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DocumentType From Sep 28, 2013 To Jun 27, 2014 10-Q
AmendmentFlag From Sep 28, 2013 To Jun 27, 2014 false
DocumentPeriodEndDate From Sep 28, 2013 To Jun 27, 2014 2014-06-27
DocumentFiscalYearFocus From Sep 28, 2013 To Jun 27, 2014 2014
DocumentFiscalPeriodFocus From Sep 28, 2013 To Jun 27, 2014 Q3
TradingSymbol From Sep 28, 2013 To Jun 27, 2014 VAR
EntityRegistrantName From Sep 28, 2013 To Jun 27, 2014 VARIAN MEDICAL SYSTEMS INC
EntityCentralIndexKey From Sep 28, 2013 To Jun 27, 2014 0000203527
CurrentFiscalYearEndDate From Sep 28, 2013 To Jun 27, 2014 --09-26
EntityFilerCategory From Sep 28, 2013 To Jun 27, 2014 Large Accelerated Filer
EntityCommonStockSharesOutstanding As of Jul 25, 2014 103201351
SalesRevenueGoodsNet
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Varian Medical Systems, Inc. (“VMS”) and subsidiaries (collectively, the “Company”) designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiosurgery, stereotactic body radiotherapy, and brachytherapy. The Company also designs, manufactures, sells and services X-ray imaging components for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, specific procedures, computed tomography and industrial applications. In addition, the Company designs, manufactures, sells and services linear accelerators, image processing software and image detection products for security and inspection purposes. The Company also develops, designs, manufactures, sells and services proton therapy products and systems for cancer treatment.
Basis of Presentation
The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 27, 2013 (the “2013 Annual Report”). In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of June 27, 2014 and September 27, 2013, results of operations and statements of comprehensive earnings for the three and nine months ended June 27, 2014 and June 28, 2013, and cash flows for the nine months ended June 27, 2014 and June 28, 2013. The results of operations for the three and nine months ended June 27, 2014 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.
Segment Reporting
During the second quarter of fiscal year 2014, the Company changed its organizational structure resulting in a change in operating and reportable segments. The Company’s operations are grouped into two reportable operating segments: Oncology Systems and Imaging Components. The Company’s Ginzton Technology Center (“GTC”) and Varian Particle Therapy (“VPT”) businesses are reflected in the “Other” category because these operating segments do not meet the criteria of a reportable operating segment. Refer to Note 18, “Segment Information.”
Reclassifications
Certain items in the condensed consolidated statements of earnings have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported total revenues, total cost of revenues and net earnings.
Fiscal Year
The fiscal years of the Company as reported are the 52- or 53- week periods ending on the Friday nearest September 30. Fiscal year 2014 is the 52-week period ending September 26, 2014, and fiscal year 2013 was the 52-week period that ended on September 27, 2013. The fiscal quarters ended June 27, 2014 and June 28, 2013 were both 13-week periods.
Principles of Consolidation
The condensed consolidated financial statements include those of VMS and its subsidiaries. Intercompany balances, transactions and stock holdings have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board ("FASB") issued an amendment to its accounting guidance related to stock-based compensation. The amendment requires that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects vesting, rather than a condition that affects the grant-date fair value. The new guidance will be effective in the Company’s fiscal year beginning 2017. Early adoption is permitted. The amendment can be applied on a prospective basis to all share-based payments granted or modified on or after the effective date. Entities will also be provided an option to apply the guidance on a modified retrospective basis to existing awards. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.
In May 2014, the FASB issued an amendment to its accounting guidance related to revenue recognition. The amendment sets forth a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. The amendment requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance will be effective in the Company’s fiscal year beginning 2018. Early application is not permitted. The amendments can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.
2. BALANCE SHEET COMPONENTS:
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June 27, |
|
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September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Available-for-sale Securities: |
|
|
|
|
|
|
|
Corporate debt securities: |
|
|
|
|
|
|
|
Amortized cost |
$ |
69.4 |
|
|
$ |
62.7 |
|
Unrealized gain (loss) |
|
- |
|
|
|
- |
|
Fair value |
$ |
69.4 |
|
|
$ |
62.7 |
|
The available-for-sale securities represent loans to California Proton Treatment Center, LLC (“CPTC”). As of June 27, 2014, of the total amount of $69.4 million of the available-for-sale securities, $60.8 million is included in “Short-term investment” and $8.6 million is included in “Other assets” on the condensed consolidated balance sheet. As of September 27, 2013, the entire amount of available-for-sale securities was included in “Short-term investment” on the condensed consolidated balance sheet. Refer to Note 16, “CPTC Loans” for additional discussion.
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Inventories: |
|
|
|
|
|
|
|
Raw materials and parts |
$ |
300.9 |
|
|
$ |
276.6 |
|
Work-in-process |
|
115.6 |
|
|
|
91.6 |
|
Finished goods |
|
169.6 |
|
|
|
167.0 |
|
Total inventories |
$ |
586.1 |
|
|
$ |
535.2 |
|
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Other long-term liabilities: |
|
|
|
|
|
|
|
Long-term income taxes payable |
$ |
50.8 |
|
|
$ |
41.9 |
|
Other |
|
99.2 |
|
|
|
102.1 |
|
Total other long-term liabilities |
$ |
150.0 |
|
|
$ |
144.0 |
|
3. FAIR VALUE
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. There is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets/Liabilities Measured at Fair Value on a Recurring Basis
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
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Fair Value Measurement Using |
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Quoted Prices in |
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Significant |
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Active Markets |
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Other |
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Significant |
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|||
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for Identical |
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Observable |
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Unobservable |
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Instruments |
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Inputs |
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Inputs |
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Total |
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||||
Type of Instruments |
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(Level 1) |
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(Level 2) |
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(Level 3) |
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Balance |
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(In millions) |
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Assets at June 27, 2014: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale corporate debt securities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
69.4 |
|
|
$ |
69.4 |
|
Derivative assets |
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.1 |
|
Total assets measured at fair value |
|
$ |
- |
|
|
$ |
0.1 |
|
|
$ |
69.4 |
|
|
$ |
69.5 |
|
|
|
|
|
|
|
|
|
|
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Liabilities at June 27, 2014: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4.2 |
) |
|
$ |
(4.2 |
) |
Total liabilities measured at fair value |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4.2 |
) |
|
$ |
(4.2 |
) |
|
|
|
|
|
|
|
|
|
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Assets at September 27, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
50.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
50.0 |
|
Available-for-sale corporate debt security |
|
|
- |
|
|
|
- |
|
|
|
62.7 |
|
|
|
62.7 |
|
Option to purchase a privately-held company |
|
|
- |
|
|
|
- |
|
|
|
1.4 |
|
|
|
1.4 |
|
Total assets measured at fair value |
|
$ |
50.0 |
|
|
$ |
- |
|
|
$ |
64.1 |
|
|
$ |
114.1 |
|
|
|
|
|
|
|
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|
|
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|
|
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|
|
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|
Liabilities at September 27, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
(1.1 |
) |
|
$ |
- |
|
|
$ |
(1.1 |
) |
Contingent consideration |
|
|
- |
|
|
|
- |
|
|
|
(2.5 |
) |
|
|
(2.5 |
) |
Total liabilities measured at fair value |
|
$ |
- |
|
|
$ |
(1.1 |
) |
|
$ |
(2.5 |
) |
|
$ |
(3.6 |
) |
Money market funds are included under cash and cash equivalents, available-for-sale corporate debt securities are included under short-term investment and other assets, derivative assets are included under prepaid expenses and other current assets, option to purchase a company is included under other assets, derivative liabilities are included under accrued liabilities and contingent consideration is included under accrued liabilities and other-long term liabilities on the condensed consolidated balance sheets.
The Company obtains valuations of Level 1 money market funds from quotes for transactions in active exchange markets involving identical assets.
The Company’s valuation of its Level 2 instruments includes valuations obtained from quoted prices for identical assets in markets that are not active. In addition, the Company has elected to use the income approach to value its derivative instruments using standard valuation techniques and Level 2 inputs, such as currency spot rates, forward points and credit default swap spreads. The Company’s derivative instruments are short-term in nature, typically one month to thirteen months in duration.
The Company measures the fair value of its Level 3 contingent consideration liabilities based on the income approach by using a Monte Carlo simulation model with key assumptions that include estimated sales units or revenues of the acquired business during the earn-out period, volatility, and estimated discount rates corresponding to the periods of expected payments. If the estimated sales units or revenues were to increase or decrease during the respective earn-out period, the fair value of the contingent consideration would increase or decrease, respectively. If the volatility were to increase or decrease, the fair value of contingent consideration would decrease or increase, respectively. If the estimated discount rates used were to increase or decrease, the fair value of the contingent consideration would decrease or increase, respectively.
The fair value of the Company’s Level 3 available-for-sale corporate debt securities is based on the income approach by using the discounted cash flow model with key assumptions that include discount rates corresponding to the terms and risks associated with the loan to CPTC. If the estimated discount rates used were to increase or decrease, the fair value of the debt securities would decrease or increase, respectively. However, the Company does not increase the fair value above its par value as ORIX Capital Markets, LLC (“ORIX”), the loan agent, has the option to purchase this loan from the Company under the original terms and conditions at par value.
As of September 27, 2013, the Company had an option to purchase the remaining equity interest of Augmenix, Inc. (“Augmenix”), a privately-held company. The option to purchase the remaining equity interest of Augmenix is classified as a Level 3 asset and its fair value is based on the income approach using key assumptions that include projected operating results of the company and an estimated discount rate corresponding to the period of expected payment.
The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
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Option to |
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|
|
Available-For-Sale Corporate Debt |
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Contingent |
|
|
Purchase a Privately - Held |
|
|||
(In millions) |
Securities |
|
|
Consideration |
|
|
Company |
|
|||
Balance at September 27, 2013 |
$ |
62.7 |
|
|
$ |
(2.5 |
) |
|
$ |
1.4 |
|
Additions (1) |
|
44.8 |
|
|
|
(2.9 |
) |
|
|
- |
|
Sale of a portion of available-for-sale corporate debt securities(2) |
|
(38.1 |
) |
|
|
- |
|
|
|
- |
|
Settlements (3) |
|
- |
|
|
|
0.6 |
|
|
|
- |
|
Change in fair value recognized in earnings |
|
- |
|
|
|
0.6 |
|
|
|
(1.4 |
) |
Balance at June 27, 2014 |
$ |
69.4 |
|
|
$ |
(4.2 |
) |
|
$ |
- |
|
1. |
Amounts reported under Available-For-Sale Corporate Debt Securities include accrued interest. |
2. |
Refer to Note 16 “CPTC Loans” |
3. |
Amounts reported under “Contingent Consideration” represent cash payments to settle contingent consideration liabilities. |
There were no transfers of assets or liabilities between fair value measurement levels during either the three and nine months ended June 27, 2014, or the three and nine months ended June 28, 2013. Transfers between fair value measurement levels are recognized at the end of the reporting period.
Assets Measured at Fair Value on a Nonrecurring Basis
For the three and nine months ended June 27, 2014, the Company recognized a $7.7 million charge relating to the impairment of a portion of our privately-held investment in Augmenix. The impairment charge of $7.7 million included a $1.4 million write-off of the option to purchase the remaining equity interest of Augmenix, upon its expiry. This option was previously measured at fair value on a recurring basis.
For the three and nine months ended June 27, 2014, the Company’s assets that were measured at fair value on a nonrecurring basis are summarized below:
|
Net Carrying Value |
|
|
Total Losses for the |
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||
(In millions) |
as of June 27, 2014 |
|
|
three and nine months ended |
|
||
Equity investment in Augmenix |
$ |
7.3 |
|
|
$ |
6.3 |
|
The fair value measurement of the impaired privately held investment was classified as Level 3 because significant unobservable inputs were used in the valuation due to the absence of quoted market prices and inherent lack of liquidity. Significant unobservable inputs, which included financial condition and recent financing activities of the investees, reflected the assumptions market participants would use in pricing these assets. The impairment charge, representing the difference between the net book value and the fair value of the investment as a result of the evaluation, was recorded to Selling, general and administrative expenses.
Fair Value of Other Financial Instruments
The fair values of certain of the Company’s financial instruments, including bank deposits and certificate of deposits included in cash and cash equivalents, accounts receivable, net of allowance for doubtful accounts, note receivables, accounts payable, and short-term debt approximate their carrying amounts due to their short maturities.
As of both June 27, 2014 and September 27, 2013, the fair value of current maturities of long-term debt approximated its carrying value of $50.0 million and $56.3 million, respectively, due to its short-term maturity. The fair value of the long-term debt payable in installments through fiscal year 2018 approximated its carrying value of $400.0 million and $450.0 million, at June 27, 2014 and September 27, 2013, respectively, because it is carried at a market observable interest rate that resets periodically and is categorized as level 2 in the fair value hierarchy.
