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Agilent Technologies 10-Q 2009

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, 2009

 

 

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 o    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, 2009

COMMON STOCK, $0.01 PAR VALUE

 

343,353,951 SHARES

 

 

 



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

Page
Number

Part I.

Financial Information

 

 

 

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

35

 

Item 4.

Controls and Procedures

35

Part II.

Other Information

 

35

 

Item 1.

Legal Proceedings

35

 

Item 1A.

Risk Factors

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

 

Item 4.

Submission of Matters to a Vote of Security Holders

44

 

Item 6.

Exhibits

45

Signature

 

 

46

Exhibit Index

 

 

47

 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

864

 

$

1,214

 

$

1,801

 

$

2,375

 

Services and other

 

227

 

242

 

456

 

474

 

Total net revenue

 

1,091

 

1,456

 

2,257

 

2,849

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

436

 

512

 

889

 

1,013

 

Cost of services and other

 

125

 

137

 

249

 

273

 

Total costs

 

561

 

649

 

1,138

 

1,286

 

Research and development

 

170

 

183

 

339

 

364

 

Selling, general and administrative

 

407

 

433

 

803

 

874

 

Total costs and expenses

 

1,138

 

1,265

 

2,280

 

2,524

 

Income (loss) from operations

 

(47

)

191

 

(23

)

325

 

Interest income

 

6

 

27

 

20

 

66

 

Interest expense

 

(23

)

(29

)

(46

)

(59

)

Other income (expense), net

 

6

 

7

 

18

 

11

 

Income (loss) before taxes

 

(58

)

196

 

(31

)

343

 

Provision for income taxes

 

43

 

23

 

6

 

50

 

Net income (loss)

 

$

(101

)

$

173

 

$

(37

)

$

293

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share — basic:

 

$

(0.29

)

$

0.48

 

$

(0.11

)

$

0.80

 

Net income (loss) per share — diluted:

 

$

(0.29

)

$

0.47

 

$

(0.11

)

$

0.78

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

344

 

363

 

348

 

367

 

Diluted

 

344

 

370

 

348

 

376

 

 

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

 

3



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)

 

 

 

April 30,
2009

 

October 31,
2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,400

 

$

1,405

 

Short-term investments

 

12

 

24

 

Accounts receivable, net

 

569

 

770

 

Inventory

 

608

 

646

 

Other current assets

 

294

 

337

 

Total current assets

 

2,883

 

3,182

 

Property, plant and equipment, net

 

821

 

824

 

Goodwill

 

648

 

646

 

Other intangible assets, net

 

189

 

228

 

Restricted cash and cash equivalents

 

1,572

 

1,582

 

Long-term investments

 

167

 

206

 

Other long-term assets

 

296

 

339

 

Total assets

 

$

6,576

 

$

7,007

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

252

 

$

308

 

Employee compensation and benefits

 

305

 

409

 

Deferred revenue

 

292

 

280

 

Income and other taxes payable

 

89

 

128

 

Other accrued liabilities

 

161

 

205

 

Total current liabilities

 

1,099

 

1,330

 

Long-term debt

 

1,515

 

1,514

 

Senior notes

 

639

 

611

 

Retirement and post-retirement benefits

 

344

 

324

 

Other long-term liabilities

 

560

 

669

 

Total liabilities

 

4,157

 

4,448

 

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; 563 million shares at April 30, 2009 and 561 million shares at October 31, 2008 issued

 

6

 

6

 

Treasury stock at cost; 220 million shares at April 30, 2009 and 211 million shares at October 31, 2008

 

(7,627

)

(7,470

)

Additional paid-in-capital

 

7,474

 

7,410

 

Retained earnings

 

2,754

 

2,791

 

Accumulated other comprehensive loss

 

(188

)

(178

)

Total stockholders’ equity

 

2,419

 

2,559

 

Total liabilities and stockholders’ equity

 

$

6,576

 

$

7,007

 

 

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

 

4



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

 

 

 

Six  Months Ended
April 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(37

)

$

293

 

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

 

 

 

 

 

Depreciation and amortization

 

81

 

100

 

Share-based compensation

 

39

 

49

 

Deferred taxes

 

34

 

58

 

Excess and obsolete and inventory-related charges

 

41

 

8

 

Translation gain from liquidation of a subsidiary

 

 

(25

)

Asset impairment charges

 

32

 

3

 

Allowance for doubtful accounts

 

