UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2012
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 001-15405
AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE |
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77-0518772 |
(State or other jurisdiction of |
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(IRS employer |
incorporation or organization) |
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Identification no.) |
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5301 STEVENS CREEK BLVD., |
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SANTA CLARA, CALIFORNIA |
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95051 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (408) 553-2424
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in rule 12b-2 of the exchange act.
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(do not check if a smaller reporting company) |
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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 issuers classes of common stock, as of the latest practicable date.
CLASS |
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OUTSTANDING AT APRIL 30, 2012 |
COMMON STOCK, $0.01 PAR VALUE |
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347,500,865 SHARES |
AGILENT TECHNOLOGIES, INC.
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Page |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
21 | |
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32 | ||
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33 | ||
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33 | ||
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34 | ||
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45 |
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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2012 |
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2011 |
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2012 |
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2011 |
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Net revenue: |
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Products |
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$ |
1,435 |
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$ |
1,389 |
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$ |
2,777 |
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$ |
2,647 |
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Services and other |
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298 |
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288 |
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591 |
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549 |
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Total net revenue |
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1,733 |
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1,677 |
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3,368 |
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3,196 |
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Costs and expenses: |
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Cost of products |
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650 |
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622 |
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1,251 |
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1,179 |
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Cost of services and other |
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165 |
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155 |
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325 |
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301 |
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Total costs |
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815 |
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777 |
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1,576 |
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1,480 |
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Research and development |
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166 |
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165 |
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328 |
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324 |
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Selling, general and administrative |
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452 |
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469 |
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893 |
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915 |
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Total costs and expenses |
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1,433 |
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1,411 |
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2,797 |
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2,719 |
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Income from operations |
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300 |
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266 |
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571 |
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477 |
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Interest income |
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2 |
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3 |
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5 |
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7 |
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Interest expense |
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(25 |
) |
(20 |
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(51 |
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(43 |
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Other income (expense), net |
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16 |
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11 |
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24 |
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17 |
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Income before taxes |
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293 |
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260 |
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549 |
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458 |
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Provision for income taxes |
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38 |
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60 |
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64 |
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65 |
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Net income |
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$ |
255 |
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$ |
200 |
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$ |
485 |
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$ |
393 |
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Net income per share: |
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Basic |
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$ |
0.73 |
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$ |
0.58 |
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$ |
1.39 |
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$ |
1.13 |
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Diluted |
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$ |
0.72 |
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$ |
0.56 |
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$ |
1.37 |
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$ |
1.11 |
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Weighted average shares used in computing net income per share: |
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Basic |
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348 |
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347 |
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348 |
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347 |
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Diluted |
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354 |
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355 |
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353 |
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355 |
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Cash dividends declared per common share |
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$ |
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$ |
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$ |
0.10 |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited)
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April 30, |
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October 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,896 |
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$ |
3,527 |
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Accounts receivable, net |
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909 |
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860 |
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Inventory |
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947 |
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898 |
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Other current assets |
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258 |
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284 |
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Total current assets |
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6,010 |
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5,569 |
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Property, plant and equipment, net |
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996 |
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1,006 |
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Goodwill |
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1,597 |
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1,567 |
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Other intangible assets, net |
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394 |
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429 |
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Long-term investments |
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111 |
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117 |
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Other assets |
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305 |
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369 |
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Total assets |
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$ |
9,413 |
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$ |
9,057 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
457 |
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$ |
472 |
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Employee compensation and benefits |
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396 |
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424 |
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Deferred revenue |
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423 |
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389 |
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Short-term debt |
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251 |
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253 |
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Other accrued liabilities |
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308 |
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299 |
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Total current liabilities |
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1,835 |
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1,837 |
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Long-term debt |
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1,926 |
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1,932 |
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Retirement and post-retirement benefits |
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281 |
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329 |
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Other long-term liabilities |
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646 |
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643 |
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Total liabilities |
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4,688 |
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4,741 |
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Commitments and contingencies (Note 11) |
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Total equity: |
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Stockholders equity: |
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Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding |
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Common stock; $0.01 par value; 2 billion shares authorized; 594 million shares at April 30, 2012 and 591 million shares at October 31, 2011, issued |
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6 |
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6 |
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Treasury stock at cost; 246 million shares at April 30, 2012 and 244 million shares at October 31, 2011 |
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(8,612 |
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(8,535 |
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Additional paid-in-capital |
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8,354 |
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8,265 |
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Retained earnings |
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4,906 |
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4,456 |
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Accumulated other comprehensive income |
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68 |
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116 |
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Total stockholders equity |
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4,722 |
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4,308 |
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Non-controlling interest |
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3 |
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8 |
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Total equity |
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4,725 |
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4,316 |
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Total liabilities and equity |
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$ |
9,413 |
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$ |
9,057 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
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Six Months Ended |
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2012 |
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2011 |
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Cash flows from operating activities: |
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Net income |
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$ |
485 |
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$ |
393 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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123 |
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127 |
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Share-based compensation |
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43 |
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44 |
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Deferred taxes |
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(4 |
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38 |
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Excess and obsolete inventory and inventory-related charges |
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13 |
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13 |
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Other non-cash expenses, net |
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2 |
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5 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(63 |
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(26 |
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Inventory |
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(64 |
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(139 |
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Accounts payable |
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(6 |
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(19 |
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Employee compensation and benefits |
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(23 |
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14 |
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Other assets and liabilities |
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(3 |
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48 |
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Net cash provided by operating activities |
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503 |
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498 |
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Cash flows from investing activities: |
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Investments in property, plant and equipment |
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(83 |
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(89 |
) | ||
Proceeds from lease receivable |
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80 |
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Proceeds from sale of investments |
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5 |
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14 |
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Purchase of non-controlling interest |
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(6 |
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Acquisitions of businesses and intangible assets, net of cash acquired |
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(76 |
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(96 |
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Change in restricted cash and cash equivalents, net |
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1,545 |
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Net cash provided by (used in) investing activities |
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(80 |
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1,374 |
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Cash flows from financing activities: |
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Issuance of common stock under employee stock plans |
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61 |
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204 |
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Payment of dividend |
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(35 |
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Repayment of debt |
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(1,500 |
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Treasury stock repurchases |
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(78 |
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(270 |
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Net cash used in financing activities |
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(52 |
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(1,566 |
) | ||
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Effect of exchange rate movements |
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(2 |
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20 |
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Net increase in cash and cash equivalents |
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369 |
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326 |
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Cash and cash equivalents at beginning of period |
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3,527 |
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2,649 |
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Cash and cash equivalents at end of period |
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$ |
3,896 |
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$ |
2,975 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 life sciences, chemical analysis, communications and electronics industries.
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 quarters.
Basis of Presentation. We have prepared the accompanying financial data for the three and six months ended April 30, 2012 and 2011 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 2011 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 April 30, 2012 and October 31, 2011, condensed consolidated statement of operations for the three and six months ended April 30, 2012 and 2011, and condensed consolidated statement of cash flows for the six months ended April 30, 2012 and 2011.