4. Financing Receivables and Allowance for Credit Losses
A financing receivable represents a financing arrangement with a contractual right to receive money, on demand or on fixed or determinable dates, and that is recognized as an asset on the Company’s Condensed Consolidated Balance Sheets.
The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year, and the related allowance for doubtful accounts are presented in the following table:
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Accounts receivable with contractual maturities of more than one year: |
|
|
|
|
|
|
|
Gross amount |
$ |
41.3 |
|
|
$ |
28.0 |
|
Allowance for doubtful accounts |
|
(3.0 |
) |
|
|
(3.0 |
) |
Net amount |
$ |
38.3 |
|
|
$ |
25.0 |
|
Amount past due |
$ |
3.5 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
During the three and nine months ended June 27, 2014, the Company sold without recourse $8.3 million and $11.3 million, respectively, of accounts receivable with contractual maturities of more than one year. During the three months ended June 28, 2013, no accounts receivable with contractual maturities of more than one year were sold. During the nine months ended June 28, 2013, the Company sold without recourse $1.1 million of accounts receivable with contractual maturities of more than one year.
5. GOODWILL AND INTANGIBLE ASSETS
The following table reflects the activity of goodwill by reportable operating segment:
|
Oncology |
|
|
Imaging |
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|
|
|
|
|
|
|
|
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(In millions) |
Systems |
|
|
Components |
|
|
Other |
|
|
Total |
|
||||
Balance at September 27, 2013 |
$ |
132.0 |
|
|
$ |
33.2 |
|
|
$ |
60.1 |
|
|
$ |
225.3 |
|
Acquisition of businesses |
|
10.4 |
|
|
|
- |
|
|
|
- |
|
|
|
10.4 |
|
Foreign currency translation adjustments |
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.4 |
|
Balance at June 27, 2014 |
$ |
142.4 |
|
|
$ |
33.2 |
|
|
$ |
60.5 |
|
|
$ |
236.1 |
|
The following table reflects the gross carrying amount and accumulated amortization of the Company’s intangible assets included in “Other assets” in the Condensed Consolidated Balance Sheets as follows:
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Intangible Assets: |
|
|
|
|
|
|
|
Acquired existing technology |
$ |
46.6 |
|
|
$ |
36.6 |
|
Patents, licenses and other |
|
27.9 |
|
|
|
29.0 |
|
Customer contracts and supplier relationship |
|
11.9 |
|
|
|
10.9 |
|
Accumulated amortization |
|
(54.7 |
) |
|
|
(53.1 |
) |
Net carrying amount |
$ |
31.7 |
|
|
$ |
23.4 |
|
Amortization expense for intangible assets was $1.4 million and $1.1 million for the three months ended June 27, 2014 and June 28, 2013, respectively, and $3.3 million for both the nine months ended June 27, 2014, and June 28, 2013. The Company estimates amortization expense for the remaining three months of fiscal year 2014, fiscal year 2015, fiscal year 2016, fiscal year 2017, fiscal year 2018, fiscal year 2019 and thereafter, will be as follows (in millions): $2.2, $7.1, $6.3, $3.7, $3.6, $3.5, and $5.3, respectively.
6. RELATED PARTY TRANSACTIONS
VMS has a 40% ownership interest in dpiX Holding LLC (“dpiX Holding”), a two-member consortium which has a 100% ownership interest in dpiX LLC (“dpiX”), a supplier of amorphous silicon based thin-film transistor arrays (“flat panels”) for the Company’s Imaging Components’ digital image detectors and for its Oncology Systems’ On-Board Imager®, and PortalVisionTM imaging products. In accordance with the dpiX Holding agreement, net profits or losses are allocated to the members in accordance with their ownership interests.
The equity investment in dpiX Holding is accounted for under the equity method of accounting. When VMS recognizes its share of net profits or losses of dpiX Holding, profits or losses in inventory purchased from dpiX are eliminated until realized by VMS. VMS recorded income of $0.7 million and $3.0 million in the three months ended June 27, 2014 and June 28, 2013, respectively, on the equity investment in dpiX Holding. VMS recorded income of $0.1 million $2.5 million in the nine months ended June 27, 2014 and June 28, 2013, respectively, on the equity investment in dpiX Holding. Income and loss on the equity investment in dpiX Holding is included in “Selling, general and administrative” expenses in the Condensed Consolidated Statements of Earnings. The carrying value of the equity investment in dpiX Holding, which is included in “Other assets” in the Condensed Consolidated Balance Sheets, was $48.4 million at June 27, 2014 and $49.7 million at September 27, 2013.
The Company purchased glass transistor arrays from dpiX totaling $5.7 million and $6.5 million, respectively, in the three months ended June 27, 2014 and June 28, 2013. The Company purchased glass transistor arrays from dpiX totaling $14.9 million and $22.6 million, respectively, in the nine months ended June 27, 2014 and June 28, 2013. The purchases of glass transistor arrays are included as a component of “Inventories” in the Condensed Consolidated Balance Sheets or “Cost of revenues - product” in the Condensed Consolidated Statements of Earnings.
In October 2013, VMS entered into an amended agreement with dpiX and other parties that, among other things, provides the Company with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires the Company to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. As of June 27, 2014, the Company had fixed cost commitments of $4.3 million related to this amended agreement, for the remaining three months of fiscal year 2014. The fixed cost commitment for future years will be determined based on forecasted dpiX sales and approved by the dpiX board of directors at the beginning of each calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement).
The Company has determined that dpiX is a variable interest entity because at-risk equity holders, as a group, lack the characteristics of a controlling financial interest. Majority votes are required to direct the manufacturing activities, legal operations and other activities that most significantly affect dpiX’s economic performance. The Company does not have majority voting rights and no power to direct the activities of dpiX and therefore is not the primary beneficiary of dpiX.
7. BORROWINGS
On August 27, 2013, VMS entered into a Credit Agreement (as amended to date) with certain lenders and Bank of America, N.A. (“BofA”) as administrative agent. The Credit Agreement provides for (i) a five-year term loan facility in an aggregate principal amount of up to $500 million (the “2013 Term Loan Facility”) and (ii) a five-year revolving credit facility in an aggregate principal amount of up to $300 million (the “2013 Revolving Credit Facility” and, collectively with the 2013 Term Loan Facility, the “2013 Credit Facility”). The 2013 Revolving Credit Facility also includes a $50 million sub-facility for the issuance of letters of credit and permits swing line loans of up to $25 million. Under the 2013 Credit Agreement, the Company has the right to make (i) up to two requests to increase the aggregate commitments under the Term Loan Facility by an aggregate amount for all such requests of up to $100 million and (ii) up to three requests to increase the aggregate commitments under the Revolving Credit Facility by an aggregate amount for all such requests of up to $200 million, provided that, in each case, the Lenders are willing to provide such new or increased commitments and certain other conditions are met. The 2013 Credit Facility contains provisions that limit the Company’s ability to pay cash dividends. The proceeds of the Credit Facility may be used for working capital, capital expenditures, permitted Company share repurchases, permitted acquisitions and other lawful corporate purposes.
Borrowings under the 2013 Term Loan Facility accrue interest either (i) based on a Eurodollar Rate, as defined in the Credit Agreement (the “Eurodollar Rate”), plus a margin of 1.00% to 1.25% based on a leverage ratio involving funded indebtedness and EBITDA or (ii) based upon a base rate of (a) the federal funds rate plus 0.50%, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus 1.00%, whichever is highest, plus a margin of 0.00% to 0.25% based on the same leverage Ratio, depending upon instructions from the Company. Borrowings under the 2013 Revolving Credit Facility accrue interest either (i) based on the Eurodollar Rate plus a margin of 1.25% to 1.50% based on a leverage ratio involving funded indebtedness and EBITDA or (ii) based upon a base rate of (a) the federal funds rate plus 0.50%, (b) BofA’s announced prime rate, or (c) the Eurodollar Rate plus 1.00%, whichever is highest, plus a margin of 0.25% to 0.50% based on the same leverage ratio, depending upon instructions from the Company. At June 27, 2014, borrowings under the 2013 Term Loan Facility totaled $450.0 million with a weighted average interest rate of 1.28%. At September 27, 2013, borrowings under the 2013 Term Loan Facility totaled $500.0 million with a weighted average interest rate of 1.31%. At June 27, 2014 and September 27, 2013, there were no amounts outstanding on the 2013 Revolving Credit Facility.
Subject to certain limitations on the amount secured, a pledge of stock issued by certain of our present and future subsidiaries that are deemed to be material under the terms of the 2013 Credit Facility serve as security for the 2013 Credit Facility. These stock pledges also serve as security for all hedging or treasury management obligations entered into by the Company with a Lender. As of June 27, 2014, VMS had pledged 65% of the voting shares that it holds in Varian Medical Systems Nederland Holdings B.V., a wholly owned subsidiary. The 2013 Credit Agreement provides that certain material domestic subsidiaries must guarantee the 2013 Credit Facility, subject to certain limitations on the amount secured. As of June 27, 2014, the 2013 Credit Facility was not guaranteed by any VMS subsidiary.
The Credit Agreement contains affirmative and negative covenants applicable to the Company and its subsidiaries that are typical for credit facilities of this type, and that are subject to materiality and other qualifications, carve-outs, baskets and exceptions. The Company has also agreed to maintain certain financial covenants including (i) a maximum consolidated leverage ratio, involving funded indebtedness and EBITDA (earnings before interest, tax and depreciation and amortization), and (ii) a minimum cash flow coverage ratio. The Company was in compliance with all covenants under the Credit Agreement for all periods within these condensed consolidated financial statements in which it was in existence.
Prior to the 2013 Credit Facility, VMS had a credit agreement (the “2012 Credit Facility”) with certain lenders and BofA as administrative agent which provided for a revolving credit facility that enabled the Company to borrow and have outstanding at any given time a maximum of $300 million. On August 27, 2013, VMS replaced the 2012 Credit Facility with the 2013 Revolving Credit Facility, terminating the 2012 Credit Facility agreement entered into as of April 27, 2012 and repaying in full the approximately $148 million then-outstanding principal balance, plus accrued interest and fees.
VMS’s Japanese subsidiary (“VMS KK”) has an unsecured uncommitted credit agreement with Sumitomo that enables VMS KK to borrow and have outstanding at any given time a maximum of 3 billion Japanese yen (the “Sumitomo Credit Facility”). In March 2014, the Sumitomo Credit Facility was extended and will expire in March 2015. Borrowings under the Sumitomo Credit Facility accrue interest based on the basic loan rate announced by the Bank of Japan plus a margin of 0.5% per annum. As of June 27, 2014, 3 billion Japanese yen or $29.6 million was outstanding under the Sumitomo Credit Facility. In July 2014, VMS KK repaid the entire balance of the amount outstanding under the Sumitomo Credit Facility. There was no outstanding amount under the Sumitomo Credit Facility as of September 27, 2013.
In April 2014, the Company paid the outstanding balance of $6.3 million for the principal amount and accrued interest of its unsecured term loan.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company measures all derivatives at fair value on the Condensed Consolidated Balance Sheets. The accounting for gains or losses resulting from changes in the fair value of those derivatives depends upon the use of the derivative and whether it qualifies for hedge accounting. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment must be recognized in earnings, together with elements excluded from effectiveness testing and the ineffective portion of a particular hedge.
The fair values of derivative instruments reported on the Company’s Condensed Consolidated Balance Sheets were as follows:
|
|
Asset Derivatives |
|
|
|
Liability Derivatives |
|
||||||||||||||
|
|
|
|
June 27, |
|
|
September 27, |
|
|
|
|
|
June 27, |
|
|
September 27, |
|
||||
|
|
Balance Sheet |
|
2014 |
|
|
2013 |
|
|
|
Balance Sheet |
|
2014 |
|
|
2013 |
|
||||
(In millions) |
|
Location |
|
Fair Value |
|
|
Fair Value |
|
|
|
Location |
|
Fair Value |
|
|
Fair Value |
|
||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Prepaid expenses and other current assets |
|
$ |
- |
|
|
$ |
- |
|
|
|
Accrued liabilities |
|
$ |
- |
|
|
$ |
1.1 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Prepaid expenses and other current assets |
|
|
0.1 |
|
|
|
- |
|
|
|
Accrued liabilities |
|
|
- |
|
|
|
- |
|
Total derivatives |
|
|
|
$ |
0.1 |
|
|
$ |
- |
|
|
|
|
|
$ |
- |
|
|
$ |
1.1 |
|
See Note 3, “Fair Value” regarding valuation of the Company’s derivative instruments. Also see Note 1, “Summary of Significant Accounting Policies” in the Consolidated Financial Statements in the Company’s 2013 Annual Report regarding credit risk associated with the Company’s derivative instruments.