4

 

1

 

Other

 

4

 

7

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

203

 

(26

)

Inventory

 

13

 

(36

)

Accounts payable

 

(58

)

19

 

Employee compensation and benefits

 

(108

)

 

Income taxes and other taxes payable

 

(44

)

(99

)

Interest rate swap proceeds

 

43

 

 

Other assets and liabilities

 

(93

)

(23

)

Net cash provided by operating activities

 

154

 

329

 

Cash flows from investing activities:

 

 

 

 

 

Investments in property, plant and equipment

 

(68

)

(71

)

Proceeds from sale of property, plant and equipment

 

 

14

 

Purchase of investments

 

(30

)

(255

)

Proceeds from sale of investments

 

62

 

114

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

(2

)

(130

)

Purchase of minority interest

 

 

(14

)

Change in restricted cash and cash equivalents, net

 

10

 

31

 

Net cash used in investing activities

 

(28

)

(311

)

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock under employee stock plans

 

27

 

84

 

Proceeds from revolving credit facility

 

325

 

250

 

Repayment of revolving credit facility

 

(325

)

 

Treasury stock repurchases

 

(157

)

(500

)

Net cash used in financing activities

 

(130

)

(166

)

 

 

 

 

 

 

Effect of exchange rate movements

 

(1

)

32

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(5

)

(116

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,405

 

1,826

 

Cash and cash equivalents at end of period

 

$

1,400

 

$

1,710

 

 

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

 

5



Table of Contents

 

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 communications, electronics, life sciences and chemical analysis 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.

 

Revisions to Financial Statement Presentation. We have revised our consolidated balance sheet as of October 31, 2008 to correct an error in the classification of deferred tax assets and liabilities.  This revision does not impact the consolidated statement of operations or the consolidated statement of cash flows for any period.  During the April 30, 2009 quarter-end process, we noted that the October 31, 2008 U.S. deferred tax valuation allowances and certain deferred tax assets/ deferred tax liabilities were misclassified on the balance sheet as a result of improperly applying the jurisdictional netting rules of SFAS No. 109. We have therefore revised our balance sheet as of October 31, 2008 by decreasing other long-term liabilities by $435 million and decreasing other long-term assets by $404 million, decreasing other current assets by $26 million and increasing other accrued liabilities by $5 million.

 

Basis of Presentation. We have prepared the accompanying financial data for the three months and six months ended April 30, 2009 and 2008 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 2008 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, 2009 and October 31, 2008, condensed consolidated statement of operations for the three and six months ended April 30, 2009 and 2008, and condensed consolidated statement of cash flows for the six months ended April 30, 2009 and 2008.

 

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, investment impairments, share-based compensation, retirement and post-retirement benefit plan assumptions, restructuring and asset impairment charges, valuation of long-lived assets and accounting for income taxes.

 

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 SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).   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.

 

The provisions of SFAS No. 142 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 SFAS No. 142, paragraph 30, a reporting unit is an operating segment, or one level below an operating segment. In accordance with paragraph 30 of SFAS No. 142, 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. For the six months ended April 30, 2009, Agilent had three reporting units, which were the same as our operating segments: electronic measurement, bio-analytical measurement and semiconductor and board test.

 

6



Table of Contents

 

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.

 

2. NEW ACCOUNTING PRONOUNCEMENTS

 

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157,Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements; rather, it applies to other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”). FSP No. 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective November 1, 2008, we adopted the measurement and disclosure requirements related to financial assets and financial liabilities. The adoption of SFAS No. 157 for financial assets and financial liabilities did not have a material impact on the company’s results of operations or the fair values of its financial assets and liabilities. We will be required to apply the provisions of SFAS No. 157 to nonfinancial assets and nonfinancial liabilities as of November 1, 2009 and are currently evaluating the impact of the application of SFAS No. 157 as it pertains to these items.

 

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. Effective November 1, 2008, we adopted SFAS 159, but we have not elected the fair value option for any eligible financial instruments as of April 30, 2009.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS No. 161”), which requires additional disclosures about objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and related interpretations, and how the derivative instruments and related hedged items affect our financial statements. SFAS No. 161 also requires disclosures about credit risk-related contingent features in derivative agreements. SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and will be applied prospectively. Effective February 1, 2009 we adopted the additional disclosures required under SFAS No. 161. The adoption of SFAS No. 161 did not have a material impact on our condensed consolidated financial statements. See note 10, “Derivatives” for additional information on adoption of SFAS No. 161.