The preparation of condensed consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on managements best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. 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, inventory valuation, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets, restructuring and asset impairment charges and accounting for income taxes.
Update to Significant Accounting Policies. There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011.
Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the cost method, their carrying value approximates their estimated fair value. The fair value of our short-term and long-term debt, calculated from quoted prices which are Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the balance sheet carrying value by approximately $2 million and $190 million, respectively as of April 30, 2012. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 8, Fair Value Measurements for additional information on the fair value of financial instruments.
Goodwill and Purchased Intangible Assets. In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the current two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The revised guidance includes examples of events and circumstances that might indicate that a reporting units fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entitys operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
The changes were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, earlier adoption is permitted. Agilent opted to early adopt this guidance for the year ended October 31, 2011.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We have aggregated components of an operating segment that have similar economic characteristics into our reporting units. Accordingly, Agilent has three reporting units, which are the same as our operating segments: life sciences, chemical analysis and electronic measurement. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination. Based on our results of our qualitative test for goodwill impairment, as of September 30, 2011, we believe that it is more-likely-than-not that the fair value of each of our three reporting units, life sciences, chemical analysis and electronic measurement was greater than their respective carrying values. There was no impairment of goodwill during the three and six months ended April 30, 2012 and 2011.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 15 years. In process research and development (IPR&D) is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilents consolidated statement of operations in the period it is abandoned.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued guidance that requires new disclosures for fair value measurements and provides clarification for existing disclosure requirements. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for gross presentation of activity in level 3 which is effective for annual periods beginning after December 15, 2010, and for interim periods in those years. We adopted the guidance for new disclosures for fair value measurements and clarification for existing disclosure requirements as of February 1, 2010 and there was no material impact on our consolidated financial statements. Additionally, we adopted the guidance regarding level 3 activity on November 1, 2011 and there was no material impact to our consolidated financial statements. See Note 8, Fair Value Measurements for additional information on the fair value of financial instruments.
In May 2011, the FASB amended fair value measurement and disclosure guidance to achieve convergence with International Financial Reporting Standards (IFRS). The amended guidance modifies the measurement of fair value, clarifies verbiage, and changes disclosure or other requirements in US GAAP and IFRS. The guidance is effective during interim and annual periods beginning after December 15, 2011. We adopted the guidance as of February 1, 2012 and there was no material impact on our consolidated financial statements.
In June 2011, the FASB issued guidance related to the presentation of comprehensive income. The guidance aims to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We expect to make presentational changes to our consolidated financial statements upon adoption of this guidance. Given that this guidance impacts financial statement presentation requirements only its adoption will not have a material impact on our consolidated financial statements.
In December 2011, the FASB issued guidance related to the enhanced disclosures that will enable the users of financial statements to evaluate the effect or potential effect of netting arrangements of an entitys financial position. The amendments require improved information about financial instruments and derivative instruments that are either offset or subject to enforceable master netting arrangements or similar agreement. The guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not expect a material impact to our consolidated financial statements due to the adoption of this guidance.
3. SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our 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 granted to selected members of our senior management under the long-term performance plan (LTPP) based on estimated fair values.
The impact on our results for share-based compensation was as follows:
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Three Months Ended |
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Six Months Ended |
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April 30, |
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April 30, |
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2012 |
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2011 |
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2012 |
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2011 |
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(in millions) |
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Cost of products and services |
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$ |
4 |
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$ |
3 |
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$ |
10 |
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$ |
10 |
|
Research and development |
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2 |
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2 |
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6 |
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6 |
| ||||
Selling, general and administrative |
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12 |
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11 |
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29 |
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28 |
| ||||
Total share-based compensation expense |
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$ |
18 |
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$ |
16 |
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$ |
45 |
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$ |
44 |
|
At April 30, 2012 there was no share-based compensation capitalized within inventory. The windfall tax benefit realized from exercised stock options and similar awards was not material for the three and six months ended April 30, 2012 and 2011.
The following assumptions were used to estimate the fair value of the options and LTPP grants.
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Three Months Ended |
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Six Months Ended |
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April 30, |
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April 30, |
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2012 |
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2011 |
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2012 |
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2011 |
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Stock Option Plans: |
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Weighted average risk-free interest rate |
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1.2 |
% |
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|
0.9 |
% |
1.5 |
% |
Dividend yield |
|
1 |
% |
|
|
0 |
% |
0 |
% |
Weighted average volatility |
|
38 |
% |
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|
38 |
% |
35 |
% |
Expected life |
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5.8yrs |
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|
5.8 yrs |
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5.8yrs |
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LTPP: |
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Volatility of Agilent shares |
|
41 |
% |
40 |
% |
41 |
% |
40 |
% |
Volatility of selected peer-company shares |
|
17%-75 |
% |
20%-76 |
% |
17%-75 |
% |
20%-76 |
% |
Price-wise correlation with selected peers |
|
62 |
% |
55 |
% |
62 |
% |
55 |
% |
The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the options 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 Agilents common stock on the date of grant adjusted for expected dividend yield. On January 17, 2012, the Companys Board of Directors approved the initiation of quarterly cash dividends to the Companys shareholders. The fair value of all the awards granted prior to the declaration of quarterly cash dividend was measured based on an expected dividend yield of 0%. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.
We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executives, which we believe is representative of future behavior.
4. PROVISION FOR INCOME TAXES
For the three and six months ended April 30, 2012, we recorded an income tax provision of $38 million and $64 million compared to an income tax provision of $60 million and $65 million, respectively, for the same periods last year. The income tax provision for the three and six months ended April 30, 2012 includes net discrete tax expense of $10 million and $14 million,
respectively. The net discrete tax charges for the three months ended April 30, 2012 primarily relate to U.S. penalties and withholding taxes. The income tax provision for the three and six months ended April 30, 2011 includes net discrete tax expense of $31 million and $16 million, respectively. The net discrete tax expense for the three months ended April 30, 2011 includes a $29 million out of period adjustment to reduce the carrying value of certain U.K. deferred tax assets. The net discrete tax expense for the six months ended April 30, 2011 includes a $16 million discrete benefit relating to a tax settlement with a foreign tax authority.
Without considering interest and penalties, the effective tax rate reflects taxes in all jurisdictions except the U.S. and foreign jurisdictions in which income tax expense or benefit continues to be offset by adjustments to valuation allowances. Our effective tax rate is affected by foreign tax credits, the expected level of other tax benefits, the effects of business acquisitions and dispositions, the impact of changes to valuation allowances, changes in other comprehensive income, as well as changes in the mix of income and losses in the jurisdictions in which we operate that have varying statutory rates. As of April 30, 2012, we intend to maintain valuation allowances in these jurisdictions until sufficient positive evidence exists to support reversal. We currently have a valuation allowance of $338 million of which $276 million relates to U.S. jurisdictions. Due to improvements in the U.S. operating results over the past three years, management believes a reasonable possibility exists that, within the year, sufficient positive evidence may become available to reach a conclusion that the U.S. valuation allowance will no longer be needed.
