Table of Contents

 

 

 

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, 2011

 

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

 

77-0518772

(State or other jurisdiction of

 

(IRS employer

incorporation or organization)

 

Identification no.)

 

 

 

5301 STEVENS CREEK BLVD.,

 

 

SANTA CLARA, CALIFORNIA

 

95051

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s 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

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the exchange act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

CLASS

 

OUTSTANDING AT APRIL 30, 2011

COMMON STOCK, $0.01 PAR VALUE

 

348,045,143 SHARES

 

 

 



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

 

Page
Number

Part I.

Financial Information

 

3

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

Condensed Consolidated Statement of Operations

3

 

 

Condensed Consolidated Balance Sheet

4

 

 

Condensed Consolidated Statement of Cash Flows

5

 

 

Notes to Condensed Consolidated Financial Statements

6

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

Item 4.

Controls and Procedures

37

Part II.

Other Information

 

37

 

Item 1.

Legal Proceedings

37

 

Item 1A.

Risk Factors

38

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

Item 6.

Exhibits

48

Signature

49

Exhibit Index

50

 

2


 


Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

1,389

 

$

1,029

 

$

2,647

 

$

2,005

 

Services and other

 

288

 

242

 

549

 

479

 

Total net revenue

 

1,677

 

1,271

 

3,196

 

2,484

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

622

 

431

 

1,179

 

852

 

Cost of services and other

 

155

 

129

 

301

 

261

 

Total costs

 

777

 

560

 

1,480

 

1,113

 

Research and development

 

165

 

150

 

324

 

299

 

Selling, general and administrative

 

469

 

407

 

915

 

824

 

Total costs and expenses

 

1,411

 

1,117

 

2,719

 

2,236

 

Income from operations

 

266

 

154

 

477

 

248

 

Interest income

 

3

 

3

 

7

 

6

 

Interest expense

 

(20

)

(22

)

(43

)

(45

)

Other income (expense), net

 

11

 

4

 

17

 

13

 

Income before taxes

 

260

 

139

 

458

 

222

 

Provision for income taxes

 

60

 

31

 

65

 

35

 

Net income

 

$

200

 

$

108

 

$

393

 

$

187

 

 

 

 

 

 

 

 

 

 

 

Net income per share — basic:

 

$

0.58

 

$

0.31

 

$

1.13

 

$

0.54

 

Net income per share — diluted:

 

$

0.56

 

$

0.31

 

$

1.11

 

$

0.53

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

347

 

348

 

347

 

348

 

Diluted

 

355

 

354

 

355

 

354

 

 

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

 

3



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AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)

 

 

 

April 30,
2011

 

October 31,
2010

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,975

 

$

2,649

 

Short-term restricted cash and cash equivalents

 

 

1,550

 

Accounts receivable, net

 

918

 

869

 

Inventory

 

853

 

716

 

Other current assets

 

350

 

385

 

Total current assets

 

5,096

 

6,169

 

Property, plant and equipment, net

 

1,004

 

980

 

Goodwill

 

1,555

 

1,456

 

Other intangible assets, net

 

493

 

494

 

Long-term investments

 

123

 

142

 

Other assets

 

378

 

455

 

Total assets

 

$

8,649

 

$

9,696

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

486

 

$

499

 

Employee compensation and benefits

 

419

 

395

 

Deferred revenue

 

429

 

358

 

Short-term debt

 

 

1,501

 

Other accrued liabilities

 

258

 

330

 

Total current liabilities

 

1,592

 

3,083

 

Long-term debt

 

2,144

 

2,190

 

Retirement and post-retirement benefits

 

233

 

477

 

Other long-term liabilities

 

719

 

710

 

Total liabilities

 

4,688

 

6,460

 

Contingencies (Note 13)

 

 

 

 

 

Total equity:

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding

 

 

 

Common stock; $0.01 par value; 2 billion shares authorized; 587 million shares at April 30, 2011 and 579 million shares at October 31, 2010, issued

 

6

 

6

 

Treasury stock at cost; 239 million shares at April 30, 2011 and 233 million shares at October 31, 2010

 

(8,308

)

(8,038

)

Additional paid-in-capital

 

8,140

 

7,904

 

Retained earnings

 

3,837

 

3,444

 

Accumulated other comprehensive income (loss)

 

278

 

(88

)

Total stockholder’s equity

 

3,953

 

3,228

 

Non-controlling interest

 

8

 

8

 

Total equity

 

3,961

 

3,236

 

Total liabilities and equity

 

$

8,649

 

$

9,696

 

 

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

 

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AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

 

 

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

393

 

$

187

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

127

 

75

 

Share-based compensation

 

44

 

38

 

Deferred taxes

 

38

 

45

 

Excess and obsolete and inventory-related charges

 

13

 

13

 

Asset impairment charges

 

5

 

20

 

Net loss (gain) on sale of assets and investments

 

(4

)

4

 

Other

 

4

 

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(26

)

(93

)

Inventory

 

(139

)

(17

)

Accounts payable

 

(19

)

55

 

Employee compensation and benefits

 

14

 

18

 

Other assets and liabilities

 

48

 

(90

)

Net cash provided by operating activities

 

498

 

255

 

Cash flows from investing activities:

 

 

 

 

 

Investments in property, plant and equipment

 

(89

)

(54

)

Proceeds from sale of property, plant and equipment

 

 

1

 

Proceeds from sale of investments

 

14

 

8

 

Proceeds from divestiture, net of cash divested

 

 

20

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

(96

)

(12

)

Change in restricted cash and cash equivalents, net

 

1,545

 

4

 

Net cash provided by (used in) investing activities

 

1,374

 

(33

)

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock under employee stock plans

 

204

 

224

 

Repayment of debt

 

(1,500

)

(15

)

Treasury stock repurchases

 

(270

)

(265

)

Net cash used in financing activities

 

(1,566

)

(56

)

 

 

 

 

 

 

Effect of exchange rate movements

 

20

 

1

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

326

 

167

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,649

 

2,479

 

Cash and cash equivalents at end of period

 

$

2,975

 

$

2,646

 

 

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

 

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AGILENT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. OVERVIEW, 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.

