UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

 

COMMISSION FILE NUMBER:  001-15405

AGILENT TECHNOLOGIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:  (408) 553-7777

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.  YES  x   NO  o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR NON-ACCELERATED FILER. SEE DEFINITION OF “ACCELERATED FILER AND LARGE ACCELERATED FILER” IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE):

LARGE ACCELERATED FILER  x

ACCELERATED FILER  o

NON-ACCELERATED FILER  o

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).  YES  o   NO  x

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

CLASS		OUTSTANDING JULY 31, 2007
COMMON STOCK, $0.01 PAR VALUE		386,547,716 SHARES

 

AGILENT TECHNOLOGIES, INC.

 TABLE OF CONTENTS

						Page  Number
Part I.		Financial Information				3
		Item 1.		Condensed Consolidated Financial Statements (Unaudited)		3
				Condensed Consolidated Statement of Operations		3
				Condensed Consolidated Balance Sheet		4
				Condensed Consolidated Statement of Cash Flows		5
				Notes to Condensed Consolidated Financial Statements		6
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk		26
		Item 4.		Controls and Procedures		26
Part II.		Other Information				27
		Item 1.		Legal Proceedings		27
		Item 1A.		Risk Factors		27
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		33
		Item 6.		Exhibits		33
Signature						34
Exhibit Index						35

 

PART I — FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AGILENT TECHNOLOGIES, INC.

 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 (in millions, except per share amounts)

(Unaudited)

		Three Months Ended July 31,						Nine Months Ended July 31,
		2007			2006			2007			2006
Net revenue:
Products		$	1,140		$	1,027		$	3,300		$	3,022
Services and other		234			212			674			623
Total net revenue		1,374			1,239			3,974			3,645
Costs and expenses:
Cost of products		484			424			1,408			1,329
Cost of services and other		132			129			387			387
Total costs		616			553			1,795			1,716
Research and development		170			162			511			499
Selling, general and administrative		420			407			1,274			1,236
Gain on sale of Palo Alto and San Jose sites		—			(65		)	—			(121		)
Total costs and expenses		1,206			1,057			3,580			3,330
Income from operations		168			182			394			315
Interest income		42			49			136			132
Interest expense		(23		)	(21		)	(68		)	(44		)
Other income (expense), net		3			17			7			51
Income from continuing operations before taxes and equity income		190			227			469			454
Provision for income taxes		5			11			11			44
Equity in net income of unconsolidated affiliate and gain - Lumileds		—			—			—			901
Income from continuing operations		185			216			458			1,311
Income from and gain (loss) on sale of discontinued operations of our semiconductor products business (net of taxes of zero and $10 million for the three and nine months ended July 31, 2006, respectively)		—			(6		)	—			1,815
Income from discontinued operations of our semiconductor test solutions business (net of taxes of $7 million and $17 million for the three and nine months ended July 31, 2006, respectively)		—			17			—			32
Net income		$	185		$	227		$	458		$	3,158
Net income (loss) per share – basic:
Income from continuing operations		$	0.47		$	0.52		$	1.15		$	2.99
Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net		—			(0.01		)	—			4.14
Income from discontinued operations of our semiconductor test solutions business, net		—			0.04			—			0.08
Net income per share – basic		$	0.47		$	0.55		$	1.15		$	7.21
Net income (loss) per share – diluted:
Income from continuing operations		$	0.45		$	0.51		$	1.11		$	2.92
Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net		—			(0.01		)	—			4.04
Income from discontinued operations of our semiconductor test solutions business, net		—			0.04			—			0.07
Net income per share – diluted		$	0.45		$	0.54		$	1.11		$	7.03
Weighted average shares used in computing net income (loss) per share:
Basic		392			412			400			438
Diluted		407			422			412			449

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)