Offsetting of Derivatives
The Company presents its derivative assets and derivative liabilities on a gross basis in the Condensed Consolidated Balance Sheets. However, under agreements containing provisions on netting with certain counterparties of foreign exchange contracts, subject to applicable requirements, the Company is allowed to net-settle transactions on the same date in the same currency, with a single net amount payable by one party to the other. As of June 27, 2014 and September 27, 2013, there were no potential effects of rights of setoff associated with derivative instruments. The Company is neither required to pledge nor entitled to receive cash collateral related to these derivative transactions.
Cash Flow Hedging Activities
The Company has many transactions denominated in foreign currencies and addresses certain of those financial exposures through a risk management program that includes the use of derivative financial instruments. The Company sells products throughout the world, often in the currency of the customer’s country, and may hedge certain of the larger foreign currency transactions when they are either not denominated in the relevant subsidiary’s functional currency or the U.S. Dollar. These foreign currency sales transactions are hedged using foreign currency forward contracts. The Company may use other derivative instruments in the future. The Company enters into foreign currency forward contracts primarily to reduce the effects of fluctuating foreign currency exchange rates. The Company does not enter into foreign currency forward contracts for speculative or trading purposes. Foreign currency forward contracts may be entered into several times a quarter and range from one to thirteen months. As of June 27, 2014, the foreign currency forward contracts ranged from one to thirteen months in maturity.
The Company designates and accounts for certain of its hedges of forecasted foreign currency revenues as cash flow hedges. The Company’s designated cash flow hedges de-designate when the anticipated revenues associated with the transactions are recognized and the effective portion in “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets is reclassified to “Revenues” in the Condensed Consolidated Statements of Earnings. Subsequent changes in fair value of the derivative instrument are recorded in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings to offset changes in fair value of the resulting non-functional currency receivables. For derivative instruments that are designated and qualify as cash flow hedges, the Company formally documents for each derivative instrument at the hedge’s inception the relationship between the hedging instrument (foreign currency forward contract) and hedged item (forecasted foreign currency revenues), the nature of the risk being hedged, and its risk management objective and strategy for undertaking the hedge. The Company records the effective portion of the gain or loss on the derivative instrument that are designated and qualify as cash flow hedges in “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets and reclassifies these amounts into “Revenues” in the Condensed Consolidated Statements of Earnings in the period during which the hedged transaction is recognized in earnings. The Company assesses hedge effectiveness both at the onset of the hedge and on an ongoing basis using regression analysis. The Company measures hedge ineffectiveness by comparing the cumulative change in the fair value of the effective component of the hedge contract with the cumulative change in the fair value of the hedged item. The Company recognizes any over performance of the derivative as ineffectiveness in “Revenues,” and amounts excluded from the assessment of effectiveness in “Cost of revenues” in the Condensed Consolidated Statements of Earnings. During the three and nine months ended June 27, 2014, the Company did not discontinue any cash flow hedges. At the inception of the hedge, the Company assesses whether the likelihood of meeting the forecasted cash flow is highly probable. As of June 27, 2014, all forecasted cash flows were still probable to occur. As of June 27, 2014, the net unrealized gain on derivative instruments, before tax, included in “Accumulated other comprehensive loss” and expected to be reclassified to earnings over the next 12 months was immaterial.
The Company had the following outstanding foreign currency forward contracts that were designated as cash flow hedges:
|
At June 27, 2014 |
|
|
|
Notional Value |
|
|
(In millions) |
Sold |
|
|
Euro |
$ |
13.7 |
|
Totals |
$ |
13.7 |
|
The following table presents the amounts, before tax, recognized in “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets and in the Condensed Consolidated Statements of Earnings that are related to the effective portion of the foreign currency forward contracts designated as cash flow hedges:
|
Gain (Loss) Recognized in Other |
|
|
Location of Gain |
|
Gain (Loss) Reclassified from Accumulated Other |
|
||||||||||||||||||||||||||
|
Comprehensive Income |
|
|
(Loss) Reclassified |
|
Comprehensive Income into Net Earnings |
|
||||||||||||||||||||||||||
|
(Effective Portion) |
|
|
from Accumulated |
|
(Effective Portion) |
|
||||||||||||||||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Other Comprehensive |
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income into Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
|
Earnings (Effective |
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||||||
(In millions) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
Portion) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||||||
Foreign currency forward contracts |
$ |
0.1 |
|
|
$ |
(0.3 |
) |
|
$ |
2.2 |
|
|
$ |
2.0 |
|
|
Revenues |
|
$ |
(0.3 |
) |
|
$ |
2.0 |
|
|
$ |
1.0 |
|
|
$ |
3.0 |
|
Balance Sheet Hedging Activities
The Company also hedges balance sheet exposures from its various subsidiaries and business units where the U.S. Dollar is the functional currency. The Company enters into foreign currency forward contracts to minimize the short-term impact of foreign currency fluctuations on monetary assets and liabilities denominated in currencies other than the U.S. Dollar functional currency. The foreign currency forward contracts are short term in nature, typically with a maturity of approximately one month, and are based on the net forecasted balance sheet exposure. These hedges of foreign currency denominated assets and liabilities do not qualify for hedge accounting treatment and are not designated as hedging instruments. For derivative instruments not designated as hedging instruments, changes in their fair values are recognized in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings. Changes in the values of these hedging instruments are offset by changes in the values of foreign currency denominated assets and liabilities. Variations from the forecasted foreign currency assets or liabilities, coupled with a significant currency rate movement, may result in a material gain or loss if the hedges are not effectively offsetting the change in value of the foreign currency asset or liability. Other than foreign exchange hedging activities, the Company has no other free-standing or embedded derivative instruments.
The Company had the following outstanding foreign currency forward contracts that were either (i) entered into to hedge balance sheet exposures from its various foreign subsidiaries and business units or (ii) originally designated as cash flow hedges (primarily in Euro and Japanese yen) and were subsequently de-designated when the forecasted revenues were recognized:
|
|
At June 27, 2014 |
|
|||||
|
|
|
|
|
|
Notional |
|
|
|
|
Notional |
|
|
Value |
|
||
(In millions) |
|
Value Sold |
|
|
Purchased |
|
||
Australian dollar |
|
$ |
14.9 |
|
|
$ |
- |
|
British pound |
|
|
4.2 |
|
|
|
- |
|
Canadian dollar |
|
|
- |
|
|
|
10.3 |
|
Euro |
|
|
170.3 |
|
|
|
- |
|
Japanese yen |
|
|
101.9 |
|
|
|
- |
|
Hungarian Forint |
|
|
2.0 |
|
|
|
|
|
Indian Rupee |
|
|
2.3 |
|
|
|
- |
|
New Zealand dollar |
|
|
3.4 |
|
|
|
- |
|
Norwegian krone |
|
|
6.9 |
|
|
|
- |
|
Swedish krona |
|
|
7.8 |
|
|
|
- |
|
Swiss franc |
|
|
- |
|
|
|
52.1 |
|
Totals |
|
$ |
313.7 |
|
|
$ |
62.4 |
|
The following table presents the gains (losses) recognized in the Condensed Consolidated Statements of Earnings related to the foreign currency forward exchange contracts that are not designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on |
|
Amount of Gain (Loss) Recognized in Net |
|
|
Amount of Gain Recognized in Net |
|
||||||||||
Derivative |
|
Earnings on Derivative |
|
|
Earnings on Derivative |
|
||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In millions) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Selling, general and administrative expenses |
|
$ |
(1.1 |
) |
|
$ |
3.4 |
|
|
$ |
0.4 |
|
|
$ |
15.7 |
|
The gains (losses) on these derivative instruments were significantly offset by the gains (losses) resulting from the remeasurement of monetary assets and liabilities denominated in currencies other than the U.S. Dollar functional currency.
Contingent Features
Certain of the Company’s derivative instruments are subject to master agreements which contain provisions that require the Company, in the event of a default, to settle the outstanding contracts in net liability positions by making settlement payments in cash or by setting off amounts owed to the counterparty against any credit support or collateral held by the counterparty. The counterparty’s right of set-off is not limited to the derivative instruments and applies to other rights held by the counterparty. These events of default, which are defined by the existing agreements, are primarily related to the Company’s failure to pay the counterparty under the derivative instruments, voluntary or involuntary bankruptcy, the Company’s default on its borrowings, and deterioration of creditworthiness of the surviving entity if the Company merges or transfers its assets or liabilities to another entity. As of June 27, 2014 and September 27, 2013, the Company did not have significant outstanding derivative instruments with credit-risk-related contingent features that were in a net liability position.
9. COMMITMENTS AND CONTINGENCIES
Product Warranty
The following table reflects the changes in the Company’s accrued product warranty:
|
Nine Months Ended |
|
|||||
|
June 27, |
|
|
June 28, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Accrued product warranty, at beginning of period |
$ |
53.2 |
|
|
$ |
52.8 |
|
Charged to cost of revenues |
|
38.8 |
|
|
|
38.9 |
|
Actual product warranty expenditures |
|
(41.5 |
) |
|
|
(41.0 |
) |
Accrued product warranty, at end of period |
$ |
50.5 |
|
|
$ |
50.7 |
|
Long-term accrued product warranty costs of $1.9 and $14.1 million are included under “Other long-term liabilities” in the Condensed Consolidated Balance Sheets as of June 27, 2014 and September 27, 2013, respectively.
Other Commitments
In September 2011, the Company, through its Swiss subsidiary, participated in a $165.3 million loan (“Tranche A loan”) for CPTC, under which the subsidiary committed to loan up to $115.3 million to finance the construction and start-up operations of a proton therapy center. On June 10, 2014 the Company, through its Swiss subsidiary, entered into a series of agreements pursuant to which JPMorgan Chase Bank, N.A. (“J.P. Morgan”) assumed $45.0 million of the Company’s original maximum commitment of $115.3 million, reducing the Company’s maximum commitment under the Tranche A loan to $70.3 million. Through these agreements, the Company’s Swiss subsidiary also increased its individual loan commitment by another $10.0 million (“Tranche B loan”). As of June 27, 2014, the Company’s outstanding commitment under the Tranche A loan was $9.5 million and under the Tranche B loan was $1.4 million. See Note 16, “CPTC Loans” for additional discussion.
In April 2012, VMS entered into a strategic global partnership with Siemens AG (“Siemens”) through which the Company committed to make certain payments, including up to $10 million in fixed fees and $20 million in license fees, in the event certain product development milestones are achieved. As of June 27, 2014, the outstanding fixed fees and license fees commitment for the Siemens agreement was $6.5 million and $19.5 million, respectively. See Note 17 “Strategic Arrangement” for additional discussion.
In October 2013, VMS entered into an amended agreement with dpiX and other parties that, among other things, provides the Company with the right to 50% of dpiX’s total manufacturing capacity produced after January 1, 2014. The amended agreement requires the Company to pay for 50% of the fixed costs (as defined in the amended agreement), as determined at the beginning of each calendar year. As of June 27, 2014, the Company had a fixed cost commitment of $4.3 million related to this amended agreement, for the remaining three months of fiscal year 2014. The fixed cost commitment for future years will be determined based on forecasted dpiX sales and approved by the dpiX board of directors at the beginning of each calendar year. The amended agreement will continue unless the ownership structure of dpiX changes (as defined in the amended agreement). See Note 6 “Related Party Transactions” for additional discussion.
Environmental Remediation Liabilities
The Company’s operations and facilities, past and present, are subject to environmental laws, including laws that regulate the handling, storage, transport and disposal of hazardous substances. Certain of those laws impose cleanup liabilities under certain circumstances. In connection with those laws and certain of the Company’s past and present operations and facilities, the Company oversees various environmental cleanup projects and also reimburses certain third parties for cleanup activities. Those include facilities sold as part of the Company’s electron devices business in 1995 and thin film systems business in 1997. In addition, the U.S. Environmental Protection Agency (“EPA”) or third parties have named the Company as a potentially responsible party under the amended Comprehensive Environmental Response Compensation and Liability Act of 1980 (“CERCLA”), at sites to which the Company or the facilities of the sold businesses were alleged to have shipped waste for recycling or disposal (the “CERCLA sites”). In connection with the CERCLA sites, the Company to date has been required to pay only modest amounts as its contributions to cleanup efforts. Under the agreement that governs the spin-offs of Varian, Inc., which was acquired by Agilent Technologies Inc. (the successor entity hereinafter referred to as “VI”), and Varian Semiconductor Equipment Associates, Inc., which was acquired by Applied Materials, Inc. (the successor entity hereinafter referred to as “VSEA”), VI and VSEA are each obligated to indemnify the Company for one-third of the environmental cleanup costs associated with corporate, discontinued or sold operations prior to the spin-offs (after adjusting for any insurance proceeds or tax benefits received by the Company), as well as fully indemnify the Company for other liabilities arising from the operations of the business transferred to it as part of the spin-offs.
