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Agilent Technologies 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

 

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 JULY 31, 2007

 

 

 

 

 

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) 553-7777

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

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

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

LARGE ACCELERATED FILER  x

ACCELERATED FILER  o

NON-ACCELERATED FILER  o

 

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

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

CLASS

 

OUTSTANDING JULY 31, 2007

 

COMMON STOCK, $0.01 PAR VALUE

 

386,547,716 SHARES

 

 

 




AGILENT TECHNOLOGIES, INC.

 TABLE OF CONTENTS

 

 

 

 

 

Page
 Number

Part I.

 

Financial Information

 

 

 

3

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

 

 

Condensed Consolidated Statement of Operations

 

3

 

 

 

 

Condensed Consolidated Balance Sheet

 

4

 

 

 

 

Condensed Consolidated Statement of Cash Flows

 

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

 

Item 2.

 

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

 

17

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

Item 4.

 

Controls and Procedures

 

26

Part II.

 

Other Information

 

 

 

27

 

 

Item 1.

 

Legal Proceedings

 

27

 

 

Item 1A.

 

Risk Factors

 

27

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

33

 

 

Item 6.

 

Exhibits

 

33

Signature

 

 

 

 

 

34

Exhibit Index

 

 

 

 

 

35

 




PART I — FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

AGILENT TECHNOLOGIES, INC.

 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 (in millions, except per share amounts)

(Unaudited)

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

1,140

 

$

1,027

 

$

3,300

 

$

3,022

 

Services and other

 

234

 

212

 

674

 

623

 

Total net revenue

 

1,374

 

1,239

 

3,974

 

3,645

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

484

 

424

 

1,408

 

1,329

 

Cost of services and other

 

132

 

129

 

387

 

387

 

Total costs

 

616

 

553

 

1,795

 

1,716

 

Research and development

 

170

 

162

 

511

 

499

 

Selling, general and administrative

 

420

 

407

 

1,274

 

1,236

 

Gain on sale of Palo Alto and San Jose sites

 

 

(65

)

 

(121

)

Total costs and expenses

 

1,206

 

1,057

 

3,580

 

3,330

 

Income from operations

 

168

 

182

 

394

 

315

 

Interest income

 

42

 

49

 

136

 

132

 

Interest expense

 

(23

)

(21

)

(68

)

(44

)

Other income (expense), net

 

3

 

17

 

7

 

51

 

Income from continuing operations before taxes and equity income

 

190

 

227

 

469

 

454

 

Provision for income taxes

 

5

 

11

 

11

 

44

 

Equity in net income of unconsolidated affiliate and gain - Lumileds

 

 

 

 

901

 

Income from continuing operations

 

185

 

216

 

458

 

1,311

 

Income from and gain (loss) on sale of discontinued operations of our semiconductor products business (net of taxes of zero and $10 million for the three and nine months ended July 31, 2006, respectively)

 

 

(6

)

 

1,815

 

Income from discontinued operations of our semiconductor test solutions business (net of taxes of $7 million and $17 million for the three and nine months ended July 31, 2006, respectively)

 

 

17

 

 

32

 

Net income

 

$

185

 

$

227

 

$

458

 

$

3,158

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.47

 

$

0.52

 

$

1.15

 

$

2.99

 

Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net

 

 

(0.01

)

 

4.14

 

Income from discontinued operations of our semiconductor test solutions business, net

 

 

0.04

 

 

0.08

 

Net income per share – basic

 

$

0.47

 

$

0.55

 

$

1.15

 

$

7.21

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.45

 

$

0.51

 

$

1.11

 

$

2.92

 

Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net

 

 

(0.01

)

 

4.04

 

Income from discontinued operations of our semiconductor test solutions business, net

 

 

0.04

 

 

0.07

 

Net income per share – diluted

 

$

0.45

 

$

0.54

 

$

1.11

 

$

7.03

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

392

 

412

 

400

 

438

 

Diluted

 

407

 

422

 

412

 

449

 

 

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

3




AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)

 

July 31,
2007

 

October 31,
2006

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,486

 

$

2,262

 

Accounts receivable, net

 

738

 

692

 

Inventory

 

