and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to an increase in revenues from the Other category and Oncology Systems, partially offset by a decrease in revenues from Proton Solutions. 43 -------------------------------------------------------------------------------- Oncology Systems Revenues Revenues by sales classification Three Months Ended Six Months Ended April 3, March 29, Percent Constant April 3, March 29, Percent Constant (Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency Product$ 381.0 $ 402.6 (5) % (4) %$ 763.0 $ 769.2 (1) % - % Service 379.5 344.2 10 % 11 % 779.9 680.1 15 % 15 % Total Oncology Systems Revenues$ 760.5 $ 746.8 2 % 3 %$ 1,542.9 $ 1,449.3 6 % 7 % Product as a percentage of total Oncology Systems revenues 50 % 54 % 49 % 53 % Service as a percentage of total Oncology Systems revenues 50 % 46 % 51 % 47 % Oncology Systems revenues as a percentage of total revenues 96 % 96 % 95 % 95 % Oncology Systems product revenues decreased in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to lower hardware product revenues caused by the COVID-19 pandemic, partially offset by higher software sales. In the three and six months endedMarch 29, 2019 , revenues from hardware products had a negative impact of approximately$9 million and$17 million from theU.S. /China Tariffs. Oncology Systems service revenues, which include performance obligations for installation, training and warranty, increased in the three and six months endedApril 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 also include approximately$17 million and$35 million in revenues from CTSI in the three and six months endedApril 3, 2020 . The first quarter of fiscal year 2020 was a 14-week period, which resulted in approximately$19 million in additional service revenues being recorded. 44 -------------------------------------------------------------------------------- Revenues by geographical region Three Months Ended Six Months Ended April 3, March 29, Percent Constant April 3, March 29, Percent Constant (Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency Americas$ 369.7 $ 357.1 4 % 4 %$ 748.6 $ 687.9 9 % 9 % EMEA 240.9 245.3 (2) % - % 500.7 479.8 4 % 6 % APAC 149.9 144.4 4 % 5 % 293.6 281.6 4 % 4 % Total Oncology Systems Revenues$ 760.5 $ 746.8 2 % 3 %$ 1,542.9 $ 1,449.3 6 % 7 % North America$ 343.9 $ 329.2 4 % 4 %$ 699.2 $ 638.3 10 % 10 % International 416.6 417.6 - % 1 % 843.7 811.0 4 % 5 % Total Oncology Systems Revenues$ 760.5 $ 746.8 2 % 3 %$ 1,542.9 $ 1,449.3 6 % 7 % North America as a percentage of total Oncology Systems revenues 45 % 44 % 45 % 44 % International as a percentage of total Oncology Systems revenues 55 % 56 % 55 % 56 % Americas Oncology Systems revenues increased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in revenues from services and software licenses, partially offset by lower revenues from hardware products caused by the COVID-19 pandemic. Americas Oncology Systems revenues increased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in revenues from services and software licenses. EMEA Oncology Systems revenues decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to lower revenues from hardware products caused by the COVID-19 pandemic, partially offset by an increase in revenues from services. EMEA Oncology Systems revenues increased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in revenues from services and, to a lesser extent, an increase in revenues from software licenses, partially offset by lower revenues from hardware products caused by the COVID-19 pandemic. EMEA Oncology Systems revenues from services included approximately$13 million and$27 million from CTSI in the three and six months endedApril 3, 2020 . APAC Oncology Systems revenues increased in the three months and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to an increase in revenues from services and hardware products, partially offset by a decrease in revenue from software licenses. In the three and six months endedMarch 29, 2019 , revenues from hardware products included a negative impact of approximately$9 million and$17 million from theU.S. /China Tariffs. Variations of higher and lower revenues between theNorth America and international regions are impacted by regional factors influencing our gross orders, which include the potential impact of COVID-19, government spending, philanthropy/donations, economic and political instability in some countries, uncertainty created byU.S. health care policy, such as the excise tax on the sale of most medical devices, Medicare reimbursement rates and consolidation of free standing clinics inthe United States , and different technology adoption cycles. See further discussion of orders under "Gross Orders." 