The Company spent $0.3 million (net of amounts borne by VI and VSEA) in both the three months ended June 27, 2014 and June 28, 2013, respectively, on environmental cleanup costs, third-party claim costs, project management costs and legal costs. The Company spent $0.8 million (net of amounts borne by VI and VSEA) in both the nine months ended June 27, 2014 and June 28, 2013, respectively, on such costs.
Inherent uncertainties make it difficult to estimate the likelihood of the cost of future cleanup, third-party claims, project management and legal services for the CERCLA sites and one of the Company’s past facilities. Nonetheless, as of June 27, 2014, the Company estimated that, net of VI’s and VSEA’s indemnification obligations, future costs associated with the CERCLA sites and this facility would range in total from $1.7 million to $9.9 million. The time frames over which these cleanup project costs are estimated vary, ranging from one year up to thirty years as of June 27, 2014. Management believes that no amount in that range is more probable of being incurred than any other amount and therefore accrued $1.7 million for these cleanup projects as of June 27, 2014. The accrued amount has not been discounted to present value due to the uncertainties that make it difficult to develop a single best estimate.
The Company believes it has gained sufficient knowledge to better estimate the scope and cost of monitoring, cleanup and management activities for its other past and present facilities. This, in part, is based on agreements with other parties and also cleanup plans approved by or completed in accordance with the requirements of the governmental agencies having jurisdiction. As of June 27, 2014, the Company estimated that the Company’s future exposure, net of VI’s and VSEA’s indemnification obligations, for the costs at these facilities, and reimbursements of third-party’s claims for these facilities, ranged in total from $6.3 million to $36.7 million. The time frames over which these costs are estimated to be incurred vary, ranging from one year to thirty years as of June 27, 2014. As to each of these facilities, management determined that a particular amount within the range of estimated costs was a better estimate than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. The best estimate within that range was $11.8 million at June 27, 2014. Accordingly, the Company has accrued $9.3 million for these costs, which represents the best estimate discounted at 4%, net of inflation. This accrual is in addition to the $1.7 million described in the preceding paragraph.
These amounts are only estimates of anticipated future costs. The amounts the Company will actually spend may be greater or less than these estimates, even as the Company believes the degree of uncertainty will narrow as cleanup activities progress. While the Company believes its reserve is adequate, as the scope of the Company’s obligations becomes more clearly defined, the Company may modify the reserve, and charge or credit future earnings accordingly. Nevertheless, based on information currently known to management, and assuming VI and VSEA satisfy their indemnification obligations, management believes the costs of these environmental-related matters are not reasonably likely to have a material adverse effect on the consolidated financial statements of the Company in any one fiscal year.
The Company evaluates its liability for investigation and cleanup costs in light of the obligations and apparent financial strength of potentially responsible parties and insurance companies with respect to which the Company believes it has rights to indemnity or reimbursement. The Company has asserted claims for recovery of environmental investigation and cleanup costs already incurred, and to be incurred in the future against various insurance companies and other third parties. The Company receives certain cash payments in the form of settlements and judgments from defendants, insurers and other third parties from time to time. The Company has also reached an agreement with an insurance company under which that insurer has agreed to pay a portion of the Company’s past and future environmental-related expenditures. Receivables, net of VI’s and VSEA’s portion, from that insurer amounted to $2.5 million at June 27, 2014 and $2.4 million at September 27, 2013. The current and noncurrent receivables portion from that insurer is included in “Prepaid expenses and other current assets” and “Other assets,” and the payable portion to that insurer is included “Other long-term liabilities” in the Condensed Consolidated Balance Sheets. The Company believes that this receivable is recoverable because it is based on a binding, written settlement agreement with what appears to be a financially viable insurance company, and the insurance company has paid the Company’s claims in the past.
The availability of the indemnities of VI and VSEA will depend upon the future financial strength of VI and VSEA. Given the long-term nature of some of the liabilities, VI and VSEA may be unable to fund the indemnities in the future. It is also possible that a court would disregard this contractual allocation among the parties and require the Company to assume responsibility for obligations allocated to another party, particularly if the other party were to refuse or was unable to pay any of its allocated share. The agreement governing the spin-offs generally provides that if a court prohibits a company from satisfying its shared indemnification obligations, the indemnification obligations will be shared equally by the two other companies.
Other Matters
From time to time, the Company is a party to or otherwise involved in legal proceedings, claims and government inspections or investigations and other legal matters, both inside and outside the United States, arising in the ordinary course of its business or otherwise. These matters included a patent infringement lawsuit initiated on April 13, 2007 by the University of Pittsburgh of the Commonwealth System of Higher Education (the “University of Pittsburgh”) regarding the Company’s Real-time Position Management™ (“RPM”) technology. The lawsuit was dismissed and re-filed on June 16, 2008 in the Northern District of California. The case was subsequently transferred to the United States District Court for the Western District of Pennsylvania (“trial court”). On or about December 21, 2011, the trial court entered a summary judgment order in the case finding that the Company’s RPM technology was covered by some of the claims of the subject patent. Subsequently, in early 2012, in the proceedings at the trial court on the remaining issues in litigation, it was found (i) that the Company willfully infringed the subject patent, (ii) that the Company is liable for approximately $40 million in actual damages and (iii) that the subject patent was valid. The trial court had ordered the Company to pay a total of approximately $102 million, comprised of approximately $80 million in enhanced damages (a doubling of the damages amount), pre-judgment interest to the damage award of approximately $13 million and approximately $9 million in attorneys’ fees. The trial court also ordered the Company to pay ongoing royalties at the rates found by the jury for sales after the date of judgment. The Company appealed the findings against it. In January 2014, the Company entered into a settlement agreement with the University of Pittsburgh that was dependent upon the appellate ruling. In April 2014, the appellate court issued an opinion affirming the trial court judgment in part and reversing it in part. Based on the opinion and the terms of the settlement agreement, the Company paid $35.6 million in full settlement of the lawsuit to the University of Pittsburgh in the third fiscal quarter of 2014. Prior to the beginning of the second quarter of fiscal year 2014, the Company had accrued in aggregate approximately $5 million for the low end of the range of the probable settlement value for this matter. In the second quarter of fiscal year 2014 the Company accrued an additional $25.1 million of the $35.6 million for all damages and interest related to the case and in the third quarter of fiscal year 2014 recorded the remaining amount of approximately $5.5 million for future royalties as prepaid royalties. The amount of prepaid royalties is being amortized over the remaining life of the patent of approximately two and a half years.
The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss (including, among other things, probable settlement value). However, such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company is unable to estimate a range of reasonably possible losses with respect to all other matters. There can be no assurances as to whether the Company will become subject to significant additional claims and liabilities with respect to ongoing or future proceedings. If actual liabilities significantly exceed the estimates made, the Company’s consolidated financial position, results of operations or cash flows could be materially adversely affected.
Restructuring Charges
As part of the Company’s plan to enhance operational performance through productivity initiatives, the Company offered an enhanced retirement program to its qualified employees during the first quarter of fiscal year 2013. The Company incurred insignificant restructuring charges during the three months ended June 28, 2013 and incurred $6.7 million of restructuring charges during nine months ended June 28, 2013. No restructuring charges were incurred during the three and nine months ended June 27, 2014 in relation to this or any other restructuring program.
10. RETIREMENT PLANS
The Company’s net defined benefit and post-retirement benefit costs were composed of the following:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Defined Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
$ |
1,028 |
|
|
$ |
1,169 |
|
|
$ |
3,077 |
|
|
$ |
3,598 |
|
Interest cost |
|
1,545 |
|
|
|
1,276 |
|
|
|
4,591 |
|
|
|
3,891 |
|
Expected return on plan assets |
|
(1,977 |
) |
|
|
(1,388 |
) |
|
|
(5,869 |
) |
|
|
(4,235 |
) |
Amortization of prior service cost |
|
43 |
|
|
|
41 |
|
|
|
128 |
|
|
|
121 |
|
Recognized actuarial loss |
|
539 |
|
|
|
682 |
|
|
|
1,616 |
|
|
|
2,045 |
|
Net periodic benefit cost |
$ |
1,178 |
|
|
$ |
1,780 |
|
|
$ |
3,543 |
|
|
$ |
5,420 |
|
Post-Retirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
$ |
43 |
|
|
$ |
40 |
|
|
$ |
129 |
|
|
120 |
|
|
Amortization of prior service cost |
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Recognized actuarial (gain) / loss |
|
(3 |
) |
|
|
15 |
|
|
|
(9 |
) |
|
|
45 |
|
Net periodic benefit cost |
$ |
41 |
|
|
$ |
56 |
|
|
$ |
123 |
|
|
$ |
168 |
|
The Company made contributions to the defined benefit plans of $5.7 million during the nine months ended June 27, 2014. The Company currently expects total contributions to the defined benefit plans for fiscal year 2014 will be approximately $7.3 million. The Company made contributions to the post-retirement benefit plans of $0.4 million during the nine months ended June 27, 2014. The Company currently expects total contributions to the post-retirement benefit plans for fiscal year 2014 will be approximately $0.5 million.
11. INCOME TAXES
The Company’s effective tax rate was 25.5% for the three months ended June 27, 2014, compared to 27.6% for the same period of fiscal year 2013. The decrease in the Company’s effective tax rate during the three months ended June 27, 2014 compared to the year ago period was primarily due to a larger net benefit for discrete items in the current period, which is primarily related to the release of certain liabilities for uncertain tax positions due to the expiration of the statutes of limitation in various jurisdictions. The Company’s effective tax rate was 28.1% for the nine months ended June 27, 2014, compared to 28.7% for the same period of fiscal year 2013. The decrease in the Company’s effective tax rate during the nine months ended June 27, 2014 compared to the year ago period was primarily due to a favorable shift in the mix of geographic earnings.
The Company’s effective income tax rate differs from the U.S. federal statutory rate primarily because the Company’s foreign earnings are taxed at rates that are, on average, lower than the U.S. federal rate, and because the Company’s domestic earnings are subject to state income taxes.
The total amount of unrecognized tax benefits did not materially change during the nine months ended June 27, 2014; however, the amount of unrecognized tax benefits has increased as a result of positions taken during the current and prior years, and has decreased as the result of the expiration of the statutes of limitation and audit settlements in various jurisdictions.
12. STOCKHOLDERS’ EQUITY
Stock Repurchase Program
In August 2012, the VMS Board of Directors authorized the repurchase of 8,000,000 shares of VMS common stock from September 29, 2012 through December 31, 2013. The Company repurchased a total of 2,000,000 shares of VMS common stock during the three months ended December 27, 2013 and thereafter no shares of VMS common stock remained available for repurchase under this repurchase authorization. All shares that were repurchased have been retired.
In November 2013, the VMS Board of Directors authorized the repurchase of an additional 6,000,000 shares of VMS common stock from December 30, 2013 through December 31, 2014. Stock repurchases under the November 2013 authorization may be made in open market purchases, in privately negotiated transactions (including accelerated share repurchase programs) or under Rule 10b5-1 share repurchase plans, and may be made from time to time in one or more blocks. The Company has repurchased a total of 1,250,000, and 5,250,000 of VMS common stock during the three and nine months ended June 27, 2014, respectively. The 5,250,000 shares repurchased during the nine months ended fiscal year 2014 included 2,000,000 shares repurchased under the August 2012 repurchase program. All shares that were repurchased have been retired. As of June 27, 2014, 2,750,000 shares of VMS common stock remained available for repurchase under this repurchase authorization.