 

Acquisition of Varian, Inc. On May 14, 2010, we completed our acquisition of Varian, Inc. (“Varian”) by means of a merger of one of our wholly-owned subsidiaries with and into Varian such that Varian became a wholly-owned subsidiary of Agilent. We financed the purchase price of Varian using the proceeds from our September 2009 offering of senior notes and other existing cash. The Varian merger has been accounted for in accordance with the authoritative accounting guidance and the results of Varian are included in Agilent’s consolidated financial statements from the date of merger. The company expects the combined entity to achieve significant savings in corporate and divisional overhead costs. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. For additional details related to the acquisition of Varian, see Note 3, “Acquisition of Varian”.

 

Basis of Presentation. We have prepared the accompanying financial data for the three and six months ended April 30, 2011 and 2010 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 2010 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, 2011 and October 31, 2010, condensed consolidated statement of operations for the three and six months ended April 30, 2011 and 2010, and condensed consolidated statement of cash flows for the six months ended April 30, 2011 and 2010.

 

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 management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. 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.

 

Reclassifications.  Certain prior year financial statement amounts have been reclassified to conform to the current year presentation with no impact on previously reported net income.

 

Update to Significant Accounting Policies. With the exception of the adoption of the new accounting pronouncements related to revenue recognition, which are discussed below, 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, 2010.

 

Revenue Recognition for Arrangements with Multiple Deliverables.  On November 1, 2010, we adopted accounting update regarding revenue recognition for multiple deliverable arrangements and accounting update for certain revenue arrangements that include software elements.

 

We adopted the above accounting updates on a prospective basis for applicable transactions originating or materially modified after November 1, 2010. The amended update for multiple deliverable arrangements did not change the units of accounting for our revenue transactions, and most products and services qualify as separate units of accounting. Under the previous guidance for multiple deliverable arrangements with software elements, we typically applied the residual method to allocate revenue if we were unable to determine vendor specific objective evidence of fair value or verifiable objective evidence of fair value for the delivered element but were able to obtain fair value for any undelivered elements.

 

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The adoption of the amended revenue recognition rules did not significantly change the timing of revenue recognition and did not have a material impact on our consolidated financial statements for the three and six months ended April 30, 2011. We cannot reasonably estimate the effect of adopting these standards on future financial periods as the impact will vary depending on the nature and volume of new or materially modified sales arrangements in any given period.

 

Our multiple-element arrangements are generally comprised of a combination of measurement instruments, installation or other start-up services and/or software and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized upon delivery once title and risk of loss pass to the customer. Delivery of installation, start-up services and other services varies based on the complexity of the equipment, staffing levels in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Revenue from the sale of software products that are not required to deliver the tangible product’s essential functionality are accounted for under software revenue recognition rules which require vendor specific objective evidence (VSOE) of fair value to allocate revenue in a multiple element arrangement. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

 

We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on VSOE if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.

 

We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately.  TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management.  We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve, we may modify our pricing practices in the future, which may result in changes in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal quarter, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.

 

Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, short-term debt, 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. The fair value of our long-term debt exceeds the carrying value by approximately 5 percent as of April 30, 2011. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. See also Note 9, “Fair Value Measurements” for additional information on the fair value of financial instruments.

 

Goodwill and Purchased Intangible Assets. We review goodwill for impairment annually as of September 30 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with the authoritative guidance. The circumstances that could trigger a goodwill impairment could include, but are not limited to, the following items to the extent that management believes the occurrence of one or more would make it more likely than not that we would fail the first step of the goodwill impairment test (as described in the next paragraph): significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, a portion of a reporting unit’s goodwill has been included in the carrying amounts of a business that will be disposed or if our market capitalization is below our net book value.

 

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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. Accordingly, we have aggregated components of an operating segment that have similar economic characteristics into our reporting units. At the time of an acquisition, we assign goodwill to the reporting unit that is expected to benefit from the synergies of the combination. Agilent has three reporting units, which are the same as our operating segments: life sciences, chemical analysis and electronic measurement.

 

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, as our businesses operate in a number of markets and geographical regions. We determine the fair value of our reporting units based on an income approach, whereby we calculate the fair value of each reporting unit based on the present value of estimated future cash flows, which are formed by evaluating historical trends, current budgets, operating plans and industry data. We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting units to our total market capitalization, taking into account an appropriate control premium. We then compare the carrying value of our reporting units to the fair value calculations based on the income approach noted above.

 

If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its goodwill carrying amount to measure the amount of impairment, if any. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit’s assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value allocated to goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess. Estimates of the future cash flows associated with the businesses are critical to these assessments. Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods.

 

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 Agilent’s consolidated statement of operations in the period it is abandoned.

 

2. NEW ACCOUNTING PRONOUNCEMENTS

 

In October 2009, the FASB amended revenue recognition guidance for arrangements with multiple deliverables. The guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence (VSOE), or third-party evidence (TPE) is unavailable.  The FASB also amended the scope of existing software revenue recognition accounting. Tangible products containing software components and non-software components that function together to deliver the product’s essential functionality would be scoped out of the accounting guidance on software and accounted for based on other appropriate revenue recognition guidance. We adopted both of the above guidance effective November 1, 2010 on a prospective basis. The adoption of the amended revenue recognition rules did not have a material impact on our consolidated financial statements.  See Note 1, “Overview, Basis of Presentation and Summary of Significant Accounting Policies” for additional information.

 

In January 2010, the 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 will adopt the guidance regarding level 3 activity on November 1, 2011 and we do not expect there to be a material impact to our consolidated financial statements.  See Note 9, “Fair Value Measurements” for additional information on the fair value of financial instruments.

 

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions.  The guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010, with early adoption permitted.  We adopted the guidance in the first quarter of 2011 and there was no material impact on our consolidated financial statements.

 

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In May 2011, the FASB amended fair value measurement and disclosure guidance to achieve convergence with 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 do not expect a material impact on our consolidated financial statements due to the adoption of this guidance.