		July 31, 2007			October 31, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	1,486		$	2,262
Accounts receivable, net		738			692
Inventory		674			627
Other current assets		383			377
Total current assets		3,281			3,958
Property, plant and equipment, net		787			775
Goodwill and other intangible assets, net		732			468
Restricted cash and cash equivalents		1,617			1,606
Other assets		607			562
Total assets		$	7,024		$	7,369
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	346		$	378
Employee compensation and benefits		368			414
Deferred revenue		251			225
Income and other taxes payable		389			390
Other accrued liabilities		156			131
Total current liabilities		1,510			1,538
Long-term debt		1,500			1,500
Retirement and post-retirement benefits		293			288
Other long-term liabilities		433			395
Total liabilities		3,736			3,721
Stockholders’ equity:
Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding		—			—
Common stock; $0.01 par value; 2 billion shares authorized; 550 million shares at July 31, 2007 and 535 million shares at October 31, 2006 issued		5			5
Treasury stock at cost; 163 million shares at July 31, 2007 and 127 million shares at October 31, 2006		(5,838		)	(4,525		)
Additional paid-in-capital		7,052			6,605
Retained earnings		1,992			1,534
Accumulated other comprehensive income		77			29
Total stockholders’ equity		3,288			3,648
Total liabilities and stockholders’ equity		$	7,024		$	7,369

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

		Nine Months Ended July 31,
		2007			2006
Cash flows from operating activities:
Net income		$	458		$	3,158
Less: income from and gain on sale of discontinued operations of our semiconductor products business, net		—			1,815
Less: income from discontinued operations of our semiconductor test solutions business, net		—			32
Income from continuing operations		458			1,311
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		143			128
Share-based compensation		103			73
Deferred taxes		(29		)	(9		)
Excess and obsolete inventory-related charges		13			28
Asset impairment charges		8			23
Net gain on sale of investments		(2		)	(9		)
Net gain on sale of assets		(13		)	(114		)
Gain on sale and undistributed equity in net income of Lumileds		—			(901		)
Net pension curtailment and settlement gains		—			(18		)
Other		1			2
Changes in assets and liabilities:
Accounts receivable		(9		)	5
Inventory		(46		)	(42		)
Accounts payable		(14		)	41
Employee compensation and benefits		(50		)	(132		)
Income taxes and other taxes payable		11			(88		)
Other current assets and liabilities		23			(8		)
Other long-term assets and liabilities		(26		)	(160		)
Net cash provided by operating activities of continuing operations		571			130
Net cash provided by operating activities of discontinued operations related to our semiconductor products business		—			7
Net cash provided by operating activities of discontinued operations related to our semiconductor test solutions business		—			96
Net cash provided by operating activities		571			233
Cash flows from investing activities:
Investments in property, plant and equipment		(115		)	(135		)
Proceeds from sale of property, plant and equipment		12			205
Investments in equity securities		—			(5		)
Proceeds from the sale of Lumileds and other investments		12			966
Net proceeds from sale of discontinued operations		—			2,509
(Increase) decrease in restricted cash, cash equivalents and investments, net		1			(1,583		)
Payment of loan receivable		—			50
Proceeds from sale of short-term investments		—			25
Purchase of minority interest, primarily Yokogawa Analytical Systems		—			(104		)
Acquisitions of businesses and intangible assets, net of cash acquired		(311		)	(30		)
Proceeds from sale of intangibles and assets, net		14			—
Net cash provided by (used in) investing activities of continuing operations		(387		)	1,898
Net cash used in investing activities of discontinued operations related to our semiconductor products business		—			(6		)
Net cash used in investing activities of discontinued operations related to our semiconductor test solutions business		—			(30		)
Net cash provided by (used in) investing activities		(387		)	1,862
Cash flows from financing activities:
Issuance of common stock under employee stock plans, net		344			513
Repurchases of common stock		(1,313		)	(4,179		)
Capital contributions to subsidiary (our semiconductor test solutions business)		—			(19		)
Proceeds from term facility		—			700
Repayment of term facility		—			(700		)
Debt issuance costs		—			(25		)
Cash distribution to minority interest in consolidated joint venture		—			(16		)
Long-term debt		(4		)	1,500
Net cash used in financing activities of continuing operations		(973		)	(2,226		)
Net cash provided by financing activities of discontinued operations related to our semiconductor test solutions business		—			140
Net cash used in financing activities		(973		)	(2,086		)
Effect of exchange rate movements		13			14
Net increase (decrease) in cash and cash equivalents		(776		)	23
Cash and cash equivalents at beginning of period		2,262			2,226
Cash and cash equivalents at end of period		$	1,486		$	2,249

