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 JULY 31, 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 JULY 31, 2009

COMMON STOCK, $0.01 PAR VALUE

 

345,112,058 SHARES

 

 

 



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page
Number

Part I.

Financial Information

 

 

3

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

Condensed Consolidated Statement of Operations

 

3

 

 

Condensed Consolidated Balance Sheet

 

4

 

 

Condensed Consolidated Statement of Cash Flows

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

Item 2.

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

 

23

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

Item 4.

Controls and Procedures

 

35

Part II.

Other Information

 

 

36

 

Item 1.

Legal Proceedings

 

36

 

Item 1A.

Risk Factors

 

37

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

Item 6.

Exhibits

 

46

Signature

 

 

 

47

Exhibit Index

 

 

 

48

 

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
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

835

 

$

1,195

 

$

2,636

 

$

3,570

 

Services and other

 

222

 

249

 

678

 

723

 

Total net revenue

 

1,057

 

1,444

 

3,314

 

4,293

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

395

 

505

 

1,284

 

1,518

 

Cost of services and other

 

123

 

136

 

372

 

409

 

Total costs

 

518

 

641

 

1,656

 

1,927

 

Research and development

 

153

 

170

 

492

 

534

 

Selling, general and administrative

 

387

 

415

 

1,190

 

1,289

 

Total costs and expenses

 

1,058

 

1,226

 

3,338

 

3,750

 

Income (loss) from operations

 

(1

)

218

 

(24

)

543

 

Interest income

 

5

 

23

 

25

 

89

 

Interest expense

 

(21

)

(31

)

(67

)

(90

)

Other income (expense), net

 

(24

)

5

 

(6

)

16

 

Income (loss) before taxes

 

(41

)

215

 

(72

)

558

 

Provision (benefit) for income taxes

 

(22

)

46

 

(16

)

96

 

Net income (loss)

 

$

(19

)

$

169

 

$

(56

)

$

462

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic:

 

$

(0.06

)

$

0.47

 

$

(0.16

)

$

1.27

 

Net income (loss) per share – diluted:

 

$

(0.06

)

$

0.45

 

$

(0.16

)

$

1.23

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

345

 

362

 

347

 

365

 

Diluted

 

345

 

372

 

347

 

375

 

 

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)

 

 

 

July 31,
2009

 

October 31,
2008

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,479

 

$

1,405

 

Short-term investments

 

20

 

24

 

Accounts receivable, net

 

544

 

770

 

Inventory

 

571

 

646

 

Other current assets

 

283

 

337

 

Total current assets

 

2,897

 

3,182

 

Property, plant and equipment, net

 

839

 

824

 

Goodwill

 

642

 

646

 

Other intangible assets, net

 

178

 

228

 

Restricted cash and cash equivalents

 

1,568

 

1,582

 

Long-term investments

 

153

 

206

 

Other long-term assets

 

296

 

339

 

Total assets

 

$

6,573

 

$

7,007

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

250

 

$

308

 

Employee compensation and benefits

 

277

 

409

 

Deferred revenue

 

286

 

280

 

Income and other taxes payable

 

38

 

128

 

Other accrued liabilities

 

140

 

205

 

Total current liabilities

 

991

 

1,330

 

Long-term debt

 

1,515

 

1,514

 

Senior notes

 

638

 

611

 

Retirement and post-retirement benefits

 

378

 

324

 

Other long-term liabilities

 

562

 

669

 

Total liabilities

 

4,084

 

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; 565 million shares at July 31, 2009 and 561 million shares at October 31, 2008 issued

 

6

 

6

 

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

 

(7,627

)

(7,470

)

Additional paid-in-capital

 

7,516

 

7,410

 

Retained earnings

 

2,735

 

2,791

 

Accumulated other comprehensive loss

 

(141

)

(178

)

Total stockholders’ equity

 

2,489

 

2,559

 

Total liabilities and stockholders’ equity

 

$

6,573

 

$

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)

 

 

 

Nine  Months Ended
July 31,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(56

)

$

462

 

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

 

 

 

 

 

Depreciation and amortization

 

122

 

157

 

Share-based compensation

 

56

 

67

 

Deferred taxes

 

14

 

43

 

Excess and obsolete and inventory-related charges

 

49

 

15

 

Translation gain from liquidation of a subsidiary

 

 

(25

)

Asset impairment charges

 

37

 

4

 

Net pension curtailment gains

 

(13

)

 

Net loss on divestitures

 

23

 

 

Allowance for doubtful accounts

 

4

 

2

 

Other

 

(1

)

6

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

243

 

14

 

Inventory

 

37

 

(38

)

Accounts payable

 

(63

)

(10

)

Employee compensation and benefits

 

(140

)

(74

)

Income taxes and other taxes payable

 

(101

)

(71

)

Interest rate swap proceeds

 

43

 

 

Other assets and liabilities

 

(59

)

(54

)

Net cash provided by operating activities

 

195

 

498

 

Cash flows from investing activities:

 

 

 

 

 