45 -------------------------------------------------------------------------------- Proton Solutions Revenues Revenues by sales classification Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Product$ 14.6 $ 27.9 (48) %$ 34.7 $ 61.5 (44) % Service 7.7 4.7 61 % 15.2 9.6 58 % Total Proton Solutions Revenues$ 22.3 $ 32.6 (32) %$ 49.9 $ 71.1 (30) % Proton Solutions revenues as a percentage of total revenues 3 % 4 % 3 % 5 % Revenues from Proton Solutions decreased in the three and six months endedApril 3, 2020 , compared to the year-ago period, primarily due to fewer orders in fiscal year 2018 and the first half of fiscal year 2019, the timing of project completion and stage of progress, 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 six months endedApril 3, 2020 . Other Revenues Revenues from the Other category was$11.7 million and$30.6 million for the three and six months endedApril 3, 2020 . Revenues from the Other category are allocated to product revenues and are related to our Interventional Solutions business. The estimated impact of the COVID-19 pandemic on Interventional Solutions revenues was not material in the three and six months endedApril 3, 2020 . Gross Margin Dollars by segment Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Oncology Systems$ 328.6 $ 322.4 2 %$ 681.6 $ 632.2 8 % Proton Solutions (0.4) (4.2) 91 % (0.4) 2.1 (118) % Other 9.0 - n/m 22.8 - n/m Gross margin$ 337.2 $ 318.2 6 %$ 704.0 $ 634.3 11 % Percentage by segment Oncology Systems 43.2 % 43.2 % 44.2 % 43.6 % Proton Solutions (1.8) % (13.0) % (0.8) % 3.2 % Other 77.6 % - % 74.7 % - %Total Company 42.5 % 40.8 % 43.4 % 41.7 % Percentage by sales classificationTotal Company - Product 35.4 % 31.6 % 35.4 % 32.5 %Total Company - Service 49.9 % 52.2 % 51.7 % 52.9 % Oncology Systems - Product 36.6 % 35.1 % 36.3 % 35.4 % Oncology Systems - Service 49.9 % 52.7 % 51.9 % 52.9 % n/m - not meaningful Oncology Systems product gross margin percentage increased in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to higher software product mix and certain tariff exclusions, partially offset by an unfavorable hardware product mix and some additional costs due to the COVID-19 pandemic. In the three months endedMarch 29, 2019 , theU.S. /China tariffs had a negative impact of approximately$13 million , comprised of a negative impact of$9 million in revenues and$4 million in cost of revenues. In the six months endedMarch 29, 2019 , theU.S. /China tariffs had a negative impact of$24 million , comprised of a negative impact of$17 million in revenues and$7 million in cost of revenues. Oncology Systems service gross margin percentage decreased in the three months and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to higher service delivery costs and service revenues from CTSI, which have a lower margin than our traditional services, partially offset by an increase in service revenues. 46 -------------------------------------------------------------------------------- Proton Solutions gross margin percentage increased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in service revenues and mix of projects. Proton Solutions gross margin percentage decreased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to the mix of projects and increased project costs. Research and Development Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Research and development$ 71.0 $ 59.4 19 %$ 138.1 $ 120.3 15 % Research and development as a percentage of total revenues 9 % 8 % 9 % 8 % Research and development expenses increased$11.6 million and$17.8 million in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to an increase in investments in software, Flash technology, adaptive radiotherapy and other strategic programs. Selling, General and Administrative and Acquisition-related expenses (benefits) Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Selling, general and administrative$ 175.3 $ 146.8 20 %$ 352.3 $ 287.9 22 % Impairment charges$ 40.5 $ - n/m$ 40.5 $ - n/m
Acquisition-related expenses (benefits)
(320) %$ 8.2 $ 4.6 80 % Selling, general and administrative as a percentage of total revenues 22 % 19 % 22 % 19 % Impairment charges as a percentage of total revenues 5 % - % 2 % - % Acquisition-related expenses as a percentage of total revenues (1) % - % 1 % - % n/m - not meaningful Selling, general and administrative expenses increased$28.5 million and$64.4 million in the three and six months endedApril 3, 2020 , compared to the year-ago periods, 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 and six months endedApril 3, 2020 , were increases of$3.9 million and$9.2 million , respectively in additional amortization of intangible assets. Impairment charges in the three and six months endedApril 3, 2020 , were due to an impairment charge of$40.5 million to our CPTC Term Loan. As a result of the COVID-19 pandemic, during March andApril 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. Acquisition-related expenses (benefits) decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to the release