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. OVERVIEW

Agilent Technologies, Inc. (“we”, “Agilent” or the “company”), incorporated in Delaware in May 1999, is a measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. In the first quarter of 2006, we completed the divestiture of our semiconductor products business. In the third quarter of 2006, we completed the initial public offering of our semiconductor test solutions business, Verigy Ltd., (“Verigy”). Verigy was a majority-owned subsidiary of Agilent until the distribution of our remaining Verigy shares to Agilent stockholders on October 31, 2006. The results of our semiconductor products business and our semiconductor test solutions business are presented as discontinued operations for fiscal year 2006 in the condensed consolidated financial statements.

Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications. The amounts comprising other income (expense), net in the consolidated statement of operations for the three and nine months ended July 31, 2006, were reclassified to conform to the more detailed presentation used in 2007, which separately discloses interest income and interest expense.

Basis of Presentation. We have prepared the accompanying financial data for the three and nine months ended July 31, 2007 and 2006 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with our 2006 Annual Report on Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our condensed consolidated balance sheet as of July 31, 2007 and October 31, 2006, condensed consolidated statement of operations for the three and nine months ended July 31, 2007 and 2006, and condensed consolidated statement of cash flows for the nine months ended July 31, 2007 and 2006.

The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, restructuring and asset impairment charges, inventory valuation, investment impairments, share-based compensation, retirement and post-retirement benefit plan assumptions, valuation of long-lived assets and accounting for income taxes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

3. NEW ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Income Tax Uncertainties” (“FIN No. 48”). FIN No. 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority and provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN No. 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the consolidated financial statements prior to the adoption of FIN No. 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently evaluating the impact of FIN No. 48 on our consolidated financial statements.

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In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, an amendment of FASB statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”), which requires companies to recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on their balance sheets. Funded status is the difference between the fair market value of plan assets and the benefit obligation. The company will adopt the recognition provisions of SFAS No. 158 as of October 31, 2007 and plans to adopt the measurement date requirement as of October 31, 2009. SFAS No. 158 will be applied prospectively. If the company had adopted SFAS No. 158 at the end of fiscal 2006, using the company’s year-end actuarial valuations, the impact would have been a reduction in assets of $2 million, an increase in liabilities of $26 million, and a reduction of accumulated other comprehensive income of $28 million.

In September 2006, the Staff of the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of determining whether the current year’s financial statements are materially misstated. We adopted SAB No. 108 in our first quarter and the adoption had no material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115” (“SFAS No. 159”). SFAS No. 159 allows companies to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. Unrealized gains and losses shall be reported on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and will be applied prospectively. We are currently evaluating the impact of adopting SFAS No. 159 on our consolidated financial statements.

4. SHARE-BASED COMPENSATION

We follow the accounting provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”), for share-based awards granted to employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”) and performance share awards under our Long-Term Performance Program (“LTPP”) using the estimated grant date fair value method of accounting in accordance with SFAS No. 123 (R).

The impact on our results for share-based compensation was as follows:

		Three Months Ended						Nine Months Ended
		July 31,						July 31,
		2007			2006			2007			2006
		(in millions, except						(in millions, except
		per share data)						per share data)
Cost of products		$	6		$	6		$	27		$	21
Research and development		4			3			18			13
Selling, general and administrative		17			10			58			39
Total share-based compensation expense		$	27		$	19		$	103		$	73
Impact on net income per share:
Basic		$	0.07		$	0.05		$	0.26		$	0.17
Diluted		$	0.07		$	0.05		$	0.25		$	0.16

 

Under the LTPP, the company’s executive officers and other key employees are entitled to receive unrestricted shares of the company’s stock after the end of a three-year period, if specified performance targets are met. The final award may vary as it is based on certain performance metrics. During the second quarter of 2007, we received the final performance results of our three years ended 2006 LTPP, which indicated that we exceeded our specified performance targets. Consequently, in the three months ended April 30, 2007 we recorded an incremental share-based compensation expense of $6 million to reflect this Plan’s performance results.