Investments in property, plant and equipment

 

(98

)

(110

)

Proceeds from sale of property, plant and equipment

 

 

14

 

Purchase of investments

 

(30

)

(256

)

Proceeds from sale of investments

 

81

 

133

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

(171

)

Purchase of minority interest

 

 

(14

)

Change in restricted cash and cash equivalents, net

 

14

 

33

 

Other, net

 

(1

)

 

Net cash used in investing activities

 

(34

)

(371

)

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock under employee stock plans

 

53

 

198

 

Proceeds from revolving credit facility

 

325

 

490

 

Repayment of revolving credit facility

 

(325

)

(280

)

Treasury stock repurchases

 

(157

)

(750

)

Net cash used in financing activities

 

(104

)

(342

)

 

 

 

 

 

 

Effect of exchange rate movements

 

17

 

29

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

74

 

(186

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,405

 

1,826

 

Cash and cash equivalents at end of period

 

$

1,479

 

$

1,640

 

 

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.

 

Proposed Acquisition of Varian, Inc. On July 26, 2009, Agilent, Varian, Inc. (“Varian”), and Cobalt Acquisition Corp., a direct, wholly-owned subsidiary of Agilent, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Varian would become a wholly-owned subsidiary of Agilent. Varian is a leading worldwide supplier of scientific instrumentation and associated consumables for life science and applied market applications. The estimated $1.5 billion total purchase price of Varian includes $52 cash per share of Varian’s common stock, the cashing out of in the money stock options (after acceleration) and assumed debt. The transaction is subject to approval by shareholders of Varian and will be completed after achieving customary closing conditions and regulatory approvals, which we expect before calendar year-end.

 

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 nine months ended July 31, 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 July 31, 2009 and October 31, 2008, condensed consolidated statement of operations for the three and nine months ended July 31, 2009 and 2008, and condensed consolidated statement of cash flows for the nine months ended July 31, 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.

 

Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, restricted cash and cash equivalents, short-term debt, accrued compensation and other accrued liabilities approximate fair value because of their short maturities.  Agilent determines the fair value of short-term and long-term investments in debt securities considering information obtained from independent pricing sources. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. The fair value of our long-term debt approximates the carrying value. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. See also Note 8, “Fair Value Measurements” for additional information on the fair value of financial instruments.

 

Goodwill and Purchased Intangible Assets. We review goodwill for impairment annually as of September 30 and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 142,

 

6



Table of Contents

 

“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 nine months ended July 31, 2009, Agilent had three reporting units, which were the same as our operating segments: electronic measurement, bio-analytical measurement and semiconductor and board test.

 

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 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 July 31, 2009.

 

7



Table of Contents

 

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 9, “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.

 

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 adopted FSP No. 107-1 in the quarter ended July 31, 2009. The required disclosures are included in Note 8, “Fair Value Measurements”.

 

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”). FSP No. 115-2 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 is effective for interim and annual periods ending after June 15, 2009. We adopted FSP No. 115-2 in the quarter ended July 31, 2009 and there was no material impact on our condensed consolidated 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 adopted FSP FAS No. 157-4 in the quarter ended July 31, 2009. The adoption of FSP No. 157-4 did not have a significant impact on our condensed consolidated 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. We adopted SFAS No. 165 in the quarter ended July 31, 2009 and evaluated all events or transactions that occurred after July 31, 2009 and up to September 4, 2009, the date we issued these financial statements. During this period, we did not have any material recognizable subsequent events that have not already been disclosed.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (“SFAS No. 166”). SFAS No. 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets.  It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. It enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets.  SFAS No. 166 will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and will be applied prospectively.  We do not expect SFAS No. 166 to have a significant impact on our financial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”). SFAS No. 167 eliminates a required quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis. It requires an ongoing reassessment of whether an

 

8



Table of Contents

 

entity is the primary beneficiary. SFAS No. 167 will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and will be applied retrospectively.  We are currently evaluating the impact, if any, that the adoption of SFAS No. 167 will have on our financial statements.

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS No. 168”). The codification, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related literature. The codification eliminates the GAAP hierarchy contained in SFAS No. 162 and establishes one level of authoritative GAAP. All other literature is considered non-authoritative.  SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  We will adopt SFAS No. 168 in the quarter ending October 31, 2009. There will be no change to our financial statements due to the implementation of SFAS No. 168.

 

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

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Cost of products and services

 

$

3

 

$

3

 

$

11

 

$

14

 

Research and development

 

3

 

3

 

9

 

11

 

Selling, general and administrative

 

11

 

12

 

36

 

42

 

Total share-based compensation expense

 

$

17

 

$

18

 

$

56

 

$

67

 

 

Included in the expense amount for the three and nine months ended July 31, 2009 is approximately $1 million and $4 million respectively 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 those employees immediately vest. 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 July 31, 2009 and 2008 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, 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 July 31, 2009 no employee stock option grants were made. During the three months ended July 31, 2008 we had no employee stock option or LTPP grants.