674

 

627

 

Other current assets

 

383

 

377

 

Total current assets

 

3,281

 

3,958

 

Property, plant and equipment, net

 

787

 

775

 

Goodwill and other intangible assets, net

 

732

 

468

 

Restricted cash and cash equivalents

 

1,617

 

1,606

 

Other assets

 

607

 

562

 

Total assets

 

$

7,024

 

$

7,369

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

346

 

$

378

 

Employee compensation and benefits

 

368

 

414

 

Deferred revenue

 

251

 

225

 

Income and other taxes payable

 

389

 

390

 

Other accrued liabilities

 

156

 

131

 

Total current liabilities

 

1,510

 

1,538

 

Long-term debt

 

1,500

 

1,500

 

Retirement and post-retirement benefits

 

293

 

288

 

Other long-term liabilities

 

433

 

395

 

Total liabilities

 

3,736

 

3,721

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock; $0.01 par value; 2 billion shares authorized; 550 million shares at July 31, 2007 and 535 million shares at October 31, 2006 issued

 

5

 

5

 

Treasury stock at cost; 163 million shares at July 31, 2007 and 127 million shares at October 31, 2006

 

(5,838

)

(4,525

)

Additional paid-in-capital

 

7,052

 

6,605

 

Retained earnings

 

1,992

 

1,534

 

Accumulated other comprehensive income

 

77

 

29

 

Total stockholders’ equity

 

3,288

 

3,648

 

Total liabilities and stockholders’ equity

 

$

7,024

 

$

7,369

 

 

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

4




AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

 

Nine Months Ended
July 31,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

458

 

$

3,158

 

Less: income from and gain on sale of discontinued operations of our semiconductor products business, net

 

 

1,815

 

Less: income from discontinued operations of our semiconductor test solutions business, net

 

 

32

 

Income from continuing operations

 

458

 

1,311

 

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

143

 

128

 

Share-based compensation

 

103

 

73

 

Deferred taxes

 

(29

)

(9

)

Excess and obsolete inventory-related charges

 

13

 

28

 

Asset impairment charges

 

8

 

23

 

Net gain on sale of investments

 

(2

)

(9

)

Net gain on sale of assets

 

(13

)

(114

)

Gain on sale and undistributed equity in net income of Lumileds

 

 

(901

)

Net pension curtailment and settlement gains

 

 

(18

)

Other

 

1

 

2

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(9

)

5

 

Inventory

 

(46

)

(42

)

Accounts payable

 

(14

)

41

 

Employee compensation and benefits

 

(50

)

(132

)

Income taxes and other taxes payable

 

11

 

(88

)

Other current assets and liabilities

 

23

 

(8

)

Other long-term assets and liabilities

 

(26

)

(160

)

Net cash provided by operating activities of continuing operations

 

571

 

130

 

Net cash provided by operating activities of discontinued operations related to our semiconductor products business

 

 

7

 

Net cash provided by operating activities of discontinued operations related to our semiconductor test solutions business

 

 

96

 

Net cash provided by operating activities

 

571

 

233

 

Cash flows from investing activities:

 

 

 

 

 

Investments in property, plant and equipment

 

(115

)

(135

)

Proceeds from sale of property, plant and equipment

 

12

 

205

 

Investments in equity securities

 

 

(5

)

Proceeds from the sale of Lumileds and other investments

 

12

 

966

 

Net proceeds from sale of discontinued operations

 

 

2,509

 

(Increase) decrease in restricted cash, cash equivalents and investments, net

 

1

 

(1,583

)

Payment of loan receivable

 

 

50

 

Proceeds from sale of short-term investments

 

 

25

 

Purchase of minority interest, primarily Yokogawa Analytical Systems

 

 

(104

)

Acquisitions of businesses and intangible assets, net of cash acquired

 

(311

)

(30

)

Proceeds from sale of intangibles and assets, net

 

14

 

 

Net cash provided by (used in) investing activities of continuing operations

 

(387

)

1,898

 

Net cash used in investing activities of discontinued operations related to our semiconductor products business

 

 

(6

)

Net cash used in investing activities of discontinued operations related to our semiconductor test solutions business

 