Other Comprehensive Earnings
The changes in accumulated other comprehensive earnings (loss) by component and related tax effects are summarized as follows (in thousands):
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains |
|
|
Gains |
|
|
|
|
|
|
Accumulated |
|
|||
|
(Losses) Defined |
|
|
(Losses) |
|
|
Cumulative |
|
|
Other |
|
||||
|
benefit pension and |
|
|
Cash Flow |
|
|
Translation |
|
|
Comprehensive |
|
||||
|
post-retirement |
|
|
Hedging |
|
|
Adjustment |
|
|
Earnings |
|
||||
|
benefit plans |
|
|
Instruments |
|
|
and Other |
|
|
(Loss) |
|
||||
Balance at September 27, 2013 |
$ |
(40,081 |
) |
|
$ |
(691 |
) |
|
$ |
701 |
|
|
$ |
(40,071 |
) |
Other comprehensive earnings before reclassifications |
|
- |
|
|
|
2,177 |
|
|
|
(752 |
) |
|
|
1,425 |
|
Amounts reclassified out of other comprehensive earnings |
|
1,737 |
|
|
|
(1,038 |
) |
|
|
- |
|
|
|
699 |
|
Tax expense |
|
(321 |
) |
|
|
(427 |
) |
|
|
- |
|
|
|
(748 |
) |
Balance at June 27, 2014 |
$ |
(38,665 |
) |
|
$ |
21 |
|
|
$ |
(51 |
) |
|
$ |
(38,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains |
|
|
Gains |
|
|
|
|
|
|
Accumulated |
|
|||
|
(Losses) Defined |
|
|
(Losses) |
|
|
Cumulative |
|
|
Other |
|
||||
|
benefit pension and |
|
|
Cash Flow |
|
|
Translation |
|
|
Comprehensive |
|
||||
|
post-retirement |
|
|
Hedging |
|
|
Adjustment |
|
|
Earnings |
|
||||
|
benefit plans |
|
|
Instruments |
|
|
and Other |
|
|
(Loss) |
|
||||
Balance at September 28, 2012 |
$ |
(48,623 |
) |
|
$ |
531 |
|
|
$ |
(8,529 |
) |
|
$ |
(56,621 |
) |
Other comprehensive earnings before reclassifications |
|
- |
|
|
|
2,046 |
|
|
|
1,998 |
|
|
|
4,044 |
|
Amounts reclassified out of other comprehensive earnings |
|
2,211 |
|
|
|
(2,962 |
) |
|
|
- |
|
|
|
(751 |
) |
Tax benefit / (expense) |
|
(411 |
) |
|
|
344 |
|
|
|
- |
|
|
|
(67 |
) |
Balance at June 28, 2013 |
$ |
(46,823 |
) |
|
$ |
(41 |
) |
|
$ |
(6,531 |
) |
|
$ |
(53,395 |
) |
The amounts reclassified out of other comprehensive earnings into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows (in thousands):
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
|
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
||||
Comprehensive Earnings Components |
Income (Loss) Before Taxes |
|
|
Income (Loss) Before Taxes |
|
|
Line Item in Statements of Earnings |
||||||||||
Unrealized gains and (losses) on defined benefit pension and post-retirement benefit plans |
$ |
(579 |
) |
|
$ |
(736 |
) |
|
$ |
(1,737 |
) |
|
$ |
(2,211 |
) |
|
Cost of Revenues & Operating Expenses |
Unrealized gains and (losses) on cash flow hedging instruments |
|
(239 |
) |
|
|
2,000 |
|
|
|
1,038 |
|
|
|
2,962 |
|
|
Revenues |
Total amounts reclassified out of other comprehensive earnings |
$ |
(818 |
) |
|
$ |
1,264 |
|
|
$ |
(699 |
) |
|
$ |
751 |
|
|
|
13. EMPLOYEE STOCK PLANS
The table below summarizes the net share-based compensation expense recognized for employee stock awards and for the option component of the employee stock purchase plan shares:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Cost of revenues - Product |
$ |
950 |
|
|
$ |
1,058 |
|
|
$ |
2,374 |
|
|
$ |
3,443 |
|
Cost of revenues - Service |
|
1,330 |
|
|
|
1,069 |
|
|
|
3,392 |
|
|
|
2,530 |
|
Research and development |
|
1,771 |
|
|
|
1,515 |
|
|
|
4,392 |
|
|
|
4,741 |
|
Selling, general and administrative |
|
7,363 |
|
|
|
6,882 |
|
|
|
19,896 |
|
|
|
23,201 |
|
Total share-based compensation expense |
|
11,414 |
|
|
|
10,524 |
|
|
|
30,054 |
|
|
|
33,915 |
|
Tax effects |
|
(3,564 |
) |
|
|
(3,181 |
) |
|
|
(9,301 |
) |
|
|
(10,359 |
) |
Net share-based compensation expense |
$ |
7,850 |
|
|
$ |
7,343 |
|
|
$ |
20,753 |
|
|
$ |
23,556 |
|
During the nine months ended June 27, 2014, the Company granted performance units to certain employees under the Third Amended 2005 Plan. The number of shares of VMS common stock ultimately issued under the performance units at the end of a three-year performance period will depend on the Company’s business performance during the three-year period against specified performance targets set by the Compensation and Management Development Committee of the Board of Directors at the beginning of the period. Subject to certain exceptions, any unvested performance unit awards are forfeited at the time of termination.
The fair value of options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Employee Stock Option Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
- |
|
|
|
4.77 |
|
|
|
4.13 |
|
|
4.76 |
|
||
Risk-free interest rate |
- |
|
|
|
0.7 |
% |
|
|
1.2 |
% |
|
|
0.6 |
% |
|
Expected volatility |
- |
|
|
|
29.6 |
% |
|
|
24.6 |
% |
|
|
32.2 |
% |
|
Expected dividend |
- |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Weighted average fair value at grant date |
$ |
- |
|
|
$ |
18.21 |
|
|
$ |
18.23 |
|
|
$ |
19.73 |
|
The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
Risk-free interest rate |
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Expected volatility |
|
11.1 |
% |
|
|
13.6 |
% |
|
|
12.8 |
% |
|
|
16.5 |
% |
Expected dividend |
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted average fair value at grant date |
$ |
14.42 |
|
|
$ |
12.21 |
|
|
$ |
14.20 |
|
|
$ |
12.95 |
|
A summary of share-based awards available for grant is as follows:
|
Shares |
|
|
|
Available |
|
|
(In thousands) |
for Grant |
|
|
Balance at September 27, 2013 |
|
9,925 |
|
Granted |
|
(1,923 |
) |
Cancelled or expired |
|
151 |
|
Balance at June 27, 2014 |
|
8,153 |
|
Awards other than stock options set forth in the table were counted against the shares available for grant limit of the Third Amended 2005 Plan as 2.5 shares for every one share awarded before February 9, 2012 and were counted against the shares available for grant limit as 2.6 shares for every one awarded on or after February 9, 2012. In addition, the shares available for grant limit was further adjusted to reflect a maximum payout of 1.5 shares that could be issued for each performance unit granted.
Activity under the Company’s employee stock plans is presented below:
|
Options Outstanding |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
||
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|||
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
||||
(In thousands, except per share amounts) |
Shares |
|
|
Price |
|
|
Term (in years) |
|
|
Value (1) |
|
||||
Balance at September 27, 2013 |
|
4,485 |
|
|
$ |
53.02 |
|
|
|
|
|
|
|
|
|
Granted |
|
619 |
|
|
|
83.49 |
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
(36 |
) |
|
|
71.03 |
|
|
|
|
|
|
|
|
|
Exercised |
|
(1,421 |
) |
|
|
48.39 |
|
|
|
|
|
|
|
|
|
Balance at June 27, 2014 |
|
3,647 |
|
|
$ |
59.84 |
|
|
|
3.4 |
|
|
$ |
87,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 27, 2014 |
|
2,688 |
|
|
$ |
53.64 |
|
|
|
2.4 |
|
|
$ |
81,202 |
|
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value of options, which is computed based on the difference between the exercise price and VMS’s closing common stock price of $83.85 as of June 27, 2014, the last trading date of the third quarter of fiscal year 2014, and which would have been received by the option holders had all option holders exercised and sold their options as of that date.
As of June 27, 2014, there was $13.4 million of total unrecognized compensation expense related to outstanding stock options. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.8 years.
The activity for restricted stock, restricted stock units, deferred stock units and performance units is summarized as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
(In thousands, except per share amounts) |
Shares |
|
|
Value |
|
||
Balance at September 27, 2013 |
|
1,035 |
|
|
$ |
64.36 |
|
Granted |
|
467 |
|
|
|
82.50 |
|
Vested |
|
(331 |
) |
|
|
63.40 |
|
Cancelled or expired |
|
(38 |
) |
|
|
70.40 |
|
Balance at June 27, 2014 |
|
1,133 |
|
|
$ |
72.10 |
|
Share-based compensation expense for restricted common stock, restricted stock units and deferred stock units is measured at the stock’s fair value on the date of grant and is amortized over each award’s respective service period. The Company values performance units using the Monte Carlo simulation model on the date of grant with assumptions that includes the historical volatilities of shares of VMS common stock, as well as the shares of common stock of peer companies. In addition, the Company estimates the probability that certain performance conditions that affect the vesting of performance units will be achieved, and recognizes expense only for those awards expected to vest.
As of June 27, 2014, unrecognized compensation expense totaling $45.9 million was related to awards of restricted stock, restricted stock units, deferred stock units and performance units. This unrecognized compensation expense is expected to be recognized over a weighted average period of 1.9 years.
14. EARNINGS PER SHARE
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of VMS common stock outstanding for the period. Diluted net earnings per share is computed by dividing net earnings by the sum of the weighted average number of common shares outstanding and dilutive common shares under the treasury stock method.
The following table sets forth the computation of net basic and diluted earnings per share:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands, except per share amounts) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Net earnings |
$ |
107,090 |
|
|
$ |
112,831 |
|
|
$ |
297,838 |
|
|
$ |
320,902 |
|
Weighted average shares outstanding - basic |
|
103,644 |
|
|
|
108,158 |
|
|
|
104,585 |
|
|
|
108,741 |
|
Dilutive effect of potential common shares |
|
1,225 |
|
|
|
1,602 |
|
|
|
1,325 |
|
|
|
1,755 |
|
Weighted average shares outstanding - diluted |
|
104,869 |
|
|
|
109,760 |
|
|
|
105,910 |
|
|
|
110,496 |
|
Net earnings per share - basic |
$ |
1.03 |
|
|
$ |
1.04 |
|
|
$ |
2.85 |
|
|
$ |
2.95 |
|
Net earnings per share - diluted |
$ |
1.02 |
|
|
$ |
1.03 |
|
|
$ |
2.81 |
|
|
$ |
2.90 |
|
Anti-dilutive employee shared based awards, excluded |
|
657 |
|
|
|
737 |
|
|
|
720 |
|
|
|
739 |
|
The Company excludes potentially dilutive common shares (consisting of shares underlying stock options and the employee stock purchase plan) from the computation of diluted weighted average shares outstanding if the per share value, either the exercise price of the awards or the sum of (a) the exercise price of the awards and (b) the amount of the compensation cost attributed to future services and not yet recognized and (c) the amount of tax benefit or shortfall that would be recorded in additional paid-in capital when the award becomes deductible, is greater than the average market price of the shares, because the inclusion of the shares underlying these stock awards would be antidilutive to earnings per share.
15. BUSINESS COMBINATIONS
In April 2014, the Company closed the acquisition of certain assets of Velocity Medical Solutions LLC (“Velocity”), a privately-held Atlanta-based developer of specialized software for cancer clinics. The Velocity software aggregates unstructured treatment and imaging data from diverse systems to give a more comprehensive view of a patient's diagnostic imaging and treatment history and help clinicians make more informed treatment decisions. The acquired assets of Velocity were integrated into the Company’s Oncology Systems business and will increase the Company’s current product offerings. The acquisition was accounted for as a business combination. The total purchase price of the acquisition of $19.9 million consisted of $17.0 million in cash (of which $2.6 million was held back) and $2.9 million of earn-out consideration at fair value. Of the purchase price, $10.6 million was preliminarily allocated to amortizable intangible assets, $9.8 million goodwill, and $(0.5) million to net assumed liabilities. If any additional information becomes available, we may revise our preliminary purchase price allocation. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and in this case is deductible for income tax purposes. The amortization period for the intangible assets acquired through the acquisition was as follows: 6 years for Developed Technology, 7 years for Customer Relationships and 6 years for Trade Name. The goodwill recognized, which was assigned to the Company’s Oncology Systems reporting unit, is primarily attributable to expected synergies resulting from the acquisition. The Company also completed an insignificant acquisition during the first quarter of fiscal year 2014.
The business combination transactions during the first nine months of fiscal year 2014 were not significant, and therefore pro forma disclosures have not been presented.