In addition, in the three months ended April 30, 2007, we recorded $4 million of expense for the acceleration of unvested awards related to the separation of a senior executive.

Share-based compensation from continuing operations capitalized within inventory at July 31, 2007 and 2006 was zero. The windfall tax benefit realized from exercised stock options and similar awards was immaterial for the three and nine months ended July 31, 2007 and 2006.

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The following assumptions were used during the three and nine months ended July 31, 2007 and 2006 to estimate the fair value of options granted, ESPP purchases and a LTPP grant:

		Three Months Ended				Nine Months Ended
		July 31,				July 31,
		2007		2006		2007		2006
Stock Option Plans:
Weighted average risk-free interest rate		5.0	%	5.0	%	4.6	%	4.3	%
Dividend yield		0	%	0	%	0	%	0	%
Weighted average volatility		25	%	31	%	29	%	29	%
Expected life		4.60 yrs		4.25 yrs		4.60 yrs		4.25 yrs
ESPP:
Weighted average risk-free interest rate		5.1	%	5.0	%	4.8	%	4.5	%
Dividend yield		0	%	0	%	0	%	0	%
Weighted average volatility		23	%	26	%	31	%	29	%
Expected life		0.5-1.5 yrs		0.5 yrs		0.5-2 yrs		0.5-1 yrs
LTPP:
Volatility of Agilent shares		30	%	N/A		31	%	28	%
Volatility of selected peer-company shares		15%-57	%	N/A		15%-5	7%	23%-82	%
Price-wise correlation with selected peers		29	%	N/A		29	%	50	%

 

For the three and nine months ended July 31, 2007 and 2006, the fair value of share-based awards for employee stock option awards and employee stock purchases made under our ESPP was estimated using the Black-Scholes option pricing model. For the three and nine months ended July 31, 2007 and for the nine months ended July 31, 2006, shares granted under the LTPP were valued using a Monte Carlo simulation. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant.

The expected stock price volatility assumption for employee stock option awards and our ESPP was determined using the implied volatility for our stock for the three and nine months ended July 31, 2007 and 2006. We estimate the stock price volatility using the implied volatility of Agilent’s publicly traded, similarly priced, stock options. We have determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than using historical volatility or a combined method of determining volatility.

In the first quarter of 2007, we revised our estimate of the expected life of our employee stock options. In revising this estimate, we considered several factors, including the expected lives used by a peer group of companies and the historical option exercise behavior of our employees. In the first quarter of 2007, we granted the majority of our employee stock options to executive employees and the review of our data indicated that our executive employees, on average, exercise their options at 4.6 years.

Under the anti-dilution provision of the 1999 Stock Plan, on November 1, 2006, Agilent adjusted the exercise price downward and number of option shares upward for each outstanding employee stock option to preserve the value of the options after the Verigy spin-off. The impact of the adjusted exercise price and number of options has been reflected in our disclosures as of November 1, 2006.

5. PROVISION FOR TAXES

We recorded $5 million and $11 million of income tax provision for the three and nine months ended July 31, 2007. The tax provision for the three months ended July 31, 2007 includes a benefit of $30 million related to valuation allowance adjustments based on changes in other comprehensive income (“OCI”) items during the nine months ended July 31, 2007, of which $23 million is due to increases in currency translation adjustments and $7 million is due to increases in the value of certain stock investments.  The tax provision for the nine months ended July 31, 2007 includes the same valuation allowance adjustments for OCI items and a benefit of $50 million related to the reversal of tax reserves for potential non-U.S. exposures where the statute of limitations has now expired. The provision for taxes was recorded for income generated in jurisdictions other than those in which the Company has full valuation allowances. We intend to maintain full valuation allowances in these jurisdictions until sufficient positive evidence exists to support the reversal of the valuation allowances.

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We are subject to ongoing tax examinations of our tax returns by the Internal Revenue Service (“IRS”) and other tax authorities in various jurisdictions. In August 2007, the IRS completed its audit of the years 2000 through 2002 and issued a Revenue Agent’s Report. For the U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable judgments. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the accrual of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

6. NET INCOME PER SHARE

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented below.