 

(30

)

Net cash provided by (used in) investing activities

 

(387

)

1,862

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock under employee stock plans, net

 

344

 

513

 

Repurchases of common stock

 

(1,313

)

(4,179

)

Capital contributions to subsidiary (our semiconductor test solutions business)

 

 

(19

)

Proceeds from term facility

 

 

700

 

Repayment of term facility

 

 

(700

)

Debt issuance costs

 

 

(25

)

Cash distribution to minority interest in consolidated joint venture

 

 

(16

)

Long-term debt

 

(4

)

1,500

 

Net cash used in financing activities of continuing operations

 

(973

)

(2,226

)

Net cash provided by financing activities of discontinued operations related to our semiconductor test solutions business

 

 

140

 

Net cash used in financing activities

 

(973

)

(2,086

)

Effect of exchange rate movements

 

13

 

14

 

Net increase (decrease) in cash and cash equivalents

 

(776

)

23

 

Cash and cash equivalents at beginning of period

 

2,262

 

2,226

 

Cash and cash equivalents at end of period

 

$

1,486

 

$

2,249

 

 

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

5




AGILENT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. OVERVIEW

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

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

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

3. NEW ACCOUNTING PRONOUNCEMENTS

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

6




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

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

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

4. SHARE-BASED COMPENSATION

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

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

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except

 

(in millions, except

 

 

 

per share data)

 

per share data)

 

Cost of products

 

$

6

 

$

6

 

$

27

 

$

21

 

Research and development

 

4

 

3

 

18

 

13

 

Selling, general and administrative

 

17

 

10

 

58

 

39

 

Total share-based compensation expense

 

$

27

 

$

19

 

$

103

 

$

73

 

 

 

 

 

 

 

 

 

 

 

Impact on net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.07

 

$

0.05

 

$

0.26

 

$

0.17

 

Diluted

 

$

0.07

 

$

0.05

 

$

0.25

 

$

0.16

 

 

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

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

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

7




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

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

5.0

%

5.0

%

4.6

%

4.3

%

Dividend yield

 

0

%

0

%

0

%

0

%

Weighted average volatility

 

25

%

31

%

29

%

29

%

Expected life

 

4.60 yrs

 

4.25 yrs

 

4.60 yrs

 

4.25 yrs

 

 

 

 

 

 

 

 

 

 

 

ESPP:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

5.1

%

5.0

%

4.8

%

4.5

%

Dividend yield

 

0

%

0

%

0

%

0

%

Weighted average volatility

 

23

%

26

%

31

%

29

%

Expected life

 

0.5-1.5 yrs

 

0.5 yrs

 

0.5-2 yrs

 

0.5-1 yrs

 

 

 

 

 

 

 

 

 

 

 

LTPP:

 

 

 

 

 

 

 

 

 

Volatility of Agilent shares

 

30

%

N/A

 

31

%

28

%

Volatility of selected peer-company shares

 

15%-57

%

N/A

 

15%-5

7%

23%-82

%

Price-wise correlation with selected peers

 

29

%

N/A

 

29

%

50

%

 

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

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

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

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

5. PROVISION FOR TAXES

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

8




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

6. NET INCOME PER SHARE

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

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

185

 

$

216

 

$

458

 

$

1,311

 

Income from and gain (loss) on sale of discontinued operations of our semiconductor products business, net

 

 

(6

)

 

1,815

 

Income from discontinued operations of our semiconductor test solutions business, net

 

 

17

 

 

32

 

Net income

 

$

185

 

$

227

 

$

458

 

$

3,158

 

Denominators:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

392

 

412

 

400

 

438

 

Potentially dilutive common stock equivalents

 

15

 

10

 

12

 

11

 

  Diluted weighted-average shares

 

407

 

422

 

412

 

449

 

 

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

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

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

Options to purchase shares of common stock (in millions)

 

4

 

22

 

5

 

8

 

Weighted-average exercise price

 

$

50

 

$

38

 

$

47

 

$

45

 

Average common stock price

 

$

38

 

$

33

 

$

35

 

$

35

 

 

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

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

9




8. INVENTORY

 

July 31,
2007

 