In the U.S., tax years remain open back to the year 2006 for federal income tax purposes and the year 2000 for significant states. In 2011, Agilent and the Internal Revenue Service (IRS) reached an agreement on transfer pricing issues covering years 2003 2007. Tax adjustments resulting from these agreements will be offset with net operating losses and tax credit carryforwards. Agilents U.S. federal income tax returns for 2006 through 2007 are currently under audit by the IRS. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2003. With these jurisdictions and the U.S., it is possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Because of the uncertainty as to the timing of a potential settlement or the completion of tax audits, an estimate cannot be made of the range of tax increases or decreases that could occur in the next twelve months.
5. 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 |
|
Six Months Ended |
| ||||||||
|
|
April 30, |
|
April 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
(in millions) |
| ||||||||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
255 |
|
$ |
200 |
|
$ |
485 |
|
$ |
393 |
|
Denominators: |
|
|
|
|
|
|
|
|
| ||||
Basic weighted-average shares |
|
348 |
|
347 |
|
348 |
|
347 |
| ||||
Potentially dilutive common stock equivalents stock options and other employee stock plans |
|
6 |
|
8 |
|
5 |
|
8 |
| ||||
Diluted weighted-average shares |
|
354 |
|
355 |
|
353 |
|
355 |
| ||||
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 and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the companys common stock can result in a greater dilutive effect from potentially dilutive awards.
For the three and six months ended April 30, 2012, options to purchase 6,000 shares and 862,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive. For the three and six months ended April 30, 2011, no options to purchase shares were excluded from the calculation of diluted earnings per share.
6. INVENTORY
|
|
April 30, |
|
October 31, |
| ||
|
|
(in millions) |
| ||||
Finished goods |
|
$ |
466 |
|
$ |
452 |
|
Purchased parts and fabricated assemblies |
|
481 |
|
446 |
| ||
Inventory |
|
$ |
947 |
|
$ |
898 |
|
7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill balances and the movements for each of our reportable segments during the six months ended April 30, 2012:
|
|
Life Sciences |
|
Chemical Analysis |
|
Electronic |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Goodwill as of October 31, 2011 |
|
$ |
367 |
|
$ |
765 |
|
$ |
435 |
|
$ |
1,567 |
|
Foreign currency translation impact |
|
(4 |
) |
(9 |
) |
(10 |
) |
(23 |
) | ||||
Goodwill arising from acquisitions |
|
35 |
|
1 |
|
17 |
|
53 |
| ||||
Goodwill as of April 30, 2012 |
|
$ |
398 |
|
$ |
757 |
|
$ |
442 |
|
$ |
1,597 |
|
The components of other intangibles as of April 30, 2012 and October 31, 2011 are shown in the table below:
|
|
Purchased Other Intangible Assets |
| |||||||
|
|
Gross |
|
Accumulated |
|
Net Book |
| |||
|
|
(in millions) |
| |||||||
As of October 31, 2011: |
|
|
|
|
|
|
| |||
Purchased technology |
|
$ |
510 |
|
$ |
246 |
|
$ |
264 |
|
Backlog |
|
12 |
|
12 |
|
|
| |||
Trademark/Tradename |
|
40 |
|
20 |
|
20 |
| |||
Customer relationships |
|
249 |
|
114 |
|
135 |
| |||
Total amortizable intangible assets |
|
811 |
|
392 |
|
419 |
| |||
In-Process R&D |
|
10 |
|
|
|
10 |
| |||
Total |
|
$ |
821 |
|
$ |
392 |
|
$ |
429 |
|
As of April 30, 2012: |
|
|
|
|
|
|
| |||
Purchased technology |
|
526 |
|
$ |
280 |
|
$ |
246 |
| |
Backlog |
|
14 |
|
13 |
|
1 |
| |||
Trademark/Tradename |
|
40 |
|
22 |
|
18 |
| |||
Customer relationships |
|
248 |
|
130 |
|
118 |
| |||
Total amortizable intangible assets |
|
828 |
|
445 |
|
383 |
| |||
In-Process R&D |
|
11 |
|
|
|
11 |
| |||
Total |
|
$ |
839 |
|
$ |
445 |
|
$ |
394 |
|
During the three and six months ended April 30, 2012, we recorded additions to goodwill of $14 million and $53 million, respectively, related to the purchase of six businesses. During the three and six months ended April 30, 2011, we recorded additions to goodwill of $64 million. During the three and six months ended April 30, 2012, we recorded additions to other intangible assets of $8 million and $24 million, respectively, related to the purchase of six businesses during the year. During the three and six months ended April 30, 2011, we recorded additions to other intangible assets of $42 million. During the six months ended April 30, 2012, we also reduced intangible assets by $6 million due to the impact of foreign exchange translation. Amortization of intangible assets was $26 million and $53 million for the three and six months ended April 30, 2012, respectively. Amortization and impairments of intangible assets was $31 million and $59 million for the three and six months ended April 30, 2011, respectively. Future amortization expense related to existing purchased intangible assets is estimated to be $47 million for the remainder of 2012, $84 million for 2013, $73 million for 2014, $59 million for 2015, $51 million for 2016, $36 million for 2017, and $44 million thereafter.
8. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instruments categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of April 30, 2012 were as follows:
|
|
|
|
Fair Value Measurement at April 30, 2012 Using |
| ||||||||
|
|
April 30, |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
|
|
(in millions) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Short-term |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (money market funds) |
|
$ |
2,791 |
|
$ |
2,791 |
|
$ |
|
|
$ |
|
|
Derivative instruments (foreign exchange and interest rate swap contracts) |
|
17 |
|
|
|
17 |
|
|
| ||||
Long-term |
|
|
|
|
|
|
|
|
| ||||
Trading securities |
|
49 |
|
49 |
|
|
|
|
| ||||
Total assets measured at fair value |
|
$ |
2,857 |
|
$ |
2,840 |
|
$ |
17 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Short-term |
|
|
|
|
|
|
|
|
| ||||
Derivative instruments (foreign exchange contracts) |
|
$ |
7 |
|
$ |
|
|
$ |
7 |
|
$ |
|
|
Long-term |
|
|
|
|
|
|
|
|
| ||||
Deferred compensation liability |
|
47 |
|
|
|
47 |
|
|
| ||||
Total liabilities measured at fair value |
|
$ |
54 |
|
$ |
|
|
$ |
54 |
|
$ |
|
|
Assets and liabilities measured at fair value on a recurring basis as of October 31, 2011 were as follows:
|
|
|
|
Fair Value Measurement at October 31, 2011 Using |
| ||||||||
|
|
October 31, |
|
Quoted Prices |
|
Significant |
|
Significant |
| ||||
|
|
(in millions) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
Short-term |
|
|
|
|
|
|
|
|
| ||||
Cash equivalents (money market funds) |
|
$ |
1,972 |
|
$ |
1,972 |
|
$ |
|
|
$ |
|
|
Derivative instruments (foreign exchange and interest rate swap contracts) |
|
37 |
|
|
|
37 |
|
|
| ||||
Long-term |
|
|
|
|
|
|
|
|
| ||||
Trading securities |
|
49 |
|
49 |
|
|
|
|
| ||||
Available-for-sale investments |
|
3 |
|
3 |
|
|
|
|
| ||||
Total assets measured at fair value |
|
$ |
2,061 |
|
$ |
2,024 |
|
$ |
37 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
| ||||
Short-term |
|
|
|
|
|
|
|
|
| ||||
Derivative instruments (foreign exchange contracts) |
|
$ |
11 |
|
$ |
|
|
$ |
11 |
|
$ |
|
|
Long-term |
|
|
|
|
|
|
|
|
| ||||
Deferred compensation liability |
|
46 |
|
|
|
46 |
|
|
| ||||
Total liabilities measured at fair value |
|
$ |
57 |
|
$ |
|
|
$ |
57 |
|
$ |
|
|
Our money market funds, trading securities investments, and available-for-sale investments are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Investments designated as available-for-sale and certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in stockholders equity. Realized gains and losses from the sale of these instruments are recorded in net income.