16. CPTC LOANS
In April 2010, the Company signed an $88 million agreement to supply a proton therapy system to CPTC, a variable interest entity that was established to finance and operate the Scripps Proton Therapy Center in San Diego, California. The Company began recognizing revenues under this contract in the fourth quarter of fiscal year 2011. In June 2011, the Company signed a ten-year, approximately $60 million agreement with CPTC to service the proton therapy system which commenced in the quarter ended December 27, 2013. In addition, in September 2011, ORIX and the Company, through its Swiss subsidiary, committed to loan up to $165.3 million (“Tranche A loan”) to CPTC to fund the development, construction and initial operations of the Scripps Proton Therapy Center. ORIX is the loan agent for this facility and, along with CPTC and Scripps, has budgetary approval authority for the Scripps Proton Therapy Center. The Company’s maximum loan commitment under the Tranche A loan was $115.3 million, reflecting the Company’s pro rata share of 69.75% of the obligation to fund the initial distribution and subsequent advances. In June 2014, the Company, through its Swiss subsidiary, entered into a series of agreements pursuant to which JPMorgan Chase Bank, N.A. (“J.P. Morgan”) assumed $45 million of the Company’s original maximum commitment of $115.3 million, reducing the Company’s maximum commitment under the Tranche A loan to $70.3 million. Pursuant to these agreements, J.P. Morgan purchased $38.1 million of the Company’s outstanding Tranche A loan at par value and is obligated to fund up to an additional $6.9 million of the remaining Tranche A loan commitment. Through these agreements, the Company’s Swiss subsidiary also increased its individual loan commitment by $10 million (“Tranche B loan”) and as a result, the Company’s maximum loan commitment under the Tranche A and Tranche B loans (collectively, referred to as the “CPTC Loans”) is $80.3 million reflecting the Company’s pro rata share of 45.8% of the total obligation to fund CPTC of $175.3 million.
As of June 27, 2014, the Company had loaned $60.8 million of its $70.3 million commitment under the Tranche A loan. The Company intends to sell all or a portion of its participation in its Tranche A loan before the maturity date. Upon the sale of all or a portion of the Tranche A loan, the Company will not be required to make further loan advances for the portion of the loan that is sold. As of June 27, 2014 the Company had loaned $8.6 million of its $10.0 million commitment under the Tranche B loan. The amounts loaned under the Tranche A and Tranche B loans include accrued interest. The CPTC loans are accounted for as available-for-sale securities and recorded at fair value. The Tranche A loan is classified as a short-term investment and included in current assets and the Tranche B loan is included in other assets on the Company’s Condensed Consolidated Balance Sheets. The Tranche B loan is subordinated to the Tranche A loan in the event of default, but otherwise has the same terms as the Tranche A loan. The Company’s subsidiary is not obligated to fund any additional amounts to CPTC beyond the $80.3 million under the CPTC Loans.
Pursuant to the agreements entered into in June 2014, the CPTC Loans mature in September 2017 and bear interest at the London Interbank Offer Rate (“LIBOR”) plus 7.00% per annum with a minimum interest rate of 9.00% per annum. Interest only payments on the CPTC Loans are due monthly in arrears until January 1, 2015, at which time monthly payments based on amortization of the principal balance over a 15-year period at the above mentioned interest rate become due and payable. The Company, as one of the lenders, is entitled to certain fees, including a commitment fee of 1.5% of the Tranche A loan commitment amount and an exit fee of 1% of the amount of CPTC Loans principal paid, whether as a result of prepayment or maturity. The CPTC Loans are collateralized by all of the assets of the Scripps Proton Therapy Center. In connection with the agreements entered into in June 2014, the Company’s subsidiary share of the gross revenues of the Scripps Proton Therapy Center for 35 years was reduced from 4% to 2.5%. Additionally, as a result of J.P. Morgan’s assumption of a portion of the Company’s maximum loan commitment, the Company’s subsidiary’s share of 2.5% of gross revenues is further proportionately split between the Company’s subsidiary and J.P. Morgan based on their maximum amount of CPTC Loans commitment. The Company’s subsidiary’s right of revenue sharing may further be reduced upon the sale of a portion of the Company’s loan and will be reduced to an amount not to exceed 1% of the gross revenues of the Scripps Proton Therapy Center upon repayment of the first $71 million of the Company’s loan amount.
The Company has determined that CPTC is a variable interest entity and that the Company holds a significant variable interest of CPTC through its subsidiary’s participation in the loan facility and its agreements to supply and service the proton therapy equipment. The Company has concluded that it is not the primary beneficiary of CPTC. The Company has no voting rights, has no approval authority or veto rights for CPTC’s budget, and does not have the power to direct patient recruitment, clinical operations and management of the Scripps Proton Therapy Center, which the Company believes are the matters that most significantly affect CPTC’s economic performance.
As of June 27, 2014, in addition to the $60.8 million of the Tranche A loan and $8.6 million of the Tranche B loan to CPTC, the Company had recorded $30.5 million in accounts receivable from CPTC, which includes unbilled accounts receivable. As of September 27, 2013, the outstanding Tranche A loan balance to CPTC was $62.7 million and the accounts receivable balance from CPTC was $48.4 million, which includes unbilled accounts receivable. The Company’s exposure to loss as a result of its involvement with CPTC was limited to the carrying amounts of these assets on its Condensed Consolidated Balance Sheets.
17. STRATEGIC ARRANGEMENT
In April 2012, VMS entered into a strategic global alliance with Siemens through which, among other things, the Company and Siemens are working on developing interfaces to enable the Company’s ARIA® oncology information system software to connect with Siemens linear accelerators and imaging systems. Under the agreement establishing this collaboration, the Company committed to make certain payments, including up to $10.0 million in fixed fees and $20.0 million in license fees, in the event certain product development milestones are achieved. The Company will also pay for additional licenses beyond the minimum quantities set forth in the agreement. As of June 27, 2014, the outstanding fixed fees and license fees commitment under the Siemens agreement was $6.5 million and $19.5 million, respectively.
In addition, pursuant to this agreement, the Company represents Siemens diagnostic imaging products to radiation oncology clinics in most international markets and in North America, and Siemens, in turn, represents the Company’s equipment and software products for radiotherapy and radiosurgery within its offerings to its healthcare customers in agreed upon countries. The Company receives commissions from Siemens for sales agency activities provided to Siemens and makes commission payments to Siemens for sales agency activities provided to the Company as part of this agreement. This agreement also provides a framework for both companies to explore opportunities to co-develop new imaging and treatment solutions in the future.
18. SEGMENT INFORMATION
During the second quarter of fiscal year 2014, the Company changed its organizational structure resulting in a change in operating and reportable segments. The Company’s operations are grouped into two reportable operating segments: Oncology Systems and Imaging Components. The Imaging Components segment includes the Company’s X-ray imaging tubes and flat panel products (previously reported as “X-Ray Products” segment), as well as our security and inspection products (previously reported as “Security and Inspection Products” under the “Other” category). The Company’s GTC and VPT businesses are reflected in the “Other” category because these operating segments do not meet the criteria of a reportable operating segment. The operating segments were determined based on how the Company’s Chief Executive Officer, its Chief Operating Decision Maker (“CODM”), views and evaluates the Company’s operations. The CODM allocates resources to and evaluates the financial performance of each operating segment primarily based on operating earnings. There was no change to the reporting units as a result of the change in operating segments.
Description of Segments
The Oncology Systems segment designs, manufactures, sells and services hardware and software products for treating cancer with radiotherapy, stereotactic radiotherapy, stereotactic body radiotherapy, stereotactic radiosurgery and brachytherapy. Products include linear accelerators, brachytherapy afterloaders, treatment simulation and verification equipment and accessories; as well as information management, treatment planning and image processing software. Oncology Systems’ products enable radiation oncology departments in hospitals and clinics to perform conventional radiotherapy treatments and offer advanced treatments such as fixed field intensity-modulated radiation therapy (“IMRT”), image-guided radiation therapy (“IGRT”), volumetric modulated arc therapy and stereotactic radiotherapy, as well as to treat patients using brachytherapy techniques, which involve temporarily implanting radioactive sources. The Company’s Oncology Systems products are also used by neurosurgeons to perform stereotactic radiosurgery. Oncology Systems’ customers worldwide include university research and community hospitals, private and governmental institutions, healthcare agencies, physicians’ offices and cancer care clinics.
The Imaging Components segment designs, manufactures, sells and services X-ray imaging components for use in a range of applications, including radiographic or fluoroscopic imaging, mammography, special procedures, computed tomography and industrial applications. The Company’s X-ray imaging components are sold to large imaging system OEM customers that incorporate them into their medical diagnostic, dental, veterinary and industrial imaging systems. The Company sells X-ray tubes and flat panel digital image detectors for filmless X-ray imaging (commonly referred to as “flat panel detectors” or “digital image detectors”) to small OEM customers, independent service companies and directly to end-users for replacement purposes. The Imaging Components segment also designs, manufactures, sells and services Linatron® X-ray accelerators, imaging processing software and image detection products (including IntellXTM) for security and inspection purposes, such as cargo screening at ports and borders and nondestructive examination in a variety of applications. The Company generally sells security and inspection products to OEM customers who incorporate its products into their inspection systems, which are then sold to customs and other government agencies, as well as to commercial private parties in the casting, power, aerospace, chemical, petro-chemical and automotive industries for nondestructive product examination purposes.
The Company has two other businesses, VPT and GTC, which are reported together under the “Other” category.
The VPT business develops, designs, manufactures, sells and services products and systems for delivering proton therapy, a form of external beam radiotherapy using proton beams for the treatment of cancer.
GTC develops technologies that enhance the Company’s current businesses or may lead to new business areas, including technology to improve radiation therapy and X-ray imaging, as well as other technology for a variety of applications, including security and cargo screening.
The following table summarizes selected operating results information for each reportable segment:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In millions) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology Systems |
|
$ |
578.2 |
|
|
$ |
561.3 |
|
|
$ |
1,722.7 |
|
|
$ |
1,667.4 |
|
Imaging Components |
|
|
161.8 |
|
|
|
158.2 |
|
|
|
492.0 |
|
|
|
474.6 |
|
Total reportable segments |
|
$ |
740.0 |
|
|
$ |
719.5 |
|
|
$ |
2,214.7 |
|
|
$ |
2,142.0 |
|
Other |
|
|
7.7 |
|
|
|
6.7 |
|
|
|
23.0 |
|
|
|
31.0 |
|
Total company |
|
$ |
747.7 |
|
|
$ |
726.2 |
|
|
$ |
2,237.7 |
|
|
$ |
2,173.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology Systems |
|
$ |
123.5 |
|
|
$ |
129.5 |
|
|
$ |
369.3 |
|
|
$ |
381.0 |
|
Imaging Components |
|
|
41.7 |
|
|
|
40.2 |
|
|
|
124.6 |
|
|
|
118.9 |
|
Total reportable segments |
|
$ |
165.2 |
|
|
$ |
169.7 |
|
|
$ |
493.9 |
|
|
$ |
499.9 |
|
Other |
|
|
(12.2 |
) |
|
|
(11.9 |
) |
|
|
(40.9 |
) |
|
|
(35.7 |
) |
Corporate |
|
|
(10.5 |
) |
|
|
(3.1 |
) |
|
|
(41.0 |
) |
|
|
(16.3 |
) |
Total company |
|
$ |
142.5 |
|
|
$ |
154.7 |
|
|
$ |
412.0 |
|
|
$ |
447.9 |
|
Prior period numbers have been recast to conform to the current period’s presentation.
19. SUBSEQUENT EVENT
In July 2014, the Company closed the acquisition of certain assets and liabilities of Transpire, Inc., a privately-held developer of software solutions for accurately and rapidly predicting the macroscopic behavior of radiation. The transaction will be accounted for as a business combination. The total purchase consideration for the acquisition is $16 million in cash, excluding potential earn-out consideration of up to $4 million, which will be paid over the next three years if certain performance targets are achieved. The Company is currently evaluating the purchase price allocation for this transaction.
Basis of Presentation
The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 27, 2013 (the “2013 Annual Report”). In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of June 27, 2014 and September 27, 2013, results of operations and statements of comprehensive earnings for the three and nine months ended June 27, 2014 and June 28, 2013, and cash flows for the nine months ended June 27, 2014 and June 28, 2013. The results of operations for the three and nine months ended June 27, 2014 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future period.
Segment Reporting
During the second quarter of fiscal year 2014, the Company changed its organizational structure resulting in a change in operating and reportable segments. The Company’s operations are grouped into two reportable operating segments: Oncology Systems and Imaging Components. The Company’s Ginzton Technology Center (“GTC”) and Varian Particle Therapy (“VPT”) businesses are reflected in the “Other” category because these operating segments do not meet the criteria of a reportable operating segment. Refer to Note 18, “Segment Information.”
Reclassifications
Certain items in the condensed consolidated statements of earnings have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported total revenues, total cost of revenues and net earnings.
Fiscal Year
The fiscal years of the Company as reported are the 52- or 53- week periods ending on the Friday nearest September 30. Fiscal year 2014 is the 52-week period ending September 26, 2014, and fiscal year 2013 was the 52-week period that ended on September 27, 2013. The fiscal quarters ended June 27, 2014 and June 28, 2013 were both 13-week periods.