October 31,
2006

 

 

 

(in millions)

 

Finished goods

 

$

314

 

$

285

 

Work in progress

 

57

 

51

 

Raw materials

 

303

 

291

 

 

Total inventory

 

$

674

 

$

627

 

 

 

9. GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Goodwill at October 31, 2006

 

$

272

 

$

113

 

$

385

 

Foreign currency translation impact

 

1

 

(2

)

(1

)

Goodwill arising from acquisitions

 

39

 

127

 

166

 

Goodwill at July 31, 2007

 

$

312

 

$

238

 

$

550

 

 

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

 

Purchased Other Intangible Assets

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

(in millions)

 

As of October 31, 2006:

 

 

 

 

 

 

 

Purchased technology

 

$

208

 

$

143

 

$

65

 

Customer relationships

 

50

 

32

 

18

 

Total

 

$

258

 

$

175

 

$

83

 

As of July 31, 2007:

 

 

 

 

 

 

 

Purchased technology

 

$

272

 

$

164

 

$

108

 

Trademarks

 

31

 

1

 

30

 

Customer relationships

 

83

 

39

 

44

 

Total

 

$

386

 

$

204

 

$

182

 

 

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

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

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

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

 

Amount

 

 

 

 

 

Net tangible assets

 

$

30

 

Goodwill

 

123

 

Identifiable intangible assets

 

99

 

Total net assets acquired

 

$

252

 

 

10




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

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

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

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

10. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS

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

Three Months Ended July 31,

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

10

 

$

11

 

$

9

 

$

11

 

$

1

 

$

1

 

Interest cost on benefit obligation

 

10

 

10

 

16

 

15

 

6

 

7

 

Expected return on plan assets

 

(14

)

(13

)

(23

)

(21

)

(7

)

(6

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

(1

)

(1

)

8

 

9

 

1

 

1

 

Prior service cost

 

 

 

 

 

(2

)

(2

)

Total net plan costs

 

$

5

 

$

7

 

$

10

 

$

14

 

$

(1

)

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailments

 

$

 

$

(12

)

$

 

$

1

 

 

$

(12

)

Settlements

 

 

(4

)

 

(4

)

 

 

Total net plan (income) costs

 

$

5

 

$

(9

)

$

10

 

$

11

 

$

(1

)

$

(11

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution of net plan costs

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

5

 

$

(1

)

$

10

 

$

10

 

(1

)

$

(9

)

Discontinued operations

 

 

(8

)

 

1

 

 

(2

)

Total net plan costs

 

$

5

 

$

(9

)

$

10

 

$

11

 

$

(1

)

$

(11

)

 

Nine Months Ended July 31,

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

30

 

$

35

 

$

27

 

$

33

 

$

3

 

$

3

 

Interest cost on benefit obligation

 

30

 

30

 

48

 

43

 

20

 

21

 

Expected return on plan assets

 

(42

)

(39

)

(69

)

(59

)

(21

)

(18

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

(3

)

(2

)

24

 

25

 

1

 

5

 

Prior service cost

 

 

 

 

 

(6

)

(8

)

Total net plan costs

 

$

15

 

$

24

 

$

30

 

$

42

 

$

(3

)

$

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailments

 

 

(34

)

 

1

 

 

(33

)

Settlements

 

(1

)

(4

)

 

(12

)

 

 

Total net plan costs

 

$

14

 

$

(14

)

$

30

 

$

31

 

$

(3

)

$

(30

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution of net plan costs

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

14

 

$

14

 

$

30

 

$

36

 

(3

)

$

(7

)

Discontinued operations

 

 

(28

)

 

(5

)

 

(23

)

Total net plan costs

 

$

14

 

$

(14

)

$

30

 

$

31

 

$

(3

)

$

(30

)

 

11




For the U.S. plans, because of lump sum payouts during the three months ended January 31, 2007, we recorded a $1 million settlement gain in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” (“SFAS No. 88”).