Impairment of Investments. There were no impairments for investments for the three and six months ended April 30, 2012 and 2011.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net income during the three and six months ended April 30, 2012 and 2011:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
(in millions) |
| ||||||||||
Long-lived assets held and used |
|
$ |
|
|
$ |
4 |
|
$ |
|
|
$ |
4 |
|
Long-lived assets held for sale |
|
|
|
1 |
|
|
|
1 |
| ||||
There were no impairments of long-lived assets for the three and six months ended April 30, 2012. For the three and six months ended April 30, 2011, long-lived assets held and used with a carrying value of $4 million were written down to their fair value of zero. For the three and six months ended April 30, 2011, long-lived assets held for sale with a carrying value of $4 million were written down to their fair value of $3 million. Fair value for the impaired long-lived assets was measured using level 2 inputs and impairments were included in net income for the period stated.
Investments in Leases
In December 2011, we terminated our leasehold interest in the municipal properties, received $80 million in cash and recognized a loss of approximately $2 million.
9. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of risk management strategy, we use derivative instruments, primarily forward contracts, purchased options, and interest rate swaps, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates and interest rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. We believe that the fair value of our fixed rate debt changes when the underlying market rates of interest change, and we may use interest rate swaps to modify such market risk. The interest rate swaps effectively change our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from our cash, cash equivalents and other short term investments. By entering into these interest rate swaps we are also hedging the movements in the fair value of the fixed-rate debt on our balance sheet. However, not all of our fixed rate debts fair value is hedged in this manner, and in the future we may choose to terminate previously executed swaps. For derivative instruments that are designated and qualify as fair value hedges, we recognize the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, in interest expense, in the consolidated statement of operations. These fair value hedges are 100 percent effective, and there is no impact on earnings due to hedge ineffectiveness. The fair value of the swaps is recorded on the consolidated balance sheet at each period end, with an offsetting entry in senior notes. As of April 30, 2012, there were four interest rate swap contracts designated as fair value hedges associated with our 2012 senior notes. The notional amount of these interest rate swap contracts, receive-fixed/pay-variable, was $250 million.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented the notional amount of $400 million. The amount to be amortized at April 30, 2012 was $29 million. On June 6, 2011, we also terminated five interest rate swap contracts associated with our 2015 senior notes that represented the notional amount of $500 million. The amount to be amortized at April 30, 2012 was $22 million. On Aug 9, 2011, we terminated five interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million. The amount to be amortized at April 30, 2012 was $30 million.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in the value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement of operations when either the forecasted transaction occurs or it becomes probable that the forecasted transaction will not occur. Changes in the fair value of the ineffective portion of derivative instruments are recognized in cost of sales in the consolidated statement of operations in the current period.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense) in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
All of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. If our corporate credit rating were to fall below investment grade, the counterparties to the derivative instruments may request collateralization on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of April 30, 2012, was $3 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of April 30, 2012.
There were 152 foreign exchange forward contracts and 11 foreign exchange option contracts open as of April 30, 2012 and designated as cash flow hedges. There were 161 foreign exchange forward contracts open as of April 30, 2012 not designated as hedging instruments. The aggregated U.S. Dollar notional amounts by currency and designation as of April 30, 2012 were as follows:
|
|
Derivatives in Cash Flow |
|
Derivatives |
| |||||
|
|
Forward |
|
Option |
|
Forward |
| |||
Currency |
|
Buy/(Sell) |
|
Buy/(Sell) |
|
Buy/(Sell) |
| |||
|
|
(in millions) |
| |||||||
Euro |
|
$ |
(74 |
) |
$ |
|
|
$ |
183 |
|
British Pound |
|
|
|
|
|
110 |
| |||
Canadian Dollar |
|
(36 |
) |
|
|
|
| |||
Australian Dollars |
|
38 |
|
|
|
44 |
| |||
Malaysian Ringgit |
|
118 |
|
|
|
2 |
| |||
Japanese Yen |
|
(59 |
) |
(126 |
) |
104 |
| |||
Other |
|
(4 |
) |
|
|
(21 |
) | |||
Totals |
|
$ |
(17 |
) |
$ |
(126 |
) |
$ |
422 |
|
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet. The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of April 30, 2012 and October 31, 2011 were as follows:
Fair Values of Derivative Instruments |
| ||||||||||||||
Asset Derivatives |
|
Liability Derivatives |
| ||||||||||||
|
|
Fair Value |
|
|
|
Fair Value |
| ||||||||
Balance Sheet Location |
|
April 30, |
|
October 31, |
|
Balance Sheet Location |
|
April 30, |
|
October 31, |
| ||||
(in millions) |
| ||||||||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Fair value hedges |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
| ||||
Other current assets |
|
$ |
1 |
|
$ |
3 |
|
Other accrued liabilities |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
| ||||
Other current assets |
|
$ |
10 |
|
$ |
7 |
|
Other accrued liabilities |
|
$ |
4 |
|
$ |
3 |
|
|
|
$ |
11 |
|
$ |
10 |
|
|
|
$ |
4 |
|
$ |
3 |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign exchange contracts |
|
|
|
|
|
|
|
|
|
|
| ||||
Other current assets |
|
$ |
6 |
|
$ |
27 |
|
Other accrued liabilities |
|
$ |
3 |
|
$ |
8 |
|
Total derivatives |
|
$ |
17 |
|
$ |
37 |
|
|
|
$ |
7 |
|
$ |
11 |
|
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
April 30, |
|
April 30, |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
(in millions) |
| ||||||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||
Fair Value Hedges |
|
|
|
|
|
|
|
|
| ||||
Gain (loss) on interest rate swap contracts, including interest accrual, recognized in interest expense |
|
$ |
|
|
$ |
16 |
|
$ |
|
|
$ |
(28 |
) |
Gain (loss) on hedged item, recognized in interest expense |
|
$ |
1 |
|
$ |
(8 |
) |
$ |
2 |
|
$ |
44 |
|
Cash Flow Hedges |
|
|
|
|
|
|
|
|
| ||||
Gain (loss) recognized in accumulated other comprehensive income |
|
$ |
|
|
$ |
|
|
$ |
6 |
|
$ |
(2 |
) |
Gain (loss) reclassified from accumulated other comprehensive income into cost of sales |
|
$ |
4 |
|
$ |
(1 |
) |
$ |
5 |
|
$ |
(2 |
) |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
| ||||
Gain (loss) recognized in other income (expense) |
|
$ |
6 |
|
$ |
24 |
|
$ |
(10 |
) |
$ |
28 |
|
The estimated net amount of existing gain at April 30, 2012 that is expected to be reclassified from other comprehensive income to the cost of sales within the next twelve months is $5 million.
10. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
Components of net periodic costs. For the three and six months ended April 30, 2012 and 2011, our net pension and post retirement benefit costs were comprised of the following:
|
|
Pensions |
|
|
| ||||||||||||||
|
|
U.S. Plans |
|
Non-U.S. |
|
U.S. Post Retirement |
| ||||||||||||
|
|
Three Months Ended April 30, |
| ||||||||||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||||
|
|
(in millions) |
| ||||||||||||||||
Service costbenefits earned during the period |
|
$ |
10 |
|
$ |
11 |
|
$ |
8 |
|
$ |
8 |
|
$ |
1 |
|
$ |
1 |
|
Interest cost on benefit obligation |
|
7 |
|
7 |
|
19 |
|
18 |
|
4 |
|
6 |
| ||||||
Expected return on plan assets |
|
(11 |
) |
(11 |
) |
(23 |
) |
(23 |
) |
(5 |
) |
(5 |
) | ||||||
Amortization and deferrals: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Actuarial losses |
|
1 |
|
1 |
|
10 |
|
9 |
|
4 |
|
3 |
| ||||||
Prior service cost |
|
(3 |
) |
(3 |
) |
|
|
|
|
(9 |
) |
(5 |
) | ||||||
Total net plan costs |
|
$ |
4 |
|
$ |
5 |
|
$ |
14 |
|
$ |
12 |
|
$ |
(5 |
) |
$ |
|
|
|
|
Pensions |
|
|
|
|
| ||||||||||||
|
|
U.S. Plans |
|
Non-U.S. |
|
U.S. Post Retirement |
| ||||||||||||
|
|
Six Months Ended April 30, |
| ||||||||||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||||
|
|
(in millions) |
| ||||||||||||||||
Service costbenefits earned during the period |
|
$ |
20 |
|
$ |
21 |
|
$ |
16 |
|
$ |
16 |
|
$ |
2 |
|
$ |
2 |
|
Interest cost on benefit obligation |
|
14 |
|
14 |
|
37 |
|
35 |
|
8 |
|
13 |
| ||||||
Expected return on plan assets |
|
(23 |
) |
(22 |
) |
(46 |
) |
(46 |
) |
(10 |
) |
(10 |
) | ||||||
Amortization and deferrals: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Actuarial losses |
|
3 |
|
2 |
|
21 |
|
19 |
|
8 |
|
7 |
| ||||||
Prior service cost |
|
(6 |
) |
(6 |
) |
|
|
|
|
(18 |
) |
(9 |
) | ||||||
Total net plan costs |
|
$ |
8 |
|
$ |
9 |
|
$ |
28 |
|
$ |
24 |
|
$ |
(10 |
) |
$ |
3 |
|
We contributed approximately $30 million to our U.S. defined benefit plans and $11 million to our non-U.S. defined benefit plans during the three months ended April 30, 2012 and $30 million and $23 million, respectively, for the six months ended April 30, 2012. We contributed approximately $30 million to our U.S. defined benefit plans and $21 million to our non-U.S. defined benefit plans during the three months ended April 30, 2011 and $33 million and $34 million, respectively, for the six months ended April 30, 2011. We do not expect to contribute to our U.S. defined benefit plans during the remainder of 2012 and expect to contribute $29 million to our non-U.S. defined benefit plans during the remainder of 2012.
11. WARRANTIES AND CONTINGENCIES
Warranties
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our condensed consolidated balance sheet. Our warranty terms typically extend for one year from the date of delivery.
A summary of the standard warranty accrual activity is shown in the table below:
|
|
Six Months Ended April 30, |
| ||||
|
|
2012 |
|
2011 |
| ||
|
|
(in millions) |
| ||||
Beginning balance as of November 1 |
|
$ |
50 |
|
$ |
45 |
|
Accruals for warranties issued during the period |
|
33 |
|
33 |
| ||
Changes in estimates |
|
10 |
|
3 |
| ||
Settlements made during the period |
|
(37 |
) |
(32 |
) | ||
Ending balance as of April 30 |
|
$ |
56 |
|
$ |
49 |
|
Contingencies
We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
12. SHORT-TERM DEBT
Credit Facility
On October 20, 2011, we entered into a five-year credit agreement, which provides for a $400 million unsecured credit facility that will expire on October 20, 2016. The company may use amounts borrowed under the facility for general corporate purposes. As of April 30, 2012 the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit facilities during the six months ended April 30, 2012.
2012 Senior Notes
On September 9, 2009, the company issued an aggregate principal amount of $250 million in senior notes maturing on September 14, 2012 (2012 senior notes). There have been no changes to the principal, maturity, interest rates and interest payment terms of the 2012 senior notes in the three and six months ended April 30, 2012 as compared to the 2012 senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011.
Upon the closing of the offering of the 2012 senior notes, we entered into interest rate swaps with an aggregate notional amount of $250 million. Under the interest rate swaps, we will receive fixed-rate interest payments and will make payments based on the U.S. dollar LIBOR plus 258 basis points with respect to the 2012 senior notes. The economic effect of these swaps will be to convert the fixed-rate interest expense on the senior notes to a variable LIBOR-based interest rate. The hedging relationship qualifies for the shortcut method of assessing hedge effectiveness, and consequently we do not expect any ineffectiveness during the life of the swap and any movement in the value of the swap would be reflected in the movement in fair value of the senior notes. At April 30, 2012, the fair value of the swaps on 2012 senior notes was an asset of $1 million, with a corresponding increase in the carrying value of senior notes.
All notes issued are unsecured and rank equally in right of payment with all of Agilents other senior unsecured indebtedness. The company incurred issuance costs of $2 million in connection with the 2012 senior notes. These costs were capitalized in other assets on the consolidated balance sheet and the costs are being amortized to interest expense over the term of the senior notes.