of$8.2 million in contingent consideration earnout liabilities related to our acquisition of CTSI, partially offset by an increase in transaction costs. Acquisition-related expenses increased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to$8.8 million increase in the fair value of contingent consideration related to theEndocare and Alicon acquisitions and an increase in transaction costs, partially offset by the release of$8.2 million in contingent consideration earnout liabilities related to our acquisition of CTSI. 47 -------------------------------------------------------------------------------- Other Income (Expense), Net Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Interest income$ 3.1 $ 4.0 (20) %$ 6.1 $ 7.9 (23) % Interest expense$ (4.3) $ (1.0) 327 %$ (9.0) $ (2.2) 301 % Other income (expense), net$ (0.9) $ 0.2 (751) %$ 3.5 $ 23.2 (85) % Interest income decreased in the three and six months endedApril 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 six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to an increase in borrowings. Other income (expense), net, decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to changes in foreign currency exchange. Other income (expense), net, decreased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to a$22.0 million gain on the sale of an equity investment in first quarter of fiscal year 2019. Taxes on Earnings Three Months Ended Six Months Ended April 3, March 29, April 3, March 29,
(Dollars in millions) 2020 2019 Change 2020 2019 Change Taxes on earnings$ 9.7 $ 24.6 (60.0) %$ 33.5 $ 58.1 (42.3) % Effective tax rate 18.5 % 21.7 % 20.2 % 23.2 % Our effective tax rate is lower in the three months endedApril 3, 2020 , compared to the year-ago period, primarily because earnings in the current period included the release of$8.2 million of contingent consideration related to our acquisition of CTSI that resulted in no tax charge. Our effective tax rate was lower for the six month period endedApril 3, 2020 , compared to the year-ago period, primarily because the prior period included the tax effect of a change in law due to the enactment of the Tax Cuts and Jobs Act, which was signed into law onDecember 22, 2017 . Our effective tax rate is impacted by the percentage of our total earnings that comes from our international regions, the mix of particular tax jurisdictions within our international regions, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws or interpretations of those laws. We expect that our effective tax rate may experience increased fluctuations from period to period. See Note 10, "Income Taxes," of the Notes to the Consolidated Financial Statements in our 2019 Annual Report. Diluted Net Earnings Per Share Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent 2020 2019 Change 2020 2019 Change Diluted net earnings per share$ 0.47 $ 0.96 (51) %$ 1.43 $ 2.09 (31) % Diluted net earnings per share decreased in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to the$40.5 million impairment of our Term Loan with CPTC, and increases in both research and development and selling, general and administrative costs, partially offset by a decrease in the effective tax rate. 48 -------------------------------------------------------------------------------- Gross Orders Gross orders by segment Three Months Ended Six Months Ended April 3, March 29, Percent April 3, March 29, Percent (Dollars in millions) 2020 2019 Change 2020 2019 Change Oncology Systems$ 773.4 $ 766.2 1 %$ 1,547.2 $ 1,482.7 4 % Proton Solutions 60.8 4.7 1,206 % 86.7 9.9 780 % Other 11.7 - n/m 30.6 - n/m Total Gross Orders$ 845.9 $ 770.9 10 %$ 1,664.5 $ 1,492.6 12 % 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 could be 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 Six Months Ended April 3, March 29, Percent Constant April 3, March 29, Percent Constant (Dollars in millions) 2020 2019 Change Currency 2020 2019 Change Currency Americas$ 355.4 $ 366.1 (3) % (3) %$ 714.9 $ 702.0 2 % 2 % EMEA 259.3 233.3 11 % 13 % 496.0 451.6 10 % 12 % APAC 158.7 166.8 (5) % (5) % 336.3 329.1 2 % 2 % Total Oncology Systems Gross Orders$ 773.4 $ 766.2 1 % 2 %$ 1,547.2 $ 1,482.7 4 % 5 % North America$ 337.8 $ 342.5 (1) % (1) %$ 664.6 $ 656.0 1 % 1 % International 435.6 423.7 3 % 4 % 882.6 826.7 7 % 8 % Total Oncology Systems Gross Orders$ 773.4 $ 766.2 1 % 2 %$ 1,547.2 $ 1,482.7 4 % 5 % The Americas Oncology Systems gross orders decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to a decrease in gross orders from hardware products caused by the COVID-19 pandemic and, to a lesser extent, a decrease in gross orders from software licenses, partially offset by an increase in gross orders from services. The Americas Oncology Systems gross orders increased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in gross orders from services, partially offset by a decrease in gross orders