 

In December 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1 requires detailed disclosures regarding the investment strategies, fair value measurements, and concentrations of risk of plan assets of a defined benefit pension or other postretirement plan. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009 and will be applied prospectively. We are currently evaluating the impact of adopting FSP 132(R)-1.

 

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Table of Contents

 

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1”). FSP No. 107-1 extends the disclosure requirements of SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to interim period financial statements, in addition to the existing requirements for annual periods and reiterates SFAS No. 107’s requirement to disclose the methods and significant assumptions used to estimate fair value. FSP No. 107-1 is effective for interim and annual periods ending after June 15, 2009. We are currently evaluating the impact, if any, that the adoption of FSP No. 107-1 will have on our financial statements.

 

In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and FSP No. 124-2”). FSP No. 115-2 and FSP No. 124-2 establishes a new method for recognizing and reporting other-than-temporary impairment of debt securities and also contains additional disclosure requirements for both debt and equity securities. FSP No. 115-2 and FSP No. 124-2 are effective for interim and annual periods ending after June 15, 2009. We are currently evaluating the impact, if any, that the adoption of FSP No. 115-2 and FSP No. 124-2 will have on our financial statements.

 

In April 2009, the FASB issued FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”). FSP No. 157-4 provides additional guidance for estimating fair value when the market activity for an asset or liability has declined significantly. FSP No. 157-4 is effective for interim and annual periods ending after June 15, 2009 and will be applied prospectively.  We are currently evaluating the impact, if any, that the adoption of FSP No. 157-4 will have on our financial statements.

 

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, (“SFAS No. 165”)   SFAS No. 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and shall be applied prospectively.

 

3. 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

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Cost of products and services

 

$

3

 

$

4

 

$

8

 

$

11

 

Research and development

 

2

 

3

 

6

 

8

 

Selling, general and administrative

 

13

 

12

 

25

 

30

 

Total share-based compensation expense

 

$

18

 

$

19

 

$

39

 

$

49

 

 

Included in the expense amount for the three and six months ended April 30, 2009 is approximately $3 million of incremental expense for the acceleration of share-based compensation related to the announced workforce reduction. Upon termination of the employees impacted by the workforce reduction, the non-vested Agilent awards held by these employees immediately vests. Employees have a period of up to three months in which to exercise the Agilent options before such options are cancelled.

 

Share-based compensation capitalized within inventory at April 30, 2009 and 2008 was zero. The windfall tax benefit realized from exercised stock options and similar awards was immaterial for the three and six months ended April 30, 2009 and 2008.

 

The following assumptions were used to estimate the fair value of the options granted, ESPP purchases and LTPP grants. During the three months ended April 30, 2008, no grants were made under any of our share-based payment award plans as reflected in the assumption table below.

 

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Table of Contents

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

1.8

%

 

2.3

%

3.2

%

Dividend yield

 

0

%

 

0

%

0

%

Weighted average volatility

 

36

%

 

32

%

33

%

Expected life

 

4.4 yrs

 

 

4.4 yrs

 

4.6 yrs

 

 

 

 

 

 

 

 

 

 

 

ESPP:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

N/A

 

 

N/A

 

3.8

%

Dividend yield

 

N/A

 

 

N/A

 

0

%

Weighted average volatility

 

N/A

 

 

N/A

 

32

%

Expected life

 

N/A

 

 

N/A

 

0.5-1 yr

 

 

 

 

 

 

 

 

 

 

 

LTPP:

 

 

 

 

 

 

 

 

 

Volatility of Agilent shares

 

33

%

 

33

%

27

%

Volatility of selected peer-company shares

 

17%-62

%

 

17%-62

%

17%-52

%

Price-wise correlation with selected peers

 

35

%

 

35

%

24

%

 

The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Effective November 1, 2008, the Compensation Committee of the Board of Directors approved a change to our ESPP that eliminated the 24-month look back period. The ESPP continues to allow eligible employees to purchase shares of our common stock at 85 percent of the purchase price, but only uses the purchase date to establish the fair market value. As a result of the change in our plan, for the three and six months ended April 30, 2009 no Black-Scholes assumptions were required in the valuation of awards granted under our current ESPP. 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.