		Three Months Ended						Nine Months Ended
		July 31,						July 31,
		2007			2006			2007			2006
		(in millions)
Numerator:
Income from continuing operations		$	185		$	216		$	458		$	1,311
Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net		—			(6		)	—			1,815
Income from discontinued operations of our semiconductor test solutions business, net		—			17			—			32
Net income		$	185		$	227		$	458		$	3,158
Denominators:
Basic weighted-average shares		392			412			400			438
Potentially dilutive common stock equivalents		15			10			12			11
Diluted weighted-average shares		407			422			412			449

 

The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required by SFAS No. 123 (R).

The following table presents options to purchase shares of common stock, which were not included in the computation of diluted net income per share because they were anti-dilutive.

 

7. RESTRICTED CASH & CASH EQUIVALENTS AND LONG-TERM DEBT

Restricted cash and cash equivalents as of July 31, 2007 was $1,617 million. In January 2006, Agilent Technologies World Trade, Inc., a consolidated wholly owned subsidiary of Agilent (“World Trade”), entered into a Master Repurchase Agreement and related Confirmation (together, the “Repurchase Agreement”) with a third party pursuant to which World Trade sold 15,000 Class A preferred shares of one of its wholly owned subsidiaries having an aggregate liquidation preference of $1.5 billion. Pursuant to the Repurchase Agreement, World Trade is obligated to repurchase from the third party those preferred shares for 100 percent of their aggregate liquidation preference in January 2011. The $1.5 billion obligation of our subsidiary to repurchase the preferred shares has been classified as long-term debt on our condensed consolidated balance sheet. Included in restricted cash and cash equivalents is $1,581 million of short-term restricted commercial paper maintained in connection with our obligations per the Repurchase Agreement.

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8. INVENTORY

		July 31, 2007			October 31, 2006
		(in millions)
Finished goods		$	314		$	285
Work in progress		57			51
Raw materials		303			291
Total inventory		$	674		$	627

 

9. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents goodwill balances and the movements for each of our reportable segments during the nine months ended July 31, 2007:

		Electronic Measurement				Bio-analytical Measurement				Total
		(in millions)
Goodwill at October 31, 2006		$		272		$		113		$		385
Foreign currency translation impact		1				(2			)	(1			)
Goodwill arising from acquisitions		39				127				166
Goodwill at July 31, 2007		$	312			$	238			$	550

 

The components of other intangibles as of July 31, 2007 and October 31, 2006 are shown in the table below:

		Purchased Other Intangible Assets
		Gross Carrying Amount				Accumulated Amortization						Net Book Value
		(in millions)
As of October 31, 2006:
Purchased technology		$		208		$				143		$				65
Customer relationships		50				32						18
Total		$		258		$			175			$			83
As of July 31, 2007:
Purchased technology		$		272		$		164				$		108
Trademarks		31				1						30
Customer relationships		83				39						44
Total		$	386			$	204					$	182

 

We recorded approximately $166 million of goodwill and $128 million of other intangibles during the nine months ended July 31, 2007, related to seven acquisitions that closed during the period including the acquisition of Stratagene Corp. (“Stratagene”).  Pro forma disclosures are not presented for these acquisitions, as they are not material.

On June 6, 2007, we completed our acquisition of Stratagene, a leading developer, manufacturer and marketer of specialized life science research and diagnostic products. The aggregate purchase price was approximately $252 million in cash used to purchase 100 percent of Stratagene’s outstanding common shares and vested common stock options that Stratagene employees held on the close date.

Under the purchase method of accounting, the purchase price of the transaction was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.  We may adjust the preliminary purchase price allocation after obtaining more information regarding, among other things, taxes and pre-acquisition contingencies.  We anticipate that the purchase price allocation will be finalized by our fiscal 2007 year-end.

Based upon the purchase price of the acquisition, the preliminary purchase price allocation is as follows (in millions).