We contributed approximately zero and $8 million to our U.S. plans during the three and nine months ended July 31, 2007 and zero and $41 million, respectively, for the same periods in 2006. We contributed approximately $10 million and $26 million to our non-U.S. plans during the three and nine months ended July 31, 2007 and $13 million and $42 million (excluding $31 million contributed to Verigy pension plans in Q306), respectively, for the same periods in 2006. The reduced funding amounts in the U.S. were due to an improved funded status, primarily due to an increase in asset returns. We expect to contribute approximately $15 million to our U.S. and non-U.S. plans during the remainder of fiscal 2007.

11. WARRANTIES

Standard Warranty

We accrue for standard warranty costs in accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”), based on historical trends in warranty charges as a percentage of gross 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. Our standard warranty terms typically extend for one year from the date of delivery.

 

FY 2007

 

FY 2006

 

 

 

(in millions)

 

Beginning balance at November 1,

 

$

29

 

$

40

 

Accruals for warranties issued during the period

 

42

 

36

 

Accruals related to pre-existing warranties (including changes in estimates)

 

(1

)

 

Settlements made during the period

 

(41

)

(44

)

Ending balance at July 31,

 

$

29

 

$

32

 

 

Extended Warranty

Revenue from our extended warranty contracts with terms beyond one year is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. Amounts representing warranty contracts for the next twelve months are included in deferred revenue on the condensed consolidated balance sheet and were $52 million and $43 million at July 31, 2007 and October 31, 2006, respectively. The long-term amounts are recorded in other long-term liabilities on the condensed consolidated balance sheet and were $56 million and $55 million at July 31, 2007 and October 31, 2006, respectively.

 

FY 2007

 

FY 2006

 

 

 

(in millions)

 

Beginning balance at November 1,

 

$

98

 

$

76

 

Recognition of revenue

 

(32

)

(21

)

Deferral of revenue for new contracts

 

42

 

41

 

Ending balance at July 31,

 

$

108

 

$

96

 

 

12




12. RESTRUCTURING

We initiated several restructuring plans in prior periods: the 2001 Plan, the 2002 Plan and the 2003 Plan (“Prior Plans”). As of July 31, 2007, we have executed all key activities on the Prior Plans. However, charges in connection with the consolidation of excess facilities continue to be recorded due to changes in market conditions from those originally expected at the date the liability for excess facility was recorded.

Our FY2005 Plan was announced in the fourth quarter of 2005. The FY2005 Plan was designed to align our workforce size with the size of our revenue base, which was significantly reduced via the sale of our semiconductor products business and the spin-off of our semiconductor test solutions business. The FY2005 Plan consists of voluntary and involuntary terminations. During the three and nine months ended July 31, 2007 we incurred zero and $16 million, respectively, in charges related to the FY2005 Plan, mostly associated with individuals notified prior to October 31, 2006.

A summary of restructuring activity for the nine months ended July 31, 2007 is shown in the table below:

 

Workforce
Reduction

 

Consolidation
of Excess
Facilities

 

Total

 

 

 

(in millions)

 

Ending balance at October 31, 2006

 

$

13

 

$

58

 

$

71

 

Total charges

 

16

 

 

16

 

Cash payments

 

(27

)

(18

)

(45

)

Ending balance at July 31, 2007

 

$

2

 

$

40

 

$

42

 

 

The restructuring accrual for all plans, which totaled $42 million as of July 31, 2007 and $71 million as of October 31, 2006, is recorded in other accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet and represents estimated future cash outlays. Completion of the workforce reduction component of the FY2005 Plan is expected by the end of fiscal year 2007; however, lease payments for excess facilities are expected to extend over the next five years.

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

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

(in millions)

 

Cost of products

 

$

 

$

6

 

$

6

 

$

22

 

Research and development

 

 

3

 

1

 

19

 

Selling, general and administrative

 

 

27

 

9

 

90

 

Restructuring and asset impairment charges in continuing operations

 

 

36

 

16

 

131

 

Restructuring charges in discontinued operations

 

 

4

 

 

14

 

Total restructuring and asset impairment charges

 

$

 

$

40

 

$

16

 

$

145

 

 

13. 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. The company may use amounts borrowed under the facility for general corporate purposes. To date the company has not borrowed under the facility, but may borrow from time to time as necessary.