 

Effective November 1, 2008 we moved to historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. Management believes that based on current data these estimates of volatility are more appropriate than implied volatility. In reaching this conclusion, we have considered many factors including the limited number of Agilent options currently traded and our limited ability to find traded options in the current market with similar terms and prices to the options we are valuing. For the three and six months ended April 30, 2008, we used implied volatility of Agilent’s publicly traded, similarly priced, stock options to estimate the expected stock price volatility assumption for employee stock option awards.

 

4. PROVISION FOR TAXES

 

For the three and six months ended April 30, 2009, we recorded an income tax provision of $43 million and $6 million, respectively, compared to an income tax provision of $23 million and $50 million in the same periods last year. The income tax provisions for the three and six months ended April 30, 2009 include net discrete benefits of zero and $34 million, respectively, and are primarily associated with lapses of statutes of limitations and tax settlements. The tax provisions for the three and six months ended April 30, 2008 both include a benefit of $12 million for effectively settled issues related to foreign audits.

 

Income tax expense is net of taxes recorded for income generated in jurisdictions other than the Netherlands, Puerto Rico, Switzerland, the U.S. and the U.K. where we have recorded valuation allowances. We intend to maintain partial or full valuation allowances in these jurisdictions until sufficient positive evidence exists to support the reversal of the valuation allowances.

 

In the U.S., the tax years remain open back to the year 2000. In other major jurisdictions where we conduct business, the tax years generally remain open back to the year 2003. It is reasonably possible that changes to our unrecognized tax benefits could be significant in the next twelve months due to lapses of statutes of limitation and tax audit settlements. As a result of uncertainties regarding the timing of the completion of tax audits in various jurisdictions and their possible outcomes, an estimate of the range of increase or decrease that could occur in the next twelve months cannot be made.

 

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Table of Contents

 

Our U.S. federal income tax returns for 2000 through 2007 have been or are under audit by the Internal Revenue Service (“IRS”). In August 2007, we received a Revenue Agent’s Report (“RAR”) for 2000 through 2002. In the RAR, the IRS proposes to assess a net tax deficiency, after applying available net operating losses from the years under audit and undisputed tax credits, for those years of approximately $405 million, plus penalties of approximately $160 million and interest. If the IRS were to fully prevail, our net operating loss and tax credits generated in recent years would be utilized earlier than they otherwise would have been, and our annual effective tax rate would increase in the period the IRS prevails. The RAR addresses several issues. One issue, however, relating to the use of Agilent’s brand name by our foreign affiliates, accounts for a majority of the claimed tax deficiency. We believe that the claimed IRS adjustment for this issue in particular is inconsistent with applicable tax laws and that we have meritorious defenses to this claim. Therefore, we have not included any tax for this item in our tax provisions. We filed a formal protest, and in the protest, we vigorously opposed the claim associated with Agilent’s brand name, and most of the other claimed adjustments proposed in the RAR. In April of 2008, we received a rebuttal to our formal protest, and after reviewing the IRS’s arguments, our assessment of the risks remains the same. In the formal protest, we also requested a conference with the Appeals Office of the IRS, and we recently began to address these matters with them. The final resolution of the proposed adjustments is uncertain and may take several years. Based on current information, it is our opinion that the ultimate disposition of these matters is unlikely to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

5. NET INCOME (LOSS) PER SHARE

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(101

)

$

173

 

$

(37

)

$

293

 

Denominators:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

344

 

363

 

348

 

367

 

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

 

 

7

 

 

9

 

Diluted weighted-average shares

 

344

 

370

 

348

 

376

 

 

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 computations of diluted net income per share because they were anti-dilutive.

 

 

 

Three Months Ended
April  30,

 

Six Months Ended
April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Options to purchase shares of common stock (in millions)

 

33

 

19

 

33

 

7

 

Weighted-average exercise price

 

$

29

 

$

36

 

$

29

 

$

45

 

Average common stock price

 

$

16

 

$

31

 

$

17

 

$

33

 

 

6. INVENTORY

 

 

 

April 30,
2009

 

October 31,
2008

 

 

 

(in millions)

 

Finished goods

 

$

310

 

$

331

 

Purchased parts and fabricated assemblies

 

298

 

315

 

Inventory

 

$

608

 

$

646

 

 

10



Table of Contents

 

7. GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following table presents goodwill balances and the movements for each of our reportable segments during the six months ended April 30, 2009:

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Semiconductor &
Board Test

 

Total

 

 

 

(in millions)

 

Goodwill as of October 31, 2008

 