 

3. ACQUISITION OF VARIAN

 

On May 14, 2010, we completed the previously announced acquisition of Varian through the merger of Varian and Cobalt Acquisition Corp., a direct wholly-owned subsidiary of Agilent (the “Purchaser”) under the Merger Agreement, dated July 26, 2009. As a result of the merger, Varian has become a wholly-owned subsidiary of Agilent. Accordingly, the results of Varian are included in Agilent’s consolidated financial statements from the date of the merger.

 

The consideration paid was approximately $1,507 million, comprising $52 cash per share of Varian’s outstanding common stock. We also paid $17 million to acquire Varian’s vested in-the money stock options at $52 cash per share less their exercise price. In addition we paid $12 million for Varian’s non-vested in-the-money stock options at $52 cash per share less their exercise price, Varian’s non-vested restricted stock awards and non-vested performance shares, at 100 percent of target each at $52 cash per share. In accordance with the authoritative accounting guidance, settlement of the non-vested awards is considered to be for the performance of post combination services and is therefore stock-based compensation expensed immediately after acquisition. Agilent funded the acquisition using the proceeds from our September 2009 offering of senior notes and other existing cash.

 

The Varian merger was accounted for in accordance with the authoritative accounting guidance. The acquired assets and assumed liabilities were recorded by Agilent at their estimated fair values. Agilent determined the estimated fair values with the assistance of appraisals or valuations performed by independent third party specialists, discounted cash flow analyses, quoted market prices where available, and estimates made by management. We expect to realize operational and cost synergies, leverage the existing sales channels and product development resources, and utilize the assembled workforce. The company expects the combined entity to achieve significant savings in corporate and divisional overhead costs. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. These factors, among others, contributed to a purchase price in excess of the estimated fair value of Varian’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.

 

Goodwill acquired was allocated to our operating segments and reporting units as a part of the purchase price allocation. We do not expect the goodwill recognized to be deductible for income tax purposes. Any impairment charges made in the future associated with goodwill will not be tax deductible.

 

The purchase price was allocated to the estimated fair values of the assets acquired and liabilities assumed on the closing date of May 14, 2010.  For the completed purchase price allocation refer to Note 3 of Agilent’s 2010 Form 10-K.

 

The following represents pro forma operating results as if Varian had been included in the company’s condensed consolidated statements of operations as of the beginning of the fiscal year presented (in millions, except per share amounts). The amounts for three months ended January 31, 2010 have been revised to correct the pro forma results previously disclosed for that period.

 

 

 

Three Months
Ended

 

Three Months
Ended

 

Six Months
Ended

 

 

 

January 31, 2010
Revised

 

April 30, 2010

 

Net revenue

 

$

1,402

 

$

1,476

 

$

2,878

 

Net income

 

$

6

 

$

87

 

$

93

 

Net income per share — basic

 

$

0.02

 

$

0.25

 

$

0.27

 

Net income per share — diluted

 

$

0.02

 

$

0.24

 

$

0.26

 

 

The pro forma financial information assumes that the companies were combined as of November 1, 2009 and include business combination accounting effects from the acquisition including amortization charges from acquired intangible assets, reduction in revenue and increase in cost of sales due to the respective estimated fair value adjustments to deferred revenue and inventory, decrease to interest income for cash used in the acquisition, acquisition related transaction costs and tax related effects. The pro forma information as presented above is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2010.

 

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Table of Contents

 

The unaudited pro forma financial information for the three months ended January  31, 2010 combine the historical results of Agilent for the three months ended January 31, 2010 and the historical results for Varian for the three months ended January 1, 2010 (due to differences in reporting periods).

 

The unaudited pro forma financial information for the three and six months ended April 30, 2010 combine the historical results of Agilent for the three and six months ended April 30, 2010 and the historical results for Varian for the three and six months ended April 2, 2010 (due to differences in reporting periods).

 

4. SHARE-BASED COMPENSATION

 

Agilent accounts for share-based awards in accordance with the provisions of the revised 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:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Cost of products and services

 

$

3

 

$

2

 

$

10

 

$

8

 

Research and development

 

2

 

2

 

6

 

6

 

Selling, general and administrative

 

11

 

9

 

28

 

24

 

Total share-based compensation expense

 

$

16

 

$

13

 

$

44

 

$

38

 

 

During the three months ended April 30, 2010, we reversed approximately $3 million of expense for the cancellation of non-vested awards related to the separation of a senior executive. At April 30, 2011 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, 2011 and 2010.

 

The following assumptions were used to estimate the fair value of the options and LTPP grants. We had no employee stock options granted during the three months ended April 30, 2011.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

 

2.4

%

1.5

%

2.2

%

Dividend yield

 

 

0

%

0

%

0

%

Weighted average volatility

 

 

36

%

35

%

37

%

Expected life

 

 

4.4 yrs

 

5.8yrs

 

4.4 yrs

 

 

 

 

 

 

 

 

 

 

 

LTPP:

 

 

 

 

 

 

 

 

 

Volatility of Agilent shares

 

40

%

39

%

40

%

39

%

Volatility of selected peer-company shares

 

20%-76

%

21%-79

%

20%-76

%

20%-80

%

Price-wise correlation with selected peers

 

55

%

53

%

55

%

53

%

 

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 option’s expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant. The 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.

 

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Table of Contents

 

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. For the grants awarded under the 2009 stock plan after November 1, 2010, we increased the period available to retirement eligible employees to exercise their options from three years at retirement date to the full contractual term of ten years. In developing our estimated life of our employee stock options of 5.8 years, we considered the historical option exercise behavior of our executive employees who were granted the majority of the options in the annual grants made during the three months ended January 31, 2011, which we believe is representative of future behavior.