Principles of Consolidation
The condensed consolidated financial statements include those of VMS and its subsidiaries. Intercompany balances, transactions and stock holdings have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Recent Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board ("FASB") issued an amendment to its accounting guidance related to stock-based compensation. The amendment requires that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects vesting, rather than a condition that affects the grant-date fair value. The new guidance will be effective in the Company’s fiscal year beginning 2017. Early adoption is permitted. The amendment can be applied on a prospective basis to all share-based payments granted or modified on or after the effective date. Entities will also be provided an option to apply the guidance on a modified retrospective basis to existing awards. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.
In May 2014, the FASB issued an amendment to its accounting guidance related to revenue recognition. The amendment sets forth a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. The amendment requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance will be effective in the Company’s fiscal year beginning 2018. Early application is not permitted. The amendments can be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of the initial application along with additional disclosures. The Company is evaluating the impact of adopting this guidance to its consolidated financial statements.
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Available-for-sale Securities: |
|
|
|
|
|
|
|
Corporate debt securities: |
|
|
|
|
|
|
|
Amortized cost |
$ |
69.4 |
|
|
$ |
62.7 |
|
Unrealized gain (loss) |
|
- |
|
|
|
- |
|
Fair value |
$ |
69.4 |
|
|
$ |
62.7 |
|
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Inventories: |
|
|
|
|
|
|
|
Raw materials and parts |
$ |
300.9 |
|
|
$ |
276.6 |
|
Work-in-process |
|
115.6 |
|
|
|
91.6 |
|
Finished goods |
|
169.6 |
|
|
|
167.0 |
|
Total inventories |
$ |
586.1 |
|
|
$ |
535.2 |
|
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Other long-term liabilities: |
|
|
|
|
|
|
|
Long-term income taxes payable |
$ |
50.8 |
|
|
$ |
41.9 |
|
Other |
|
99.2 |
|
|
|
102.1 |
|
Total other long-term liabilities |
$ |
150.0 |
|
|
$ |
144.0 |
|
In the tables below, the Company has segregated all assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
|
|
Fair Value Measurement Using |
|
|||||||||||||
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
||
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|||
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|||
|
|
Instruments |
|
|
Inputs |
|
|
Inputs |
|
|
Total |
|
||||
Type of Instruments |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Balance |
|
||||
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at June 27, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale corporate debt securities |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
69.4 |
|
|
$ |
69.4 |
|
Derivative assets |
|
|
- |
|
|
|
0.1 |
|
|
|
- |
|
|
|
0.1 |
|
Total assets measured at fair value |
|
$ |
- |
|
|
$ |
0.1 |
|
|
$ |
69.4 |
|
|
$ |
69.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at June 27, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4.2 |
) |
|
$ |
(4.2 |
) |
Total liabilities measured at fair value |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(4.2 |
) |
|
$ |
(4.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at September 27, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
50.0 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
50.0 |
|
Available-for-sale corporate debt security |
|
|
- |
|
|
|
- |
|
|
|
62.7 |
|
|
|
62.7 |
|
Option to purchase a privately-held company |
|
|
- |
|
|
|
- |
|
|
|
1.4 |
|
|
|
1.4 |
|
Total assets measured at fair value |
|
$ |
50.0 |
|
|
$ |
- |
|
|
$ |
64.1 |
|
|
$ |
114.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at September 27, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
- |
|
|
$ |
(1.1 |
) |
|
$ |
- |
|
|
$ |
(1.1 |
) |
Contingent consideration |
|
|
- |
|
|
|
- |
|
|
|
(2.5 |
) |
|
|
(2.5 |
) |
Total liabilities measured at fair value |
|
$ |
- |
|
|
$ |
(1.1 |
) |
|
$ |
(2.5 |
) |
|
$ |
(3.6 |
) |
The following table presents the reconciliation for all assets and liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
Option to |
|
|
|
Available-For-Sale Corporate Debt |
|
|
Contingent |
|
|
Purchase a Privately - Held |
|
|||
(In millions) |
Securities |
|
|
Consideration |
|
|
Company |
|
|||
Balance at September 27, 2013 |
$ |
62.7 |
|
|
$ |
(2.5 |
) |
|
$ |
1.4 |
|
Additions (1) |
|
44.8 |
|
|
|
(2.9 |
) |
|
|
- |
|
Sale of a portion of available-for-sale corporate debt securities(2) |
|
(38.1 |
) |
|
|
- |
|
|
|
- |
|
Settlements (3) |
|
- |
|
|
|
0.6 |
|
|
|
- |
|
Change in fair value recognized in earnings |
|
- |
|
|
|
0.6 |
|
|
|
(1.4 |
) |
Balance at June 27, 2014 |
$ |
69.4 |
|
|
$ |
(4.2 |
) |
|
$ |
- |
|
x |
Amounts reported under Available-For-Sale Corporate Debt Securities include accrued interest. |
x |
Refer to Note 16 “CPTC Loans” |
x |
Amounts reported under “Contingent Consideration” represent cash payments to settle contingent consideration liabilities. |
For the three and nine months ended June 27, 2014, the Company’s assets that were measured at fair value on a nonrecurring basis are summarized below:
|
Net Carrying Value |
|
|
Total Losses for the |
|
||
(In millions) |
as of June 27, 2014 |
|
|
three and nine months ended |
|
||
Equity investment in Augmenix |
$ |
7.3 |
|
|
$ |
6.3 |
|
The Company’s financing receivables, consisting of its accounts receivable with contractual maturities of more than one year, and the related allowance for doubtful accounts are presented in the following table:
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Accounts receivable with contractual maturities of more than one year: |
|
|
|
|
|
|
|
Gross amount |
$ |
41.3 |
|
|
$ |
28.0 |
|
Allowance for doubtful accounts |
|
(3.0 |
) |
|
|
(3.0 |
) |
Net amount |
$ |
38.3 |
|
|
$ |
25.0 |
|
Amount past due |
$ |
3.5 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
The following table reflects the activity of goodwill by reportable operating segment:
|
Oncology |
|
|
Imaging |
|
|
|
|
|
|
|
|
|
||
(In millions) |
Systems |
|
|
Components |
|
|
Other |
|
|
Total |
|
||||
Balance at September 27, 2013 |
$ |
132.0 |
|
|
$ |
33.2 |
|
|
$ |
60.1 |
|
|
$ |
225.3 |
|
Acquisition of businesses |
|
10.4 |
|
|
|
- |
|
|
|
- |
|
|
|
10.4 |
|
Foreign currency translation adjustments |
|
- |
|
|
|
- |
|
|
|
0.4 |
|
|
|
0.4 |
|
Balance at June 27, 2014 |
$ |
142.4 |
|
|
$ |
33.2 |
|
|
$ |
60.5 |
|
|
$ |
236.1 |
|
The following table reflects the gross carrying amount and accumulated amortization of the Company’s intangible assets included in “Other assets” in the Condensed Consolidated Balance Sheets as follows:
|
June 27, |
|
|
September 27, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Intangible Assets: |
|
|
|
|
|
|
|
Acquired existing technology |
$ |
46.6 |
|
|
$ |
36.6 |
|
Patents, licenses and other |
|
27.9 |
|
|
|
29.0 |
|
Customer contracts and supplier relationship |
|
11.9 |
|
|
|
10.9 |
|
Accumulated amortization |
|
(54.7 |
) |
|
|
(53.1 |
) |
Net carrying amount |
$ |
31.7 |
|
|
$ |
23.4 |
|
The fair values of derivative instruments reported on the Company’s Condensed Consolidated Balance Sheets were as follows:
|
|
Asset Derivatives |
|
|
|
Liability Derivatives |
|
||||||||||||||
|
|
|
|
June 27, |
|
|
September 27, |
|
|
|
|
|
June 27, |
|
|
September 27, |
|
||||
|
|
Balance Sheet |
|
2014 |
|
|
2013 |
|
|
|
Balance Sheet |
|
2014 |
|
|
2013 |
|
||||
(In millions) |
|
Location |
|
Fair Value |
|
|
Fair Value |
|
|
|
Location |
|
Fair Value |
|
|
Fair Value |
|
||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Prepaid expenses and other current assets |
|
$ |
- |
|
|
$ |
- |
|
|
|
Accrued liabilities |
|
$ |
- |
|
|
$ |
1.1 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts |
|
Prepaid expenses and other current assets |
|
|
0.1 |
|
|
|
- |
|
|
|
Accrued liabilities |
|
|
- |
|
|
|
- |
|
Total derivatives |
|
|
|
$ |
0.1 |
|
|
$ |
- |
|
|
|
|
|
$ |
- |
|
|
$ |
1.1 |
|
The Company had the following outstanding foreign currency forward contracts that were designated as cash flow hedges:
|
At June 27, 2014 |
|
|
|
Notional Value |
|
|
(In millions) |
Sold |
|
|
Euro |
$ |
13.7 |
|
Totals |
$ |
13.7 |
|
The Company had the following outstanding foreign currency forward contracts that were either (i) entered into to hedge balance sheet exposures from its various foreign subsidiaries and business units or (ii) originally designated as cash flow hedges (primarily in Euro and Japanese yen) and were subsequently de-designated when the forecasted revenues were recognized:
|
|
At June 27, 2014 |
|
|||||
|
|
|
|
|
|
Notional |
|
|
|
|
Notional |
|
|
Value |
|
||
(In millions) |
|
Value Sold |
|
|
Purchased |
|
||
Australian dollar |
|
$ |
14.9 |
|
|
$ |
- |
|
British pound |
|
|
4.2 |
|
|
|
- |
|
Canadian dollar |
|
|
- |
|
|
|
10.3 |
|
Euro |
|
|
170.3 |
|
|
|
- |
|
Japanese yen |
|
|
101.9 |
|
|
|
- |
|
Hungarian Forint |
|
|
2.0 |
|
|
|
|
|
Indian Rupee |
|
|
2.3 |
|
|
|
- |
|
New Zealand dollar |
|
|
3.4 |
|
|
|
- |
|
Norwegian krone |
|
|
6.9 |
|
|
|
- |
|
Swedish krona |
|
|
7.8 |
|
|
|
- |
|
Swiss franc |
|
|
- |
|
|
|
52.1 |
|
Totals |
|
$ |
313.7 |
|
|
$ |
62.4 |
|
The following table presents the amounts, before tax, recognized in “Accumulated other comprehensive loss” in the Condensed Consolidated Balance Sheets and in the Condensed Consolidated Statements of Earnings that are related to the effective portion of the foreign currency forward contracts designated as cash flow hedges:
|
Gain (Loss) Recognized in Other |
|
|
Location of Gain |
|
Gain (Loss) Reclassified from Accumulated Other |
|
||||||||||||||||||||||||||
|
Comprehensive Income |
|
|
(Loss) Reclassified |
|
Comprehensive Income into Net Earnings |
|
||||||||||||||||||||||||||
|
(Effective Portion) |
|
|
from Accumulated |
|
(Effective Portion) |
|
||||||||||||||||||||||||||
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Other Comprehensive |
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income into Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
|
Earnings (Effective |
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||||||
(In millions) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
Portion) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||||||
Foreign currency forward contracts |
$ |
0.1 |
|
|
$ |
(0.3 |
) |
|
$ |
2.2 |
|
|
$ |
2.0 |
|
|
Revenues |
|
$ |
(0.3 |
) |
|
$ |
2.0 |
|
|
$ |
1.0 |
|
|
$ |
3.0 |
|
The following table presents the gains (losses) recognized in the Condensed Consolidated Statements of Earnings related to the foreign currency forward exchange contracts that are not designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on |
|
Amount of Gain (Loss) Recognized in Net |
|
|