$

329

 

$

278

 

$

39

 

$

646

 

Foreign currency translation impact

 

 

 

2

 

2

 

Goodwill as of April 30, 2009

 

$

329

 

$

278

 

$

41

 

$

648

 

 

The components of other intangibles as of April 30, 2009 and October 31, 2008 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, 2008:

 

 

 

 

 

 

 

Purchased technology

 

$

281

 

$

124

 

$

157

 

Trademark/Tradename

 

32

 

3

 

29

 

Customer relationships

 

85

 

43

 

42

 

Total

 

$

398

 

$

170

 

$

228

 

As of April 30, 2009:

 

 

 

 

 

 

 

Purchased technology

 

$

281

 

$

154

 

$

127

 

Trademark/Tradename

 

32

 

5

 

27

 

Customer relationships

 

85

 

50

 

35

 

Total

 

$

398

 

$

209

 

$

189

 

 

We recorded no additions to goodwill and no additions to other intangibles during the six months ended April 30, 2009. We incurred $6 million and $16 million in impairment charges related to other intangibles for the three and six months ended April 30, 2009, respectively.

 

Amortization of intangible assets was $11 million and $23 million for the three and six months ended April 30, 2009 and $13 million and $26 million for the same periods in the prior year. Future amortization expense related to existing purchased intangible assets is estimated to be $21 million for the remainder of 2009, $39 million for 2010, $35 million for 2011, $28 million for 2012, $20 million for 2013, $14 million for 2014, and $32 million thereafter.

 

8. INVESTMENTS

 

The following table summarizes the company’s investments at April 30, 2009 and October 31, 2008 (net book value):

 

 

 

April 30,

 

October 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Short-Term

 

 

 

 

 

Available-for-sale investments

 

$

12

 

$

24

 

Long-Term

 

 

 

 

 

Cost method investments

 

$

13

 

$

19

 

Trading securities

 

43

 

57

 

Available-for-sale investments

 

111

 

130

 

Total

 

$

167

 

$

206

 

 

Cost method investments consist of non-marketable equity securities and are accounted for at historical cost. Trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. Investments designated as available-for-sale 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 available-for-sale investments are recorded in earnings.

 

11



Table of Contents

 

In February 2008, Agilent traded an externally managed short-term investment for the underlying securities of the investment and now manages those investments internally. The securities received were fixed income debt securities and are held as available-for-sale. Agilent estimated the fair values based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that could have been realized as of April 30, 2009 or that will be realized in the future.

 

Investments in available-for-sale securities at estimated fair value were as follows at April 30, 2009 and October 31, 2008:

 

 

 

April 30, 2009

 

October 31, 2008

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

 

 

(in millions)

 

Debt securities

 

$

69

 

$

 

$

(4

)

$

65

 

$

101

 

$

 

$

(5

)

$

96

 

Equity securities

 

4

 

6

 

 

10

 

4

 

5

 

 

9

 

Other

 

61

 

 

(13

)

48

 

50

 

 

(1

)

49

 

 

 

$

134

 

$

6

 

$

(17

)

$

123

 

$

155

 

$

5

 

$

(6

)

$

154

 

 

Other represents shares we own in two special funds that target underlying investments of approximately 40 percent debt securities and 60 percent equity securities.

 

Contractual maturities of available-for-sale debt securities were as follows at April 30, 2009:

 

 

 

 

 

Estimated Fair

 

 

 

Cost

 

Value

 

 

 

(in millions)

 

 

 

 

 

 

 

Due in less than 1 year

 

$

12

 

$

12

 

Due in 1-5 years

 

34

 

33

 

Due after 5 years

 

23

 

20

 

 

 

$

69

 

$

65

 

 

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 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, forecast 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.

 

Amounts included in other income (expense) for realized gains and losses on the sale of cost method investments, available-for-sale securities and other than temporary impairments were as follows for the three and six months ended April 30, 2009 and 2008:

 

 

 

Three months ended

 

Six months ended

 

 

 

April 30,

 

April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Cost method investments – realized gain

 

$

 

$

 

$

1

 

$

 

Available-for-sale investments – realized loss

 

 

(3

)

 

(4

)

Other than temporary impairment on investments

 

(2

)

(2

)

(8

)

(2

)

Total

 

$

(2

)

$

(5

)

$

(7

)

$

(6

)

 

12



Table of Contents

 

Our trading securities portfolio incurred $1 million of unrealized gains and $6 million of unrealized losses for the three months ended April 30, 2009 and 2008, respectively. Unrealized losses on our trading securities portfolio were $15 million and $8 million for the six months ended April 30, 2009 and 2008, respectively.