 

5. PROVISION FOR INCOME TAXES

 

For the three and six months ended April 30, 2011, we recorded an income tax provision of $60 million and $65 million, respectively, compared to an income tax provision of $31 million and $35 million, respectively, for the same periods last year. The income tax provision for the three and six months ended April 30, 2011 includes a net discrete tax expense of $31 million and $16 million, respectively. The income tax provision for the three and six 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 overstatement of these deferred tax assets resulted in an overstatement of the UK valuation allowance release in the fourth quarter of 2010. The income tax provision for the six months ended April 30, 2011 includes a $16 million discrete benefit relating to a tax settlement with a foreign tax authority.

 

The income tax expense for the three and six months ended April 30, 2010 includes a net discrete expense of $12 million and $3 million, respectively, relating primarily to tax settlements, lapses of statutes of limitations and valuation allowance adjustments based on changes in other comprehensive income items.

 

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. As of April 30, 2011 we intend to maintain partial or full valuation allowances in these jurisdictions until sufficient positive evidence exists to support its reversal.  We currently have a valuation allowance of $307 million of which $244 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 next year, sufficient positive evidence may be sufficient to reach a conclusion that a significant portion of 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 state purposes.  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.

 

In December 2010, Agilent reached an agreement with the Internal Revenue Service (IRS) for tax years 2003-2005.  In addition, Agilent and the IRS reached an agreement on transfer pricing issues covering years 2003-2007. Tax adjustments resulting from these agreements were offset by applying available net operating losses and tax credit carry forwards. Primarily as a result of these agreements, unrecognized tax benefits were reduced from $656 million at October 31, 2010 to $564 million at April 30, 2011.  Agilent’s U.S. federal income tax returns for 2006 through 2007 are currently under audit by the IRS.

 

6. NET INCOME PER SHARE

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

200

 

$

108

 

$

393

 

$

187

 

Denominators:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

347

 

348

 

347

 

348

 

Potentially dilutive common stock equivalents — stock options and other employee stock plans

 

8

 

6

 

8

 

6

 

Diluted weighted-average shares

 

355

 

354

 

355

 

354

 

 

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Table of Contents

 

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 company’s common stock can result in a greater dilutive effect from potentially dilutive awards.

 

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. For the three and six months ended April 30, 2011 the average stock price was $45 and $42, respectively.  For the three and six months ended April 30, 2010, options to purchase 4 million shares with a weighted average exercise price of $40, and 12 million shares with a weighted average exercise price of $35, 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, 2010 the average stock price was $33 and $31, respectively.

 

7. INVENTORY

 

 

 

April 30,
2011

 

October 31,
2010

 

 

 

(in millions)

 

Finished goods

 

$

407

 

$

338

 

Purchased parts and fabricated assemblies

 

446

 

378

 

Inventory

 

$

853

 

$

716

 

 

8. 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, 2011:

 

 

 

Life Sciences

 

Chemical Analysis

 

Electronic
Measurement

 

Total

 

 

 

(in millions)

 

Goodwill as of October 31, 2010

 

$

311

 

$

747

 

$

398

 

$

1,456

 

Goodwill arising from acquisitions

 

53

 

11

 

 

64

 

Foreign currency translation impact and other adjustments

 

8

 

25

 

2

 

35

 

Goodwill as of April 30, 2011

 

$

372

 

$

783

 

$

400

 

$

1,555

 

 

The components of other intangibles as of April 30, 2011 and October 31, 2010 are shown in the table below:

 

 

 

Purchased Other Intangible Assets

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization
and
Impairments

 

Net Book
Value

 

 

 

(in millions)

 

As of October 31, 2010:

 

 

 

 

 

 

 

Purchased technology

 

$

466

 

$

176

 

$

290

 

Backlog

 

12

 

12

 

 

Trademark/Tradename

 

39

 

13

 

26

 

Customer relationships

 

236

 

77

 

159

 

Total amortizable intangible assets

 

$

753

 

$

278

 

$

475

 

In-Process R&D

 

19

 

 

19

 

Total

 

$

772

 

$

278

 

$

494

 

As of April 30, 2011:

 

 

 

 

 

 

 

Purchased technology

 

$

505

 

$

213

 

$

292

 

Backlog

 

12

 

12

 

 

Trademark/Tradename

 

40

 

17

 

23

 

Customer relationships

 

254

 

95

 

159

 

Total amortizable intangible assets

 

$

811

 

$

337

 

$

474

 

In-Process R&D

 

19

 

 

19

 

Total

 

$

830

 

$

337

 

$

493

 

 

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Table of Contents

 

There were $64 million of additions to goodwill and $42 million of additions to other intangible assets in the three and six months ended April 30, 2011 related to the purchase of three businesses.

 

Amortization of intangible assets was $28 million and $56 million for the three and six months ended April 30, 2011 and $9 million and $19 million for the same periods in the prior year. In addition, we recorded $3 million of impairments of other intangibles related to an exited business during the three and six months ended April 30, 2011. Future amortization expense related to existing purchased intangible assets is estimated to be $57 million for the remainder of 2011, $95 million for 2012, $78 million for 2013, $68 million for 2014, $57 million for 2015, $50 million for 2016, and $88 million thereafter.

 

9. 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. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

 

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 instrument’s 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, 2011 were as follows:

 

 

 

 

 

Fair Value Measurement at April 30, 2011 Using

 

 

 

April 30,
2011

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

(in millions)

 

Assets:

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

Cash equivalents (money market funds)

 

$

1,388

 

$

1,388

 

$

 

$

 

Derivative instruments (foreign exchange contracts)

 

41

 

 

41

 

 

Long-term

 

 

 

 

 

 

 

 

 

Trading securities

 

52

 

52

 

 

 

Derivative instruments (interest rate contracts)

 

26

 

 

26

 

 

Available-for-sale investments

 

2

 

2

 

 

 

Total assets measured at fair value

 

$

1,509

 

$

1,442

 

$

67

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

Derivative instruments (foreign exchange contracts)

 

$

25

 

$

 

$

25

 

$

 

Long-term

 

 

 

 

 

 

 

 

 

Derivative instruments (interest rate contracts)

 

9

 

 

9

 

 

Deferred compensation liability

 

50

 

 

50

 

 

Total liabilities measured at fair value

 

$

84

 

$

 

$

84

 

$

 

 

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Table of Contents

 

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.