Amount of Gain Recognized in Net |
|
||||||||||
Derivative |
|
Earnings on Derivative |
|
|
Earnings on Derivative |
|
||||||||||
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In millions) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Selling, general and administrative expenses |
|
$ |
(1.1 |
) |
|
$ |
3.4 |
|
|
$ |
0.4 |
|
|
$ |
15.7 |
|
The following table reflects the changes in the Company’s accrued product warranty:
|
Nine Months Ended |
|
|||||
|
June 27, |
|
|
June 28, |
|
||
(In millions) |
2014 |
|
|
2013 |
|
||
Accrued product warranty, at beginning of period |
$ |
53.2 |
|
|
$ |
52.8 |
|
Charged to cost of revenues |
|
38.8 |
|
|
|
38.9 |
|
Actual product warranty expenditures |
|
(41.5 |
) |
|
|
(41.0 |
) |
Accrued product warranty, at end of period |
$ |
50.5 |
|
|
$ |
50.7 |
|
The Company’s net defined benefit and post-retirement benefit costs were composed of the following:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Defined Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
$ |
1,028 |
|
|
$ |
1,169 |
|
|
$ |
3,077 |
|
|
$ |
3,598 |
|
Interest cost |
|
1,545 |
|
|
|
1,276 |
|
|
|
4,591 |
|
|
|
3,891 |
|
Expected return on plan assets |
|
(1,977 |
) |
|
|
(1,388 |
) |
|
|
(5,869 |
) |
|
|
(4,235 |
) |
Amortization of prior service cost |
|
43 |
|
|
|
41 |
|
|
|
128 |
|
|
|
121 |
|
Recognized actuarial loss |
|
539 |
|
|
|
682 |
|
|
|
1,616 |
|
|
|
2,045 |
|
Net periodic benefit cost |
$ |
1,178 |
|
|
$ |
1,780 |
|
|
$ |
3,543 |
|
|
$ |
5,420 |
|
Post-Retirement Benefit Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost |
$ |
43 |
|
|
$ |
40 |
|
|
$ |
129 |
|
|
120 |
|
|
Amortization of prior service cost |
|
1 |
|
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
Recognized actuarial (gain) / loss |
|
(3 |
) |
|
|
15 |
|
|
|
(9 |
) |
|
|
45 |
|
Net periodic benefit cost |
$ |
41 |
|
|
$ |
56 |
|
|
$ |
123 |
|
|
$ |
168 |
|
The changes in accumulated other comprehensive earnings (loss) by component and related tax effects are summarized as follows (in thousands):
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains |
|
|
Gains |
|
|
|
|
|
|
Accumulated |
|
|||
|
(Losses) Defined |
|
|
(Losses) |
|
|
Cumulative |
|
|
Other |
|
||||
|
benefit pension and |
|
|
Cash Flow |
|
|
Translation |
|
|
Comprehensive |
|
||||
|
post-retirement |
|
|
Hedging |
|
|
Adjustment |
|
|
Earnings |
|
||||
|
benefit plans |
|
|
Instruments |
|
|
and Other |
|
|
(Loss) |
|
||||
Balance at September 27, 2013 |
$ |
(40,081 |
) |
|
$ |
(691 |
) |
|
$ |
701 |
|
|
$ |
(40,071 |
) |
Other comprehensive earnings before reclassifications |
|
- |
|
|
|
2,177 |
|
|
|
(752 |
) |
|
|
1,425 |
|
Amounts reclassified out of other comprehensive earnings |
|
1,737 |
|
|
|
(1,038 |
) |
|
|
- |
|
|
|
699 |
|
Tax expense |
|
(321 |
) |
|
|
(427 |
) |
|
|
- |
|
|
|
(748 |
) |
Balance at June 27, 2014 |
$ |
(38,665 |
) |
|
$ |
21 |
|
|
$ |
(51 |
) |
|
$ |
(38,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
Net Unrealized Gains |
|
|
Gains |
|
|
|
|
|
|
Accumulated |
|
|||
|
(Losses) Defined |
|
|
(Losses) |
|
|
Cumulative |
|
|
Other |
|
||||
|
benefit pension and |
|
|
Cash Flow |
|
|
Translation |
|
|
Comprehensive |
|
||||
|
post-retirement |
|
|
Hedging |
|
|
Adjustment |
|
|
Earnings |
|
||||
|
benefit plans |
|
|
Instruments |
|
|
and Other |
|
|
(Loss) |
|
||||
Balance at September 28, 2012 |
$ |
(48,623 |
) |
|
$ |
531 |
|
|
$ |
(8,529 |
) |
|
$ |
(56,621 |
) |
Other comprehensive earnings before reclassifications |
|
- |
|
|
|
2,046 |
|
|
|
1,998 |
|
|
|
4,044 |
|
Amounts reclassified out of other comprehensive earnings |
|
2,211 |
|
|
|
(2,962 |
) |
|
|
- |
|
|
|
(751 |
) |
Tax benefit / (expense) |
|
(411 |
) |
|
|
344 |
|
|
|
- |
|
|
|
(67 |
) |
Balance at June 28, 2013 |
$ |
(46,823 |
) |
|
$ |
(41 |
) |
|
$ |
(6,531 |
) |
|
$ |
(53,395 |
) |
The amounts reclassified out of other comprehensive earnings into the Condensed Consolidated Statements of Earnings, with line item location, during each period were as follows (in thousands):
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
|
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
|
||||
Comprehensive Earnings Components |
Income (Loss) Before Taxes |
|
|
Income (Loss) Before Taxes |
|
|
Line Item in Statements of Earnings |
||||||||||
Unrealized gains and (losses) on defined benefit pension and post-retirement benefit plans |
$ |
(579 |
) |
|
$ |
(736 |
) |
|
$ |
(1,737 |
) |
|
$ |
(2,211 |
) |
|
Cost of Revenues & Operating Expenses |
Unrealized gains and (losses) on cash flow hedging instruments |
|
(239 |
) |
|
|
2,000 |
|
|
|
1,038 |
|
|
|
2,962 |
|
|
Revenues |
Total amounts reclassified out of other comprehensive earnings |
$ |
(818 |
) |
|
$ |
1,264 |
|
|
$ |
(699 |
) |
|
$ |
751 |
|
|
|
The table below summarizes the net share-based compensation expense recognized for employee stock awards and for the option component of the employee stock purchase plan shares:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Cost of revenues - Product |
$ |
950 |
|
|
$ |
1,058 |
|
|
$ |
2,374 |
|
|
$ |
3,443 |
|
Cost of revenues - Service |
|
1,330 |
|
|
|
1,069 |
|
|
|
3,392 |
|
|
|
2,530 |
|
Research and development |
|
1,771 |
|
|
|
1,515 |
|
|
|
4,392 |
|
|
|
4,741 |
|
Selling, general and administrative |
|
7,363 |
|
|
|
6,882 |
|
|
|
19,896 |
|
|
|
23,201 |
|
Total share-based compensation expense |
|
11,414 |
|
|
|
10,524 |
|
|
|
30,054 |
|
|
|
33,915 |
|
Tax effects |
|
(3,564 |
) |
|
|
(3,181 |
) |
|
|
(9,301 |
) |
|
|
(10,359 |
) |
Net share-based compensation expense |
$ |
7,850 |
|
|
$ |
7,343 |
|
|
$ |
20,753 |
|
|
$ |
23,556 |
|
The fair value of options granted was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Employee Stock Option Plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
- |
|
|
|
4.77 |
|
|
|
4.13 |
|
|
4.76 |
|
||
Risk-free interest rate |
- |
|
|
|
0.7 |
% |
|
|
1.2 |
% |
|
|
0.6 |
% |
|
Expected volatility |
- |
|
|
|
29.6 |
% |
|
|
24.6 |
% |
|
|
32.2 |
% |
|
Expected dividend |
- |
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
Weighted average fair value at grant date |
$ |
- |
|
|
$ |
18.21 |
|
|
$ |
18.23 |
|
|
$ |
19.73 |
|
The option component of employee stock purchase plan shares was estimated at the date of grant using the Black-Scholes model with the following weighted average assumptions:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected term (in years) |
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.50 |
|
Risk-free interest rate |
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Expected volatility |
|
11.1 |
% |
|
|
13.6 |
% |
|
|
12.8 |
% |
|
|
16.5 |
% |
Expected dividend |
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Weighted average fair value at grant date |
$ |
14.42 |
|
|
$ |
12.21 |
|
|
$ |
14.20 |
|
|
$ |
12.95 |
|
A summary of share-based awards available for grant is as follows:
|
Shares |
|
|
|
Available |
|
|
(In thousands) |
for Grant |
|
|
Balance at September 27, 2013 |
|
9,925 |
|
Granted |
|
(1,923 |
) |
Cancelled or expired |
|
151 |
|
Balance at June 27, 2014 |
|
8,153 |
|
Activity under the Company’s employee stock plans is presented below:
|
Options Outstanding |
|
|||||||||||||
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
||
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|||
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
||||
(In thousands, except per share amounts) |
Shares |
|
|
Price |
|
|
Term (in years) |
|
|
Value (1) |
|
||||
Balance at September 27, 2013 |
|
4,485 |
|
|
$ |
53.02 |
|
|
|
|
|
|
|
|
|
Granted |
|
619 |
|
|
|
83.49 |
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
(36 |
) |
|
|
71.03 |
|
|
|
|
|
|
|
|
|
Exercised |
|
(1,421 |
) |
|
|
48.39 |
|
|
|
|
|
|
|
|
|
Balance at June 27, 2014 |
|
3,647 |
|
|
$ |
59.84 |
|
|
|
3.4 |
|
|
$ |
87,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 27, 2014 |
|
2,688 |
|
|
$ |
53.64 |
|
|
|
2.4 |
|
|
$ |
81,202 |
|
(1) The aggregate intrinsic value represents the total pre-tax intrinsic value of options, which is computed based on the difference between the exercise price and VMS’s closing common stock price of $83.85 as of June 27, 2014, the last trading date of the third quarter of fiscal year 2014, and which would have been received by the option holders had all option holders exercised and sold their options as of that date.
The activity for restricted stock, restricted stock units, deferred stock units and performance units is summarized as follows:
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant-Date Fair |
|
|
(In thousands, except per share amounts) |
Shares |
|
|
Value |
|
||
Balance at September 27, 2013 |
|
1,035 |
|
|
$ |
64.36 |
|
Granted |
|
467 |
|
|
|
82.50 |
|
Vested |
|
(331 |
) |
|
|
63.40 |
|
Cancelled or expired |
|
(38 |
) |
|
|
70.40 |
|
Balance at June 27, 2014 |
|
1,133 |
|
|
$ |
72.10 |
|
The following table sets forth the computation of net basic and diluted earnings per share:
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In thousands, except per share amounts) |
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Net earnings |
$ |
107,090 |
|
|
$ |
112,831 |
|
|
$ |
297,838 |
|
|
$ |
320,902 |
|
Weighted average shares outstanding - basic |
|
103,644 |
|
|
|
108,158 |
|
|
|
104,585 |
|
|
|
108,741 |
|
Dilutive effect of potential common shares |
|
1,225 |
|
|
|
1,602 |
|
|
|
1,325 |
|
|
|
1,755 |
|
Weighted average shares outstanding - diluted |
|
104,869 |
|
|
|
109,760 |
|
|
|
105,910 |
|
|
|
110,496 |
|
Net earnings per share - basic |
$ |
1.03 |
|
|
$ |
1.04 |
|
|
$ |
2.85 |
|
|
$ |
2.95 |
|
Net earnings per share - diluted |
$ |
1.02 |
|
|
$ |
1.03 |
|
|
$ |
2.81 |
|
|
$ |
2.90 |
|
Anti-dilutive employee shared based awards, excluded |
|
657 |
|
|
|
737 |
|
|
|
720 |
|
|
|
739 |
|
The following table summarizes selected operating results information for each reportable segment:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
June 27, |
|
|
June 28, |
|
|
June 27, |
|
|
June 28, |
|
||||
(In millions) |
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology Systems |
|
$ |
578.2 |
|
|
$ |
561.3 |
|
|
$ |
1,722.7 |
|
|
$ |
1,667.4 |
|
Imaging Components |
|
|
161.8 |
|
|
|
158.2 |
|
|
|
492.0 |
|
|
|
474.6 |
|
Total reportable segments |
|
$ |
740.0 |
|
|
$ |
719.5 |
|
|
$ |
2,214.7 |
|
|
$ |
2,142.0 |
|
Other |
|
|
7.7 |
|
|
|
6.7 |
|
|
|
23.0 |
|
|
|
31.0 |
|
Total company |
|
$ |
747.7 |
|
|
$ |
726.2 |
|
|
$ |
2,237.7 |
|
|
$ |
2,173.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology Systems |
|
$ |
123.5 |
|
|
$ |
129.5 |
|
|
$ |
369.3 |
|
|
$ |
381.0 |
|
Imaging Components |
|
|
41.7 |
|
|
|
40.2 |
|
|
|
124.6 |
|
|
|
118.9 |
|
Total reportable segments |
|
$ |
165.2 |
|
|
$ |
169.7 |
|
|
$ |
493.9 |
|
|
$ |
499.9 |
|
Other |
|
|
(12.2 |
) |
|
|
(11.9 |
) |
|
|
(40.9 |
) |
|
|
(35.7 |
) |
Corporate |
|
|
(10.5 |
) |
|
|
(3.1 |
) |
|
|
(41.0 |
) |
|
|
(16.3 |
) |
Total company |
|
$ |
142.5 |
|
|
$ |
154.7 |
|
|
$ |
412.0 |
|
|
$ |
447.9 |
|
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Last Modified: 18/05/2009