13. LONG-TERM DEBT
Senior Notes
The following table summarizes the companys senior notes and the related interest rate swaps:
|
|
April 30, 2012 |
|
October 31, 2011 |
| ||||||||||||||
|
|
Amortized |
|
Swap |
|
Total |
|
Amortized |
|
Swap |
|
Total |
| ||||||
|
|
(in millions) |
| ||||||||||||||||
2013 Senior Notes |
|
$ |
250 |
|
$ |
|
|
$ |
250 |
|
$ |
250 |
|
$ |
|
|
$ |
250 |
|
2015 Senior Notes |
|
499 |
|
22 |
|
521 |
|
499 |
|
24 |
|
523 |
| ||||||
2017 Senior Notes |
|
598 |
|
29 |
|
627 |
|
598 |
|
31 |
|
629 |
| ||||||
2020 Senior Notes |
|
498 |
|
30 |
|
528 |
|
498 |
|
32 |
|
530 |
| ||||||
Total |
|
$ |
1,845 |
|
$ |
81 |
|
$ |
1,926 |
|
$ |
1,845 |
|
$ |
87 |
|
$ |
1,932 |
|
All notes issued are unsecured and rank equally in right of payment with all of Agilents other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the senior notes in the three and six months ended April 30, 2012 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011. All swap contracts have been terminated and amounts to be amortized over the remaining life of the senior notes as of April 30, 2012 and October 31, 2011 are detailed above.
The company incurred issuance costs of $5 million in connection with the 2017 senior notes, incurred $3 million in connection with the 2015 senior notes and incurred $5 million in connection with 2013 and 2020 senior notes. These costs were capitalized in other assets on the consolidated balance sheet and the costs are being amortized to interest expense over the term of the senior notes.
14. STOCKHOLDERS EQUITY
Stock Repurchase Program
On November 19, 2009 our board of directors approved a share-repurchase program to reduce or eliminate dilution of basic outstanding shares in connection with issuances of stock under the companys equity incentive plans. The share-repurchase program does not require the company to acquire a specific number of shares and may be suspended or discontinued at any time. There is no fixed termination date for the new share-repurchase program. For the three and six months ended April 30, 2012, we repurchased 1 million shares for $44 million and 2 million shares for $78 million, respectively. For the three months ended April 30, 2011, we did not repurchase any shares and for the six months ended April 30, 2011, we repurchased 6 million shares for $270 million. All such shares and related costs are held as treasury stock and accounted for using the cost method.
Cash Dividends on Shares of Common Stock
On April 25, 2012 we paid $35 million of dividends previously declared on January 17, 2012. On May 16, 2012, we declared a quarterly dividend of $0.10 per share of common stock, or approximately $35 million which will be paid on July 25, 2012 to shareholders of record as of close of business on July 3, 2012. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Comprehensive Income
The following table presents the components of comprehensive income, net of deferred tax expense (benefit):
|
|
Three Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
|
|
(in millions) |
| ||||
Net income |
|
$ |
255 |
|
$ |
200 |
|
Other comprehensive income: |
|
|
|
|
| ||
Change in unrealized gain on investments |
|
|
|
(5 |
) | ||
Change in unrealized gain and loss on derivative instruments |
|
|
|
|
| ||
Reclassification of (gains) and losses into earnings related to derivative instruments, net of $(1) and zero of tax |
|
(3 |
) |
1 |
| ||
Foreign currency translation |
|
(19 |
) |
135 |
| ||
Change in deferred net defined benefit pension cost and post retirement plan costs: |
|
|
|
|
| ||
Net gain, net of $3 and $4 of tax |
|
15 |
|
4 |
| ||
Prior service (loss) and gain |
|
(12 |
) |
206 |
| ||
Comprehensive income |
|
$ |
236 |
|
$ |
541 |
|
|
|
Six Months Ended |
| ||||
|
|
2012 |
|
2011 |
| ||
|
|
(in millions) |
| ||||
Net income |
|
$ |
485 |
|
$ |
393 |
|
Other comprehensive income: |
|
|
|
|
| ||
Change in unrealized gain on investments, net of $(8) and zero of tax |
|
6 |
|
(5 |
) | ||
Change in unrealized gain and loss on derivative instruments |
|
6 |
|
(2 |
) | ||
Reclassification of (gains) and losses into earnings related to derivative instruments, net of $1 and zero of tax |
|
(6 |
) |
2 |
| ||
Foreign currency translation |
|
(58 |
) |
156 |
| ||
Change in deferred net defined benefit pension cost and post retirement plan costs: |
|
|
|
|
| ||
Net gain, net of $6 and $7 of tax |
|
28 |
|
16 |
| ||
Prior service (loss) and gain |
|
(24 |
) |
199 |
| ||
Comprehensive income |
|
$ |
437 |
|
$ |
759 |
|
15. SEGMENT INFORMATION
Description of segments. We are a measurement company, providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, communications and electronics industries. The three operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
A description of our three reportable segments is as follows:
Our life sciences business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in life sciences include: DNA and RNA microarrays and associated scanner, software, and reagents; microfluidics-based sample analysis systems; capillary electrophoresis systems; liquid chromatography (LC) systems, columns and components; liquid chromatography mass spectrometry (LCMS) systems; laboratory software and informatics systems; bio-reagents and related products; laboratory automation and robotic systems, dissolution testing; Nuclear Magnetic Resonance (NMR) and Magnetic Resonance Imaging (MRI) systems along with X-Ray crystallography, and services and support for the aforementioned products.
Our chemical analysis business provides application-focused solutions that include instruments, software, consumables, and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Key product categories in chemical analysis include: gas chromatography (GC) systems, columns and components; gas chromatography mass spectrometry (GC-MS) systems; inductively coupled plasma mass spectrometry (ICP-MS) instruments; atomic absorption (AA) instruments; inductively coupled plasma optical emission spectrometry (ICP-OES) instruments; microwave plasma-atomic emission spectroscopy (MPAES); Fourier transform infrared (FTIR) instruments; software and data systems; vacuum pumps and measurement technologies; services and support for our products.
Our electronic measurement business provides electronic measurement instruments and systems, software design tools and related services that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment, and microscopy products. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customers product lifecycle.
A significant portion of the segments expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments.
The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with U.S. GAAP. The performance of each segment is measured based on several metrics, including adjusted income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as noted in the reconciliations below.