 

For assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during the three and six months ended April 30, 2011 and  2010:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Balance, beginning of period

 

$

 

$

3

 

$

 

$

6

 

Realized losses related to amortization of premium

 

 

(1

)

 

(1

)

Realized losses related to investment impairments

 

 

 

 

 

Sales

 

 

 

 

(2

)

Transfers into level 3

 

 

 

 

 

Transfers out of level 3

 

 

(1

)

 

(2

)

Balance, end of period

 

$

 

$

1

 

$

 

$

1

 

Total losses included in net income attributable to change in unrealized losses relating to assets still held at the reporting date, reported in interest and other income, net

 

$

 

$

(1

)

$

 

$

(1

)

 

Impairment of Investments. All of our investments, excluding trading securities, are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. There were no other than temporary impairments for investments for the three and six months ended April 30, 2011 and 2010.

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

 

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, 2011 and 2010:

 

 

 

Three Months Ended
April  30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Long-lived assets held and used

 

$

4

 

$

1

 

$

4

 

$

6

 

Long-lived assets held for sale

 

$

1

 

$

 

$

1

 

$

14

 

 

For the three months 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. For the three months ended April 30, 2010,  long-lived assets held and used with a carrying value of $1 million were written down to their fair value of zero. For the six months ended April 30, 2010,  long-lived assets held and used with a carrying value of $29 million were written down to their fair value of $23 million. For the six months ended April 30, 2010,  long-lived assets held for sale with a carrying value of $30 million were written down to their fair value of $16 million. Fair value for the impaired long-lived assets was measured using level 2 inputs.

 

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Table of Contents

 

10. 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 enter into fair value hedges to reduce the exposure of our debt portfolio to interest rate risk. We issue long-term senior notes in U.S. dollars based on market conditions at the time of financing. We use interest rate swaps to modify the market risk exposure in connection with fixed interest rate senior notes to U.S. dollar London inter-bank offered rate (LIBOR)-based floating interest rate. Alternatively, we may choose not to swap fixed for floating interest rate or may terminate a previously executed swap.  We designate and qualify these interest rate swaps as fair value hedges of the interest rate risk inherent in the debt. 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, 2011, there were 14 interest rate swap contracts designated as fair value hedges associated with our 2012, 2015 and 2020 senior notes. The notional amount of these interest rate swap contracts, receive-fixed/pay-variable, was $1,250 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 asset value upon termination was approximately $43 million and the amount to be amortized at April 30, 2011 was $33 million. The proceeds were recorded as operating cash flows and the gain is being deferred and amortized over the remaining life of the 2017 senior notes. On June 6, 2011, we terminated our interest rate swap contracts related to our 2015 senior notes that represented the notional amount of $500 million.  The asset value upon termination for these contracts was approximately $31 million.  The gain is being deferred and amortized to interest expense over the remaining life of the senior notes.

 

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, 2011, was approximately $4 million for forward contracts and $2 million for interest rate swap derivatives. The credit-risk-related contingent features underlying these agreements had not been triggered as of April 30, 2011.

 

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Table of Contents

 

There were 115 foreign exchange forward contracts and 7 foreign exchange option contracts open as of April 30, 2011 and designated as cash flow hedges. There were 209 foreign exchange forward contracts open as of April 30, 2011 not designated as hedging instruments. The aggregated U.S. Dollar notional amounts by currency and designation as of April 30, 2011 were as follows:

 

 

 

Derivatives in Cash Flow
Hedging Relationships

 

Derivatives
Not
Designated
as Hedging
Instruments

 

 

 

Forward
Contracts

 

Option
Contracts

 

Forward
Contracts

 

Currency

 

Buy/(Sell)

 

Buy/(Sell)

 

Buy/(Sell)

 

 

 

(in millions)

 

Euro

 

$

(116

)

$

 

$

187

 

British Pound

 

(47

)

 

137

 

Canadian Dollar

 

(42

)

 

10

 

Australian Dollars

 

47

 

 

29

 

Malaysian Ringgit

 

123

 

 

45

 

Japanese Yen

 

(63

)

(134

)

19

 

Other

 

2

 

 

28

 

 

 

$

(96

)

$

(134

)

$

455

 

 

The gross fair values and balance sheet location of derivative instruments held in the condensed consolidated balance sheet as of April 30, 2011 and October 31, 2010 were as follows:

 

Fair Values of Derivative Instruments

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Fair Value

 

 

 

Fair Value

 

Balance Sheet Location

 

April 30,
2011

 

October 31,
2010

 

Balance Sheet Location

 

April 30,
2011

 

October 31,
2010

 

(in millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Fair value hedges

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

$

26

 

$

61

 

Other long-term liabilities

 

$

9

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

12

 

$

13

 

Other accrued liabilities

 

$

14

 

$

15

 

 

 

$

38

 

$

74

 

 

 

$

23

 

$

15

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

29

 

$

11

 

Other accrued liabilities

 

$

11

 

$

7

 

 

 

$

29

 

$

11

 

 

 

$

11

 

$

7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

67

 

$

85

 

 

 

$

34

 

$

22

 

 

16



Table of Contents

 

The effect of derivative instruments for foreign exchange and interest rate swap contracts designated as hedging instruments and not designated as hedging instruments in our condensed consolidated statement of operations were as follows:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Fair Value Hedges

 

 

 

 

 

 

 

 

 

Gain (loss) on interest rate swap contracts, including interest settlement, recognized in interest expense

 

$

16

 

$

5

 

$

(28

)

$

16

 

Gain (loss) on hedged item, recognized in interest expense

 

$

(8

)

$

 

$

44

 

$

(7

)

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in accumulated other comprehensive income

 

$

 

$

9

 

$

(2

)

$

11

 

Gain (loss) reclassified from accumulated other comprehensive income into cost of sales

 

$

(1

)

$

3

 

$

(2

)

$

3

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Gain (loss) recognized in other income (expense)

 

$

24

 

$

(11

)

$

28

 

$

(23

)

 

The estimated net amount of existing losses at April 30, 2011 that is expected to be reclassified from other comprehensive income to the cost of sales within the next twelve months is $2 million.