from hardware products caused by the COVID-19 pandemic. EMEA Oncology Systems gross orders increased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in gross orders from services and, to a lesser extent, an increase in gross orders from hardware 49 -------------------------------------------------------------------------------- products, partially offset by a decrease in gross orders from software licenses. EMEA gross orders increased in the six months ended compared to the year-ago period, primarily due to an increase in service revenues, partially offset by a decrease in hardware products. The COVID-19 pandemic had a negative impact to gross orders in the three months endedApril 3, 2020 . EMEA Oncology Systems gross orders from services include approximately$13 million and$27 million from CTSI in the three and six months endedApril 3, 2020 . APAC Oncology Systems gross orders decreased in the three months endedApril 3, 2020 , compared to the year-ago period, primarily due to a decrease in gross orders from hardware products caused by the COVID-19 pandemic. APAC Oncology Systems gross orders increased in the six months endedApril 3, 2020 , compared to the year-ago period, primarily due to an increase in gross orders from services, partially offset by a decrease in gross orders from hardware products caused by the COVID-19 pandemic. The trailing 12 months' growth in gross orders for Oncology Systems at the end of the second quarter of fiscal year 2020 and at the end of each of the previous three fiscal quarters was: Trailing 12 Months Ended April 3, January 3, September 27, June 28, 2020 2020 2019 2019 Americas 4% 6% 7% 6% EMEA 9% 11% 12% 13% APAC (2)% 6% 9% 22% North America 3% 6% 8% 6% International 5% 9% 10% 15% Total Oncology Systems Gross Orders 5% 8% 9% 11% 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 increased$56.1 million and$76.8 million in the three and six months endedApril 3, 2020 , compared to the year-ago periods, primarily due to three proton therapy system orders in the six months endedApril 3, 2020 , as compared to none in the prior year periods. Also contributing to the increase in gross orders was an increase in service orders. We expect that the COVID-19 pandemic will have an adverse effect on Proton Solutions gross orders for the remainder of fiscal year 2020. Other Category Gross Orders The Other category gross orders were$11.7 million and$30.6 million in the three and six months endedApril 3, 2020 . Gross orders from the Other category are related to our Interventional Solutions business. We expect that the COVID-19 pandemic will have an adverse effect on the Other category gross orders 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. AtApril 3, 2020 , total Company backlog was$3.3 billion , an increase of 5% compared to the backlog atMarch 29, 2019 . Our Oncology Systems backlog atApril 3, 2020 was 3% higher than the backlog atMarch 29, 2019 , which reflected an increase of 4% and 2% for the international andNorth America regions, respectively. Proton Solutions backlog was approximately$259 million atApril 3, 2020 . 50 -------------------------------------------------------------------------------- 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$70.7 million and$145.2 million in the three and six months endedApril 3, 2020 , compared to net reductions of$48.2 million and$37.2 million in the year-ago periods. Liquidity and Capital Resources Liquidity is the measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, acquire businesses or make other investments or loans, repurchase shares of VMS common stock, and fund continuing operations and capital expenditures. Our sources of cash have included operations, borrowings, stock option exercises, and employee stock purchases. Cash, Cash Equivalents, and Restricted Cash The following table summarizes our cash, cash equivalents, and restricted cash: April 3, September 27, (In millions) 2020 2019 Increase Cash and cash equivalents$ 667.8 $ 531.4 $ 136.4 Restricted cash 21.2 12.7 8.5
Total cash, cash equivalents, and restricted cash
The increase in cash, cash equivalents, and restricted cash in the six months endedApril 3, 2020 was primarily due to$134.5 million of cash provided by operating activities,$110.0 million in net borrowings from our credit facility,$32.1 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,$37.0 million used for purchases of property, plant, and equipment, and$11.5 million used for tax withholdings on vesting of equity awards. AtApril 3, 2020 , we had approximately$144 million , or 22%, of cash and cash equivalents inthe United States , which includes approximately$100 million in money market funds, and approximately$524 million , or 78%, 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 ofApril 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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