|
|
Life Sciences |
|
Chemical |
|
Electronic |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Three months ended April 30, 2012: |
|
|
|
|
|
|
|
|
| ||||
Total net revenue |
|
$ |
469 |
|
$ |
388 |
|
$ |
876 |
|
$ |
1,733 |
|
Segment income from operations |
|
$ |
59 |
|
$ |
73 |
|
$ |
205 |
|
$ |
337 |
|
Three months ended April 30, 2011: |
|
|
|
|
|
|
|
|
| ||||
Total segment revenue |
|
$ |
464 |
|
$ |
381 |
|
$ |
834 |
|
$ |
1,679 |
|
Varian acquisition deferred revenue fair value adjustment |
|
$ |
(1 |
) |
$ |
(1 |
) |
$ |
|
|
$ |
(2 |
) |
Total net revenue |
|
$ |
463 |
|
$ |
380 |
|
$ |
834 |
|
$ |
1,677 |
|
Segment income from operations |
|
$ |
61 |
|
$ |
72 |
|
$ |
191 |
|
$ |
324 |
|
|
|
Life Sciences |
|
Chemical |
|
Electronic |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Six months ended April 30, 2012: |
|
|
|
|
|
|
|
|
| ||||
Total net revenue |
|
$ |
930 |
|
$ |
784 |
|
$ |
1,654 |
|
$ |
3,368 |
|
Segment income from operations |
|
$ |
125 |
|
$ |
161 |
|
$ |
365 |
|
$ |
651 |
|
Six months ended April 30, 2011: |
|
|
|
|
|
|
|
|
| ||||
Total segment revenue |
|
$ |
868 |
|
$ |
730 |
|
$ |
1,605 |
|
$ |
3,203 |
|
Varian acquisition deferred revenue fair value adjustment |
|
$ |
(4 |
) |
$ |
(3 |
) |
$ |
|
|
$ |
(7 |
) |
Total net revenue |
|
$ |
864 |
|
$ |
727 |
|
$ |
1,605 |
|
$ |
3,196 |
|
Segment income from operations |
|
$ |
109 |
|
$ |
137 |
|
$ |
347 |
|
$ |
593 |
|
The following table reconciles reportable segments income from operations to Agilents total enterprise income before taxes:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
|
(in millions) |
| ||||||||||
Total reportable segments income from operations |
|
$ |
337 |
|
$ |
324 |
|
$ |
651 |
|
$ |
593 |
|
Restructuring related costs |
|
|
|
(3 |
) |
|
|
(5 |
) | ||||
Transformational initiatives |
|
(8 |
) |
(11 |
) |
(16 |
) |
(22 |
) | ||||
Amortization of intangibles |
|
(26 |
) |
(28 |
) |
(53 |
) |
(54 |
) | ||||
Acquisition and integration costs |
|
(4 |
) |
(13 |
) |
(11 |
) |
(28 |
) | ||||
Varian acquisition related fair value adjustments |
|
|
|
(3 |
) |
|
|
(7 |
) | ||||
Other |
|
1 |
|
|
|
|
|
|
| ||||
Interest income |
|
2 |
|
3 |
|
5 |
|
7 |
| ||||
Interest expense |
|
(25 |
) |
(20 |
) |
(51 |
) |
(43 |
) | ||||
Other income (expense), net |
|
16 |
|
11 |
|
24 |
|
17 |
| ||||
Income before taxes, as reported |
|
$ |
293 |
|
$ |
260 |
|
$ |
549 |
|
$ |
458 |
|
The following table reflects segment assets under our management reporting system. Segment assets include allocations of corporate assets, including deferred tax assets, goodwill, other intangibles and other assets. Unallocated assets primarily consist of cash, cash equivalents, accumulated amortization of other intangibles and the valuation allowance relating to deferred tax assets.
|
|
Life Sciences |
|
Chemical |
|
Electronic |
|
Total |
| ||||
|
|
(in millions) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
| ||||
As of April 30, 2012 |
|
$ |
1,826 |
|
$ |
1,727 |
|
$ |
2,149 |
|
$ |
5,702 |
|
As of October 31, 2011 |
|
$ |
1,837 |
|
$ |
1,772 |
|
$ |
2,156 |
|
$ |
5,765 |
|
16. SUBSEQUENT EVENT
On May 16, 2012, Agilent, Agilent Technologies Europe B.V., a limited liability company incorporated under the laws of the Netherlands and a wholly-owned subsidiary of Agilent (Agilent Europe), and Delphi S.a.r.l., a Luxembourg private limited liability company that is ultimately controlled by EQT V Limited, entered into a share purchase agreement which provides for the acquisition by Agilent Europe of 100% of the issued and outstanding share capital of Dako A/S (Dako), a limited liability company incorporated under the laws of Denmark, for a cash enterprise value of approximately $2.2 billion, subject to a post-closing working capital and net debt adjustment. Dako provides antibodies, reagents, scientific instruments and software primarily to customers in pathology laboratories to raise the standards for fast and accurate diagnostic answers for cancer patients. The acquisition is subject to customary closing conditions and is scheduled to close upon receipt of approvals related to antitrust and competition laws, which is expected to occur within 60 days of signing. On May 30, 2012, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, applicable to the proposed acquisition. Satisfaction of additional closing conditions remain pending. Agilent will utilize existing cash on hand to pay for the acquisition. To the extent that we are required to pay portions of the acquisition price in foreign currencies, Agilent has entered into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction. The net notional currency amounts and forward rates of these contracts are: Danish krona ($1.4 billion, 5.822dkk/$) and Euro ($0.3 billion, 1.276$/). These foreign exchange contracts do not qualify for hedge accounting treatment and are not designated as hedging instruments. Accordingly, any gains or losses resulting from movements in the underlying exchange rates will be recognized in other income (expense) in the condensed consolidated statement of operations.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality, cyclicality and growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, the ability of our products to meet market needs, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, uncertainties relating to Food and Drug Administration (FDA) and other regulatory approvals, the anticipated closing of our acquisition of Dako A/S, the integration of our acquisitions, our transition to lower-cost regions, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed below in Risks, Uncertainties and Other Factors That May Affect Future Results and elsewhere in this Form 10-Q.
Basis of Presentation
The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows. 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.
Executive Summary
Agilent is the worlds premier measurement company, providing core bio-analytical and electronic measurement solutions to the life sciences, chemical analysis, communications and electronics industries.
Total orders for the three and six months ended April 30, 2012 increased 8 percent and 4 percent, respectively, compared to last year. For the three months ended April 30, 2012, life sciences orders decreased 1 percent, chemical analysis orders increased 7 percent and electronic measurement orders increased 13 percent when compared to the same period last year. For the six months ended April 30, 2012, life sciences orders increased 2 percent, chemical analysis orders increased 6 percent and electronic measurement orders increased 4 percent when compared to the same period last year.
Net revenue of $1,733 million and $3,368 million for the three and six months ended April 30, 2012, respectively, increased 3 percent and 5 percent, respectively, from the same periods last year. Revenue growth in the life sciences business, for the three and six months ended April 30, 2012, was led by demand for products in pharmaceutical and biotechnology markets when compared to the same periods last year. Revenue grew overall and in all of the key end-markets within the chemical analysis business for the three and six months ended April 30, 2012 when compared to the same periods last year. Within electronic measurement, revenue from general purpose improved overall in the three and six months ended April 30, 2012 when compared to the same periods last year. Also within electronic measurement, communications test business revenues increased and were flat in the three and six months ended April 30, 2012, respectively. Within the communications test business there was strong growth in wireless manufacturing test in the three and six months ended April 30, 2012 when compared to the same periods last year.
Net income for the three and six months ended April 30, 2012 was $255 million and $485 million respectively, compared to $200 million and $393 million, respectively, for the corresponding periods last year. In the six months ended April 30, 2012, we generated $503 million of cash from operations compared with $498 million generated in the same period last year.