 

11. RESTRUCTURING COSTS, ASSET IMPAIRMENTS AND OTHER SPECIAL CHARGES

 

Our 2005 restructuring program, announced in the fourth quarter of 2005, is largely complete. The remaining obligations under this and previous plans relate primarily to lease obligations that are expected to be satisfied over approximately the next year.

 

Our 2009 restructuring program, the (“FY 2009 Plan”), announced in the first half of 2009, was conceived in response to deteriorating economic conditions and was designed to deliver sufficient savings to enable our businesses to reach their profitability targets throughout the cycle. Workforce reduction payments, primarily severance, were largely complete in fiscal year 2010. Lease payments should primarily be complete by the end of fiscal 2014.

 

A summary of total restructuring activity and other special charges is shown in the table below:

 

 

 

Workforce
Reduction

 

Consolidation
of Excess
Facilities

 

Special
Charges
related to
Inventory

 

Total

 

 

 

(in millions)

 

Balance as of October 31, 2010

 

$

8

 

$

26

 

$

1

 

$

35

 

Income statement expense

 

 

 

 

 

Asset impairments/inventory charges

 

 

 

 

 

Cash payments

 

(7

)

(4

)

(1

)

(12

)

Balance as of April 30, 2011

 

$

1

 

$

22

 

$

 

$

23

 

 

The restructuring and other special accruals for all plans, which totaled $23 million at April 30, 2011, are recorded in other accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet. These balances reflect estimated future cash outlays.

 

A summary of the charges in the condensed consolidated statement of operations resulting from all restructuring plans is shown below:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Cost of products and services

 

$

 

$

3

 

$

 

$

6

 

Research and development

 

 

 

 

1

 

Selling, general and administrative

 

(2

)

13

 

 

43

 

Total restructuring, asset impairments and other special charges

 

$

(2

)

$

16

 

$

 

$

50

 

 

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Table of Contents

 

12. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS

 

Components of net periodic costs. For the three and six months ended April 30, 2011 and 2010, our net pension and post retirement benefit costs were comprised of the following:

 

 

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Three Months Ended April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

11

 

$

10

 

$

8

 

$

8

 

$

1

 

$

1

 

Interest cost on benefit obligation

 

7

 

7

 

18

 

17

 

6

 

7

 

Expected return on plan assets

 

(11

)

(10

)

(23

)

(21

)

(5

)

(5

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss

 

1

 

1

 

9

 

7

 

3

 

4

 

Prior service cost

 

(3

)

(3

)

 

 

(5

)

(4

)

Total net plan costs

 

$

5

 

$

5

 

$

12

 

$

11

 

$

 

$

3

 

 

 

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Six Months Ended April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

21

 

$

20

 

$

16

 

$

16

 

$

2

 

$

2

 

Interest cost on benefit obligation

 

14

 

14

 

35

 

35

 

13

 

14

 

Expected return on plan assets

 

(22

)

(20

)

(46

)

(43

)

(10

)

(10

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss

 

2

 

3

 

19

 

20

 

7

 

8

 

Prior service cost

 

(6

)

(6

)

 

 

(9

)

(8

)

Total net plan costs

 

$

9

 

$

11

 

$

24

 

$

28

 

$

3

 

$

6

 

 

As of April 1, 2011, we approved changes to our U.S. Post-Retirement Benefit Plan. In connection with these changes, we reduced our Accumulated Prospective Benefit Obligation by $194 million with the offset going to accumulated other comprehensive income.  The prior service credit will be amortized over the future working lifetime of all participants in the plan which is approximately 9 years.

 

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 contributed approximately $30 million to our U.S. defined benefit plans and $10 million to our non-U.S. defined benefit plans during the three months ended April 30, 2010 and $32 million and $22 million, respectively, for the six months ended April 30, 2010.  We expect to contribute approximately zero to our U.S. defined benefit plans and $30 million to our non-U.S. defined benefit plans during the remainder of 2011.

 

13. 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:

 

 

 

FY 2011

 

FY 2010

 

 

 

(in millions)

 

Beginning balance as of November 1,

 

$

45

 

$

28

 

Accruals for warranties issued during the period

 

33

 

26

 

Changes in estimates

 

3

 

(2

)

Settlements made during the period

 

(32

)

(24

)

Ending balance as of April 30,

 

$

49

 

$

28

 

 

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Table of Contents

 

Contingencies

 

We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters. We record a provision for a liability when management believes that it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. There are no matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations or cash flows.

 

14. SHORT-TERM DEBT AND SHORT-TERM RESTRICTED CASH & CASH EQUIVALENTS

 

Credit Facility

 

On May 11, 2007, we entered into a five-year credit agreement, which provides for a $300 million unsecured credit facility that will expire on May 11, 2012. On September 8, 2009, we entered into an Accession Agreement, increasing the credit facility from $300 million to $330 million. The company may use amounts borrowed under the facility for general corporate purposes. As of April 30, 2011 the company has no borrowings outstanding under the facility.

 

On August 17, 2009 the credit facility agreement was amended to provide additional financing flexibility in advance of the acquisition of Varian, Inc. The amendment allowed for incremental indebtedness to be excluded from the leverage ratio covenant until March 1, 2011 and reduced the basket for other secured financings permitted from $300 million to $75 million during this period.  The amendment has since expired and we were in compliance with the covenants for the credit facility during the three months ended April 30, 2011.

 

World Trade Debt

 

We satisfied the financing obligation of World Trade in its entirety on December 10, 2010 using the proceeds of our senior notes issued in July 2010 and existing cash on our balance sheet.

 

Short-Term Restricted Cash & Cash Equivalents

 

As of October 31, 2010, $1,550 million was reported as short-term restricted cash and cash equivalents in our consolidated balance sheet which was held in commercial paper maintained in connection with our World Trade repurchase obligation. This restricted cash, held by one of our wholly-owned subsidiaries, has been reclassified to cash and cash equivalents following the December 10, 2010 settlement of the World Trade repurchase obligation.