		Amount
Net tangible assets		$	30
Goodwill		123
Identifiable intangible assets		99
Total net assets acquired		$	252

 

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Identifiable intangible assets consist of purchased technology, customer relationships, and trademarks. The useful life was based on the period over which the intangible asset is expected to contribute directly or indirectly to the future cash flows, in accordance with SFAS 142, “Goodwill and Other Intangible Assets”.

As part of the merger agreement with Stratagene we entered into an Asset Purchase Agreement with Catalyst LLC (“Catalyst”), a Delaware limited liability company, to sell, transfer, and assign certain intangible and tangible assets to Catalyst on June 7, 2007.  Catalyst was formed by the former chairman, CEO and founder of Stratagene to pursue molecular diagnostic applications. We received $7 million in cash for the following:  intangible assets, $5 million; and tangible assets, $2 million.  No gain or loss was recognized on the sale of these assets to Catalyst.

The results of operations for Stratagene have been included in our condensed consolidated financial statements from the date of acquisition. The financial results of this acquisition are considered immaterial for purposes of pro forma financial disclosures.  Goodwill recorded as a result of the acquisition of Stratagene is not deductible for tax purposes.

Amortization of intangible assets was $13 million and $29 million for the three and nine months ended July 31, 2007, respectively, and $7 million and $18 million for the same periods in the prior year.  Future amortization expense related to existing purchased intangible assets is estimated to be $12 million for the remainder of 2007, $38 million for 2008, $31 million for 2009, $27 million for 2010, $24 million for 2011, $17 million for 2012, and $33 million thereafter.

10. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS

Components of net periodic costs. For the three and nine months ended July 31, 2007 and 2006, our net pension and post retirement benefit costs were comprised of the following:

Three Months Ended July 31,

		Pensions
		U.S. Plans						Non-U.S. Plans						U.S. Post Retirement Benefit Plans
		2007			2006			2007			2006			2007				2006
		(in millions)
Service cost—benefits earned during the period		$	10		$	11		$	9		$	11		$		1		$				1
Interest cost on benefit obligation		10			10			16			15			6				7
Expected return on plan assets		(14		)	(13		)	(23		)	(21		)	(7			)	(6					)
Amortization and deferrals:
Actuarial (gain) loss		(1		)	(1		)	8			9			1				1
Prior service cost		—			—			—			—			(2			)	(2					)
Total net plan costs		$	5		$	7		$	10		$	14		$		(1	)	$				1
Curtailments		$	—		$	(12	)	$	—		$	1		—				$				(12	)
Settlements		—			(4		)	—			(4		)	—				—
Total net plan (income) costs		$	5		$	(9	)	$	10		$	11		$		(1	)	$			(11		)
Distribution of net plan costs
Continuing operations		$	5		$	(1	)	$	10		$	10		(1			)	$		(9			)
Discontinued operations		—			(8		)	—			1			—				(2					)
Total net plan costs		$	5		$	(9	)	$	10		$	11		$	(1		)	$	(11				)

 

Nine Months Ended July 31,

		Pensions
		U.S. Plans						Non-U.S. Plans						U.S. Post Retirement Benefit Plans
		2007			2006			2007			2006			2007				2006
		(in millions)
Service cost—benefits earned during the period		$	30		$	35		$	27		$	33		$		3		$			3
Interest cost on benefit obligation		30			30			48			43			20				21
Expected return on plan assets		(42		)	(39		)	(69		)	(59		)	(21			)	(18				)
Amortization and deferrals:
Actuarial (gain) loss		(3		)	(2		)	24			25			1				5
Prior service cost		—			—			—			—			(6			)	(8				)
Total net plan costs		$	15		$	24		$	30		$	42		$		(3	)	$			3
Curtailments		—			(34		)	—			1			—				(33				)
Settlements		(1		)	(4		)	—			(12		)	—				—
Total net plan costs		$	14		$	(14	)	$	30		$	31		$		(3	)	$			(30	)
Distribution of net plan costs
Continuing operations		$	14		$	14		$	30		$	36		(3			)	$		(7		)
Discontinued operations		—			(28		)	—			(5		)	—				(23				)
Total net plan costs		$	14		$	(14	)	$	30		$	31		$	(3		)	$	(30			)

 

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