On April 25, 2012 we paid $35 million of dividends previously declared on January 17, 2012. On May 16, 2012, we declared a quarterly dividend of $0.10 per share of common stock, or approximately $35 million which will be paid on July 25, 2012 to shareholders of record as of close of business on July 3, 2012. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
On May 16, 2012, Agilent, Agilent Technologies Europe B.V., a limited liability company incorporated under the laws of the Netherlands and a wholly-owned subsidiary of Agilent (Agilent Europe), and Delphi S.a.r.l., a Luxembourg private limited liability company that is ultimately controlled by EQT V Limited, entered into a share purchase agreement which provides for the acquisition by Agilent Europe of 100% of the issued and outstanding share capital of Dako A/S (Dako), a limited liability company incorporated under the laws of Denmark, for a cash enterprise value of approximately $2.2 billion, subject to a post-closing working capital and net debt adjustment. Dako provides antibodies, reagents, scientific instruments and software primarily to customers in pathology laboratories to raise the standards for fast and accurate diagnostic answers for cancer patients. The acquisition is subject to customary closing conditions and is scheduled to close upon receipt of approvals related to antitrust and competition laws, which is expected to occur within 60 days of signing. On May 30, 2012, the U.S. Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, applicable to the proposed acquisition. Satisfaction of additional closing conditions remain pending. Agilent will utilize existing cash on hand to pay for the acquisition. To the extent that we are required to pay portions of the acquisition price in foreign currencies, Agilent has entered into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction. The net notional currency amounts and forward rates of these contracts are: Danish krona ($1.4 billion, 5.822dkk/$) and Euro ($0.3 billion, 1.276$/). These foreign exchange contracts do not qualify for hedge accounting treatment and are not designated as hedging instruments. Accordingly, any gains or losses resulting from movements in the underlying exchange rates will be recognized in other income (expense) in the condensed consolidated statement of operations.
Looking forward, we believe we are well positioned to navigate continued economic uncertainty. There are marketing opportunities in emerging markets and improvements to be achieved in operating performance by leveraging our design, supply chain and manufacturing capabilities. We will continue to deliver market-leading products, while we make progress in optimizing our order fulfillment operations.
Critical Accounting Policies and Estimates
Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. 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, inventory valuation, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets, restructuring and asset impairment charges, and accounting for income taxes, a number of which are described in the following paragraphs. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on managements best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.
Share-based compensation. We estimate the stock price volatility using the historical volatility of Agilents stock options over the most recent historical period equivalent to the expected life of stock options. In reaching this conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. A 10 percent increase in our estimated historical volatility from 38 percent to 48 percent for our most recent employee stock option grant would generally increase the value of an award and the associated compensation cost by approximately 23 percent if no other factors were changed. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executive employees, which we believe is representative of future behavior.
Goodwill and purchased intangible assets. Agilent reviews goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We have aggregated components of an operating segment that have similar economic characteristics into our reporting units. We have three reporting units for goodwill impairment testing purposes: life sciences, chemical analysis and electronic measurement. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination.
In September 2011, the FASB approved changes to the goodwill impairment guidance which are intended to reduce the cost and complexity of the annual impairment test. The changes provide entities an option to perform a qualitative assessment to determine whether further impairment testing is necessary. The revised standard gives an entity the option to first assess qualitative factors to determine whether performing the current two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The revised guidance includes examples of events and circumstances that might indicate that a reporting units fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entitys operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
The new qualitative indicators replace those currently used to determine whether an interim goodwill impairment test is required. The changes will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, earlier adoption is permitted. Agilent has opted to early adopt this guidance for the year ended October 31, 2011.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit.
Based on our results of our qualitative test for goodwill impairment, as of September 30, 2011, we believe that it is more-likely-than-not that the fair value of each of our three reporting units, life sciences, chemical analysis and electronic measurement, was greater than their respective carrying values. There was no impairment of goodwill during the three and six months ended April 30, 2012 and 2011. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the straight-line method over estimated useful lives ranging from 6 months to 15 years. In process research and development (IPR&D) is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilents consolidated statement of operations in the period it is abandoned.
We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including purchased intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Based on the analyses, there were no impairments of long-lived assets, including purchased intangible assets, for the three and six months ended April 30, 2012 and $8 million of impairments of long-lived assets, including purchased intangibles assets, for the three and six months ended April 30, 2011.
Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. At April 30, 2012, we provided a valuation allowance for our net U.S. deferred tax assets and on certain foreign deferred tax assets. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support reversal.
Due to improvements in the U.S. operating results over the past three years, management believes a reasonable possibility exists that, within the year, sufficient positive evidence may become available to reach a conclusion that the U.S. valuation allowance will no longer be needed.
We have not provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes will increase materially in that period.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all 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. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. 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 payment 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. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.
Adoption of New Pronouncements
See Note 2, New Accounting Pronouncements, to the condensed consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (rolling twelve month period). Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, Agilent may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations
Orders and Net Revenue
|
|
Three Months Ended |
|
Six Months Ended |
|
Year over Year Change |
| ||||||||||
|
|
April 30, |
|
April 30, |
|
Three |
|
Six |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
Months |
|
Months |
| ||||
|
|
(in millions) |
|
|
|
|
| ||||||||||
Orders |
|
$ |
1,841 |
|
$ |
1,703 |
|
$ |
3,464 |
|
$ |
3,330 |
|
8 |
% |
4 |
% |
Net revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Products |
|
$ |
1,435 |
|
$ |
1,389 |
|
$ |
2,777 |
|
$ |
2,647 |
|
3 |
% |
5 |
% |
Services and other |
|
298 |
|
288 |
|
591 |
|
549 |
|
3 |
% |
8 |
% | ||||
Total net revenue |
|
$ |
1,733 |
|
$ |
1,677 |
|
$ |
3,368 |
|
$ |
3,196 |
|
3 |
% |
5 |
% |
Net revenue of $1,733 million and $3,368 million for the three and six months ended April 30, 2012, respectively, increased 3 percent and 5 percent, respectively, from the same periods last year. Revenue growth in the life sciences business, for the three and six months ended April 30, 2012, was led by demand for products in pharmaceutical and biotechnology markets when compared to the same periods last year. Revenue grew overall and in all of the key end-markets within the chemical analysis business for the three and six months ended April 30, 2012 when compared to the same periods last year. Within electronic measurement, revenue from general purpose improved overall in the three and six months ended April 30, 2012 when compared to the same periods last year. Also within electronic measurement, communications test business revenues increased and were flat in the three and six months ended April 30, 2012, respectively. Within the communications test business there was strong growth in wireless manufacturing test in the three and six months ended April 30, 2012 when compared to the same periods last year.
Services and other revenue include revenue generated from servicing our installed base of products, warranty extensions and consulting. Services and other revenue increased 3 percent and 8 percent in the three and six months ended April 30, 2012, respectively, as compared to the same periods in 2011. The service and other revenue growth is impacted by a portion of the revenue being driven by the current and previously installed product base.
Operating Results
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|
Three Months Ended |
|
Six Months Ended |
|
Year over Year Change |
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|
|
April 30, |
|
April 30, |
|
Three |
|
Six |
| ||||||||
|
|
2012 |
|
2011 |
|
2012 |
|