 

15.  LONG-TERM DEBT

 

Senior Notes

 

The following table summarizes the company’s senior notes and the related interest rate swaps:

 

 

 

April 30, 2011

 

October 31, 2010

 

 

 

Amortized
Principal

 

Swap

 

Total

 

Amortized
Principal

 

Swap

 

Total

 

 

 

(in millions)

 

2012 Senior Notes

 

$

250

 

$

4

 

$

254

 

$

250

 

$

6

 

$

256

 

2013 Senior Notes

 

249

 

 

249

 

249

 

 

249

 

2015 Senior Notes

 

499

 

22

 

521

 

499

 

37

 

536

 

2017 Senior Notes

 

598

 

33

 

631

 

598

 

35

 

633

 

2020 Senior Notes

 

498

 

(9

)

489

 

498

 

18

 

516

 

Total

 

$

2,094

 

$

50

 

$

2,144

 

$

2,094

 

$

96

 

$

2,190

 

 

2012 Senior Notes

 

In September 2009, we issued an aggregate principal amount of $250 million in senior notes. The senior notes were issued at 99.91% of their principal amount. The notes will mature on September 14, 2012, and bear interest at a fixed rate of 4.45% per annum. The interest is payable semi-annually on March 14th and September 14th of each year, payments commenced on March 14, 2010.

 

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Table of Contents

 

2013 Senior Notes

 

In July 2010, we issued an aggregate principal amount of $250 million in senior notes. The senior notes were issued at 99.82% of their principal amount. The notes will mature on July 15, 2013, and bear interest at a fixed rate of 2.50% per annum. The interest is payable semi-annually on January 15th and July 15th of each year, payments commenced on January 15, 2011.

 

2015 Senior Notes

 

In September 2009, we issued an aggregate principal amount of $500 million in senior notes. The senior notes were issued at 99.69% of their principal amount. The notes will mature on September 14, 2015, and bear interest at a fixed rate of 5.50% per annum. The interest is payable semi-annually on March 14th and September 14th of each year, payments commenced on March 14, 2010.

 

2017 Senior Notes

 

In October 2007, we issued an aggregate principal amount of $600 million in senior notes. The senior notes were issued at 99.60% of their principal amount. The notes will mature on November 1, 2017, and bear interest at a fixed rate of 6.50% per annum. The interest is payable semi-annually on May 1st and November 1st of each year and payments commenced on May 1, 2008.

 

2020 Senior Notes

 

In July 2010, we issued an aggregate principal amount of $500 million in senior notes. The senior notes were issued at 99.54% of their principal amount. The notes will mature on July 15, 2020, and bear interest at a fixed rate of 5.00% per annum. The interest is payable semi-annually on January 15th and July 15th of each year, payments commenced on January 15, 2011.

 

All notes issued are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. We incurred issuance costs of $5 million in connection with the 2017 senior notes, incurred $5 million in connection with the 2015 and 2012 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.

 

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 asset value upon termination was approximately $43 million and the amount to be amortized at April 30, 2011 was $33 million. The gain is being deferred and amortized over the remaining life of the senior notes.

 

Upon the closing of the offering of the 2015 and 2012 senior notes, we entered into interest rate swaps with an aggregate notional amount of $750 million. Also concurrent with issuing the 2020 senior notes in July 2010, we entered into interest rate swaps with an aggregate notional amount of $500 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 253 basis points, 258 basis points and 179 basis points with respect to the 2015, 2012 and 2020 senior notes, respectively. 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, 2011, the fair value of the swaps on 2015 and 2012 senior notes was an asset of $26 million, with a corresponding increase in the carrying value of senior notes, and a liability of $9 million on 2020 senior notes with a corresponding decrease in carrying value of the senior notes.

 

On June 6, 2011, we terminated our interest rate swap contracts related to our 2015 senior notes that represented the notional amount of $500 million.  The asset value upon termination for these contracts was approximately $31 million.  The gain is being deferred and amortized to interest expense over the remaining life of the senior notes.

 

16. COMPREHENSIVE INCOME

 

The following table presents the components of comprehensive income:

 

 

 

Three Months Ended
April 30,

 

 

 

2011

 

2010

 

 

 

(in millions)

 

Net income

 

$

200

 

$

108

 

Other comprehensive income (loss):

 

 

 

 

 

Change in unrealized gain and loss on investments

 

(5

)

3

 

Change in unrealized gain and loss on derivative instruments

 

 

9

 

Reclassification of (gains) and losses into earnings related to derivative instruments

 

1

 

(3

)

Foreign currency translation

 

135

 

(27

)

Change in deferred net pension cost

 

214

 

(16

)

Deferred taxes

 

(4

)

(4

)

Comprehensive income

 

$

541

 

$

70

 

 

 

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

 

 

(in millions)

 

Net income

 

$

393

 

$

187

 

Other comprehensive income (loss):

 

 

 

 

 

Change in unrealized gain and loss on investments

 

(5

)

4

 

Change in unrealized gain and loss on derivative instruments

 

(2

)

11

 

Reclassification of (gains) and losses into earnings related to derivative instruments

 

2

 

(3

)

Foreign currency translation

 

156

 

(54

)

Change in deferred net pension cost

 

222

 

(4

)

Deferred taxes

 

(7

)

(8

)

Comprehensive income

 

$

759

 

$

133

 

 

20



Table of Contents

 

17. 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 company’s 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 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 using settlement date calculation. For the three and six months ended April 30, 2010, we repurchased 5 million shares for $165 million and 8 million shares for $265 million, respectively. All such shares and related costs are held as treasury stock and accounted for using the cost method.

 

18. 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; liquid chromatography (LC) systems, columns and components; liquid chromatography mass spectrometry (LCMS) systems; capillary electrophoresis 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) products; spectroscopy products; software and data systems; vacuum pumps and measurement technologies; services and support for the aforementioned 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 customer’s 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.

 

21



Table of Contents

 

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 impairment of other intangibles and other items as noted in the reconciliations below.