 

9. FAIR VALUE MEASUREMENTS

 

SFAS No. 157 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

 

SFAS No. 157 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. SFAS No. 157 establishes 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.

 

Our money market funds and publicly traded available-for-sale and trading securities investments are generally classified as level 1 of the fair value hierarchy because they are valued using quoted market prices. Our derivative financial instruments are classified as 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.  Available-for-sale investments, as well as our commercial paper are classified as level 2 because although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.  Marketable securities measured at fair value using level 3 inputs are comprised of asset-backed securities, mortgage-backed securities, and corporate bonds within our available-for-sale investment portfolio. The values of these investments are determined based on models for which some of the inputs are not readily observable. Counterparty credit risk is evaluated when assigning levels to our financial instruments.

 

Asset 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, 2009 were as follows:

 

 

 

 

 

Fair Value Measurement at April 30, 2009 Using

 

 

 

April 30,
2009

 

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)

 

$

578

 

$

578

 

$

 

$

 

Available-for-sale investments

 

12

 

 

4

 

8

 

Derivative instruments

 

17

 

 

17

 

 

Long-term

 

 

 

 

 

 

 

 

 

Trading securities

 

43

 

43

 

 

 

Available-for-sale investments

 

111

 

10

 

96

 

5

 

Restricted cash (commercial paper)

 

1,561

 

 

1,561

 

 

 Total assets measured at fair value

 

$

2,322

 

$

631

 

$

1,678

 

$

13

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

12

 

$

 

$

12

 

$

 

Long-term

 

 

 

 

 

 

 

 

 

Deferred compensation liability

 

41

 

 

41

 

 

Total liabilities measured at fair value

 

$

53

 

$

 

$

53

 

$

 

 

13



Table of Contents

 

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, 2009:

 

 

 

Three Months Ended
 April 30, 2009

 

Six Months Ended April 30, 2009

 

 

 

(in millions)

 

 

 

 

 

 

 

Balance, beginning of period

 

$

16

 

$

19

 

Realized losses related to amortization of premium

 

(1

)

(2

)

Total unrealized gains (losses) included in accumulated other comprehensive loss

 

 

 

 

Realized losses related to investment impairments

 

(1

)

(4

)

Sales

 

(3

)

(6

)

Transfers into (out of) level 3

 

2

 

6

 

Balance, end of period

 

$

13

 

$

13

 

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

 

$

(1

)

$

(2

)

 

10. DERIVATIVES

 

We are exposed to foreign exchange rate risks in the normal course of business. We enter into foreign exchange contracts, primarily forward contracts and purchased options, to manage economic and/or accounting exposures resulting from changes in foreign currency exchange rates.

 

The company enters 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 SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). 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 condensed 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 condensed consolidated statement of operations in the current period.

 

Additionally, the company enters 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 under SFAS No. 133. Changes in value of the derivative are recognized in other income (expense) in the condensed consolidated statement of operations, in the current period, along with the offsetting gain or loss on the underlying assets or liabilities.

 

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 the threshold limits, the counterparties to the derivative instruments may request collateralization on derivative instruments in net liability positions.

 

14



Table of Contents

 

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on April 30, 2009, was $5 million. The credit-risk-related contingent features underlying these agreements had not been triggered on April 30, 2009.

 

There were 106 foreign exchange forward contracts and 7 foreign exchange option contracts open as of April 30, 2009 and designated as cash flow hedges. There were 147 foreign exchange forward contracts open as of April 30, 2009 not designated as hedging instruments. The aggregated notional amounts by currency and designation as of April 30, 2009 were as follows:

 

 

 

Derivatives in Cash Flow
Hedging Relationships under
SFAS No. 133

 

Derivatives
Not
Designated
as Hedging
Instruments
under SFAS
No. 133

 

 

 

Forward
Contracts

 

Option
Contracts

 

Forward
Contracts

 

Currency

 

Buy/(Sell)

 

Buy/(Sell)

 

Buy/(Sell)

 

 

 

(in millions)

 

Euro

 

$

(64

)

$

 

$

412

 

 

 

 

 

 

 

 

 

 

 

 

British Pound

 

4

 

 

106

 