13




14. COMPREHENSIVE INCOME

The following table presents the components of comprehensive income:

 

Three Months Ended
July 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Net income

 

$

185

 

$

227

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain (loss) on investments

 

22

 

(2

)

Change in unrealized (loss) on derivative instruments

 

(8

)

(2

)

Foreign currency translation

 

17

 

9

 

Change in minimum pension liability

 

 

53

 

Deferred taxes

 

(28

)

(18

)

Comprehensive income

 

$

188

 

$

267

 

 

 

Nine Months Ended
July 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Net income

 

$

458

 

$

3,158

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain (loss) on investments

 

23

 

(7

)

Change in unrealized gain (loss) on derivative instruments

 

(6

)

(8

)

Foreign currency translation

 

62

 

46

 

Change in minimum pension liability

 

 

53

 

Deferred taxes

 

(31

)

(17

)

Comprehensive income

 

$

506

 

$

3,225

 

 

For the three and nine months ended July 31, 2007, deferred taxes are primarily related to foreign currency translation gains and losses and unrealized gains on equity securities. For the three and nine months ended July 31, 2006, deferred taxes are primarily related to a reduction in additional minimum pension liabilities.

15. STOCK REPURCHASE PROGRAM

In the fourth quarter of 2006, our Board of Directors authorized a $2 billion stock repurchase program and subsequently, during the second quarter of 2007, they approved an acceleration of the remaining amount. As a result, we now plan to complete the repurchase by the end of 2007.

The following repurchases under the above program were completed in the periods presented below:

Quarter Ended

 

Number of
Common
Stock Repurchased

 

Amount of
Common
Stock Repurchased

 

 

 

(in millions)

 

October 31, 2006

 

1.7

 

$

56

 

January 31, 2007

 

7.6

 

253

 

April 30, 2007

 

11.4

 

382

 

July 31, 2007

 

17.7

 

678

 

Program to date as of July 31, 2007

 

38.4

 

$

1,369

 

 

All such shares and related costs are held as treasury stock and accounted for using the cost method. The remaining amount that is authorized under the plan is approximately $630 million.

16. SEGMENT INFORMATION

We are a measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. During 2006, we completed the divestiture of our semiconductor products business and spin-off of our semiconductor test solutions business. Currently, Agilent has two primary businesses — bio-analytical measurement and electronic measurement — each of which comprises a reportable segment. In the beginning of the third quarter of 2007, we moved the nanotechnology measurement business from the electronics measurement segment to the bio-analytical measurement segment to more closely align with the new materials sciences business in that segment. All segment numbers have been restated historically. The segments were determined primarily on how the chief operating decision maker views and evaluates our operations. Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining our reportable segments.

14




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 considered to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. For 2006, corporate charges previously allocated to our semiconductor products business and semiconductor test systems business, but not classified within discontinued operations, were not reallocated to our other segments. These charges are presented below as a component of the reconciliation between the segments’ income from operations and Agilent’s income from continuing operations and are classified as unallocated semiconductor products business corporate charges and unallocated semiconductor test systems business corporate charges.

The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with generally accepted accounting principles in the U.S. The performance of each segment is measured based on several metrics, including 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 amortization and impairment of other intangibles, restructuring and asset impairment charges, share based compensation expense, investment gains and losses, interest income, interest expense and other items as noted in the reconciliation below.

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Three months ended July 31, 2007:

 

 

 

 

 

 

 

Total net revenue

 

$

874

 

$

500

 

$

1,374

 

Segment income from operations

 

$

133

 

$

92

 

$

225

 

Three months ended July 31, 2006:

 

 

 

 

 

 

 

Total net revenue

 

$

819

 

$

420

 

$

1,239

 

Segment income from operations

 

$

119

 

$

66

 

$

185

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Nine months ended July 31, 2007:

 

 

 

 

 

 

 

Total net revenue

 

$

2,527

 

$

1,447

 

$

3,974

 

Segment income from operations

 

$

344

 

$

261

 

$

605

 

Nine months ended July 31, 2006:

 

 

 

 

 

 

 

Total net revenue

 

$

2,424

 

$

1,221

 

$

3,645

 

Segment income from operations

 

$

316

 

$

175