 

 

 

Life Sciences

 

Chemical
Analysis

 

Electronic
Measurement

 

Total

 

 

 

(in millions)

 

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

 

Three months ended April 30, 2010:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

334

 

$

238

 

$

699

 

$

1,271

 

Segment income from operations

 

$

48

 

$

57

 

$

100

 

$

205

 

 

 

 

Life Sciences

 

Chemical
Analysis

 

Electronic
Measurement

 

Total

 

 

 

(in millions)

 

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

 

Six months ended April 30, 2010:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

674

 

$

482

 

$

1,328

 

$

2,484

 

Segment income from operations

 

$

103

 

$

124

 

$

158

 

$

385

 

 

The following table reconciles reportable segment results to Agilent’s total enterprise results from operations before taxes:

 

 

 

Three Months Ended
April 30,

 

Six Months Ended
April 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in millions)

 

Total reportable segments’ income from operations

 

$

324

 

$

205

 

$

593

 

$

385

 

Restructuring related costs and asset impairments

 

(3

)

(16

)

(5

)

(64

)

Transformational initiatives

 

(11

)

(6

)

(22

)

(15

)

Interest income

 

3

 

3

 

7

 

6

 

Interest expense

 

(20

)

(22

)

(43

)

(45

)

Other income (expense), net

 

11

 

4

 

17

 

13

 

Acquisition and integration costs

 

(13

)

(10

)

(28

)

(27

)

Varian acquisition related fair value adjustments

 

(3

)

 

(7

)

 

Amortization of Intangibles and Other

 

(28

)

(19

)

(54

)

(31

)

Income before taxes, as reported

 

$

260

 

$

139

 

$

458

 

$

222

 

 

22



Table of Contents

 

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
Analysis

 

Electronic
Measurement

 

Total

 

 

 

(in millions)

 

Assets:

 

 

 

 

 

 

 

 

 

As of April 30, 2011

 

$

1,852

 

$

1,756

 

$

2,171

 

$

5,779

 

As of October 31, 2010

 

$

1,564

 

$

1,635

 

$

2,245

 

$

5,444

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)

 

The following discussion should be read in conjunction with the condensed 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, savings and headcount reduction recognized from our restructuring programs, uncertainties relating to Federal and Drug Administration (FDA) and other regulatory approvals, the integration of our Varian acquisition and other transactions, our stock repurchase program, our transition to lower-cost regions, the existence, length or timing of an economic recovery 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 world’s 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 months and six months ended April 30, 2011 were $1,703 million and $3,330 million, respectively, an increase of 27 percent and 30 percent, respectively, above the same periods last year with each business segment showing order growth in the three and six months when compared to the same periods last year. For the three and six months ended April 30, 2011, life sciences orders increased 45 percent and 38 percent, respectively, when compared to the same periods last year. Chemical analysis orders increased 65 percent and 62 percent in the three and six months ended April 30, 2011, respectively, when compared to the same periods last year. Electronic measurement orders increased 8 percent and 15 percent in the three and six months ended April 30, 2011, respectively, when compared to the same periods last year. The increase in orders in the three and six months ended April 30, 2011 attributable to our acquisitions, less orders attributable to our divestitures, accounted for 9 percentage points and 10 percentage points of total order growth, respectively, when compared to the same periods last year.

 

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Net revenue of $1,677 million and $3,196 million for the three and six months ended April 30, 2011, increased 32 percent and 29 percent, respectively, from the same periods last year. The revenue increase attributable to our acquisitions, less revenue attributable to our divestitures, accounted for 11 percentage points and 9 percentage points of revenue increase for the three and six months ended April 30, 2011, respectively, when compared to the same periods last year.  Excluding acquisitions and divestitures, revenue growth in the life sciences business, for the three and six months ended April 30, 2011, was led by demand for products in pharmaceutical and biotechnology markets when compared to the same periods last year. Excluding acquisitions, revenue growth in the chemical analysis business for the three and six months ended April 30, 2011, was led by strong growth in the petrochemical markets when compared to the same periods last year.  Within electronic measurement, revenue from general purpose end-markets improved strongly in the three and six months ended April 30, 2011 when compared to the same periods last year. The increase was led by increased sales to the industrial, semiconductor and computer markets. Also within electronic measurement, the communications test businesses improved in the three and six months ended April 30, 2011 when compared to the same periods last year. Wireless manufacturing reported strong revenue growth in the three and six months ended April 30, 2011.

 

Net income for the three and six months ended April 30, 2011 was $200 million and $393 million, respectively, compared to $108 million and $187 million, respectively, for the corresponding periods last year. In the six months ended April 30, 2011, we generated $498 million of cash from operations, compared with $255 million generated in the same period last year.

 

On May 14, 2010, we completed our acquisition of Varian by means of a merger of one of our wholly-owned subsidiaries with and into Varian such that Varian became a wholly-owned subsidiary of Agilent. We financed the purchase price of Varian using the proceeds from our September 2009 offering of senior notes and other existing cash. The Varian merger has been accounted for in accordance with the authoritative accounting guidance and the results of Varian are included in Agilent’s consolidated financial statements from the date of merger. The company expects the combined entity to achieve significant savings in corporate and divisional overhead costs. The company also anticipates opportunities for growth through expanded geographic and customer segment diversity and the ability to leverage additional products and capabilities. For additional details related to the acquisition of Varian, see Note 3, “Acquisition of Varian”.

 

In the three and six months ended April 30, 2011 we acquired three separate businesses: A2 Technologies, Lab901 and Biocius Life Sciences Inc. for $96 million in total consideration, net of cash acquired.

 

Looking forward, we are focused on integrating Varian’s order fulfillment systems and processes into Agilent and our priority is to continue to focus on revenue and cost synergies, as well as increase technology sharing between our businesses. We are currently expecting to achieve $100 million in net savings as a result of the integration of Varian into Agilent. We are also looking to increase our electronic measurement business manufacturing capacity based on current demand.

 

Critical Accounting Policies and Estimates

 

Management’s 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 management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

 

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