 

 

 

 

 

 

 

 

Australian Dollar

 

 

 

99

 

 

 

 

 

 

 

 

 

Malaysian Ringgit

 

89

 

 

4

 

 

 

 

 

 

 

 

 

Japanese Yen

 

(83

)

(109

)

(3

)

 

 

 

 

 

 

 

 

Other

 

7

 

 

44

 

 

 

$

(47

)

$

(109

)

$

662

 

 

Derivative instruments are subject to master netting arrangements and qualify for net presentation in the balance sheet. The gross fair values and balance sheet location of derivative instruments held in the condensed consolidated balance sheet as of April 30, 2009 were as follows:

 

 

 

Fair Values of Derivative Instruments

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet Location

 

Fair Value

 

Balance Sheet Location

 

Fair Value

 

 

 

(in millions)

 

Derivatives designated as hedging instruments under SFAS No. 133:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

5

 

Other accrued liabilities

 

$

8

 

 

 

Other accrued liabilities

 

1

 

Other current assets

 

1

 

 

 

 

 

$

6

 

 

 

$

9

 

Derivatives not designated as hedging instruments under SFAS No. 133:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

14

 

Other accrued liabilities

 

$

6

 

 

 

Other accrued liabilities

 

1

 

Other current assets

 

1

 

 

 

 

 

$

15

 

 

 

$

7

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

21

 

 

 

$

16

 

 

15



Table of Contents

 

The effect of derivative instruments for foreign exchange contracts designated as cash flow hedges and not designated as hedging instruments under SFAS No. 133 in our condensed consolidated statement of operations were as follows:

 

 

 

Three Months 
Ended
April 30, 2009

 

 

 

(in millions)

 

Derivatives in Cash Flow Hedging Relationships under SFAS No. 133

 

 

 

Gain recognized in OCI on derivatives

 

$

7

 

Loss reclassified from OCI into cost of sales

 

$

10

 

Derivatives Not Designated as Hedging Instruments under SFAS No. 133

 

 

 

Gain recognized in other income (expense)

 

$

23

 

 

The estimated net amount of existing losses at April 30, 2009 that is expected to be reclassified from other comprehensive income to the cost of sales within the next twelve months is $3 million.

 

11. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS

 

Components of net periodic costs. For the three and six months ended April 30, 2009 and 2008, 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,

 

 

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

7

 

$

9

 

$

8

 

$

10

 

$

1

 

$

1

 

Interest cost on benefit obligation

 

12

 

9

 

16

 

19

 

7

 

7

 

Expected return on plan assets

 

(9

)

(14

)

(19

)

(28

)

(5

)

(8

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

 

(3

)

8

 

5

 

1

 

 

Prior service cost

 

 

 

 

 

(3

)

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net plan (income) costs

 

$

10

 

$

1

 

$

13

 

$

6

 

$

1

 

$

(3

)

 

16



Table of Contents

 

 

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Six Months Ended April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

15

 

$

18

 

$

16

 

$

19

 

$

2

 

$

2

 

Interest cost on benefit obligation

 

24

 

19

 

32

 

38

 

14

 

14

 

Expected return on plan assets

 

(19

)

(28

)

(39

)

(55

)

(10

)

(16

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

1

 

(6

)

17

 

10

 

2

 

 

Prior service cost

 

 

 

 

 

(6

)

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net plan (income) costs

 

$

21

 

$

3

 

$

26

 

$

12

 

$

2

 

$

(6

)

 

We contributed approximately $37 million and $38 million to our U.S. defined benefit plans during the three and six months ended April 30, 2009 and zero and $2 million respectively, for the same periods in 2008. We contributed approximately $12 million and $31 million to our non-U.S. defined benefit plans during the three and six months ended April 30, 2009 and $9 million and $19 million, respectively, for the same periods in 2008. We expect to contribute approximately $27 million to our non-U.S. defined benefit plans during the remainder of fiscal 2009 which is more than previously anticipated and is due to the need to make additional contributions in some countries as asset values have declined. We do not anticipate making further contributions to the U.S. defined benefit plans during the remainder of fiscal 2009.

 

As of April 30, 2009, due to restructuring actions in response to the continuing deterioration of economic conditions (the “FY 2009 Plan”), we recorded a curtailment loss less than $1 million related to a Non-U.S. Plan as required by SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” (“SFAS No. 88”).  In connection with the remeasurement of the pension obligation for this plan, we recorded additional net losses totaling $45 million in accumulated other comprehensive loss on the balance sheet mainly due to lower asset values.

 

12. WARRANTIES

 

We accrue for warranty costs in accordance with SFAS No. 5, “Accounting for Contingencies”, 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 warranty terms typically extend for one year from the date of delivery.

 

 

 

FY 2009

 

FY 2008

 

 

 

(in millions)

 

Beginning balance as of November 1,

 

$

29

 

$

29

 

Accruals for warranties issued during the period

 

23

 

25

 

Changes in estimates

 

3

 

(1

)

Settlements made during the period

 

(26

)

(25

)

Ending balance as of April 30,

 

$

29

 

$

28

 

 

13. RESTRUCTURING COSTS, ASSET IMPAIRMENTS AND OTHER SPECIAL CHARGES

 

Our FY2005 Plan, 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 three years and are included in the “consolidation of excess facilities and other exit costs” column in the table below.

 

In the first quarter of 2009, we announced a new restructuring plan (the “FY 2009 Plan”) to reduce our annual operating expenses by reducing approximately 500 positions of the global workforce of regular employees. The FY 2009 Plan is in response to deteriorating economic conditions and is designed to enhance the potential of some of our business units most affected by the economic downturn to reach their operating model goals. In the second quarter of 2009, we announced additional actions as part of the FY 2009 Plan to restructure our global infrastructure organization and to restructure our electronic measurement and semiconductor and board test segments in response to the continuing deterioration of economic conditions. The additional actions will further reduce our global workforce of regular employees by approximately 3,300 positions, bringing the total headcount reductions under the FY 2009 Plan to approximately 3,800 employees. We expect to complete a majority of these activities related to the FY 2009 Plan by October 31, 2009, with the remainder expected to be completed by the end of the second quarter of fiscal 2010. As of April 30, 2009 approximately 650 employees have left Agilent under the FY 2009 Plan.

 

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Table of Contents

 

A summary of total restructuring activity and other special charges for the six months ended April 30, 2009 is shown in the table below:

 

 

 

Workforce
Reduction

 

Consolidation
of Excess
Facilities

 

Impairment
of Building
and
Purchased
Intangible
Assets

 

Special
Charges
related to
Inventory

 

Total

 

 

 

(in millions)

 

Balance as of October 31, 2008

 

$

 

$

10

 

$

 

$

 

$

10

 

Income statement expense

 

89

 

5

 

17

 

23

 

134

 

Asset impairments/inventory charges

 

 

 

(17

)

(14

)

(31

)

Cash payments

 

(34

)

(2

)

 

 

(36

)

Balance as of April 30, 2009

 

$

55

 

$

13

 

$

 

$

9

 

$

77

 

 

The restructuring and other special accruals for all plans, which totaled $77 million at April 30, 2009 and $10 million at October 31, 2008, are recorded in other accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet and represents estimated future cash outlays. Lease payments are expected approximately over the next three years. Workforce reduction payments, primarily severance, are expected to be completed by the end of the second quarter of fiscal year 2010.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 30,

 

April 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

(in millions)

 

Cost of products

 

$

22

 

$

 

$

55

 

$

 

Research and development

 

17

 

 

21

 

 

Selling, general and administrative

 

47

 

 

58

 

(4

)

Total restructuring, asset impairments and other special charges

 

$

86

 

$

 

$

134

 

$

(4

)

 

14. SHORT-TERM DEBT

 

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. As of April 30, 2009 the company has no borrowings outstanding under the credit facility. During the three months ended April 30, 2009 the company repaid the $50 million balance outstanding on the facility at the end of the January 31, 2009.

 

15. SENIOR NOTES

 

In October 2007, the company 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. The senior notes are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. The company incurred issuance costs of $5 million in connection with the senior notes. These costs were capitalized in other assets on the condensed 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 the two remaining interest rate swap contracts associated with our senior notes that represented the notional amount of $400 million. The asset value upon termination was approximately $43 million. The proceeds were recorded as operating cash flows and the gain is being deferred and amortized over the remaining life of the senior notes.

 

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Table of Contents

 

16. LONG-TERM DEBT AND LONG-TERM RESTRICTED CASH AND CASH EQUIVALENTS

 

The following table summarizes the company’s long-term debt as of April 30, 2009 and October 31, 2008:

 

 

 

April 30,
2009

 

October 31,
2008