 

9



Table of Contents

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

 

 

2.3

%

3.2

%

Dividend yield

 

 

 

0

%

0

%

Weighted average volatility

 

 

 

32

%

33

%

Expected life

 

 

 

4.4 yrs

 

4.6 yrs

 

 

 

 

 

 

 

 

 

 

 

ESPP:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

N/A

 

1.7

%

N/A

 

2.9

%

Dividend yield

 

N/A

 

0

%

N/A

 

0

%

Weighted average volatility

 

N/A

 

30

%

N/A

 

31

%

Expected life

 

N/A

 

0.5 yr

 

N/A

 

0.5-1 yr

 

 

 

 

 

 

 

 

 

 

 

LTPP:

 

 

 

 

 

 

 

 

 

Volatility of Agilent shares

 

33

%

 

33

%

27

%

Volatility of selected peer-company shares

 

18%-62

%

 

17%-62

%

17%-52

%

Price-wise correlation with selected peers

 

36

%

 

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 nine months ended July 31, 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 nine months ended July 31, 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 nine months ended July 31, 2009, we recorded an income tax benefit of $22 million and $16 million, respectively, compared to an income tax provision of $46 million and $96 million in the same periods last year. The income tax benefits for the three and nine months ended July 31, 2009 include net discrete benefits of $25 million and $67 million, respectively, relating primarily to benefits associated with valuation allowance adjustments based on changes in other comprehensive income (“OCI”) items,  lapses of statutes of limitations and tax settlements. The discrete tax benefits relating to the valuation allowance adjustments based on OCI items are $24 million and $32 million, respectively for the three and nine months ended July 31, 2009. The tax provisions for the three and nine months ended July 31, 2008 included a benefit of zero and $12 million, respectively, 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.

 

10



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. The RAR proposed many adjustments to taxable income. One adjustment, however, which deals with the use of Agilent’s brand name by our foreign affiliates accounts for the majority of the proposed adjustments. In August of 2009, this brand name issue was resolved with no adjustments made to Agilent’s taxable income. We continue to meet with the Appeals Office of the IRS in order to resolve the remaining issues associated with the RAR’s proposed adjustments. We are uncertain as to how and when these issues will be finally resolved. It may take several years. We believe that any required adjustments however will be more than offset by applying available net operating losses from the years under audit and undisputed tax credits. Based on current information, we believe 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

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(19

)

$

169

 

$

(56

)

$

462

 

Denominators:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

345

 

362

 

347

 

365

 

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

 

 

10

 

 

10

 

Diluted weighted-average shares

 

345

 

372

 

347

 

375

 

 

The dilutive effect of share-based awards is reflected in diluted net income (loss) 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 (loss) per share because they were anti-dilutive.

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

Options to purchase shares of common stock (in millions)

 

30

 

6

 

32

 

6

 

Weighted-average exercise price

 

$

30

 

$

45

 

$

29

 

$

45

 

Average common stock price

 

$

20

 

$

36

 

$

18

 

$

34

 

 

6. INVENTORY

 

 

 

July 31,
2009

 

October 31,
2008

 

 

 

(in millions)

 

Finished goods

 

$

296

 

$

331

 

Purchased parts and fabricated assemblies

 

275

 

315

 

Inventory

 

$

571

 

$

646

 

 

11



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 nine months ended July 31, 2009:

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Semiconductor &
Board Test

 

Total

 

 

 

(in millions)

 

Goodwill as of October 31, 2008

 

$

329

 

$

278

 

$

39

 

$

646

 

Disposals

 

(11

)

(7

)

 

(18

)

Foreign currency translation impact

 

9

 

1

 

4

 

14

 

Goodwill as of July 31, 2009

 

$

327

 

$

272

 

$

43

 

$

642

 

 

The components of other intangibles as of July 31, 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 July 31, 2009:

 

 

 

 

 

 

 

Purchased technology

 

$

281

 

$

162

 

$

119

 

Trademark/Tradename

 

32

 

5

 

27

 

Customer relationships

 

85

 

53

 

32

 

Total

 

$

398

 

$

220

 

$

178

 

 

We recorded no additions to goodwill and no additions to other intangibles during the nine months ended July 31, 2009. Goodwill was reduced by $18 million for the three and nine months ended July 31, 2009 relating to businesses that we divested which had not been fully integrated into Agilent. In addition, we recorded zero and $16 million in impairment charges for other intangibles in the three and nine months ended July 31, 2009, respectively, primarily related to divested businesses.

 

Amortization of intangible assets was $11 million and $34 million for the three and nine months ended July 31, 2009 and $14 million and $40 million for the same periods in the prior year. Future amortization expense related to existing purchased intangible assets is estimated to be $10 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. 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.

 

12


 


Table of Contents

 

Asset and Liabilities Measured at Fair Value on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis as of July 31, 2009 were as follows:

 

 

 

 

 

Fair Value Measurement at July 31, 2009 Using

 

 

 

July 31,
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)

 

$

596

 

$

596

 

$

 

$

 

Available-for-sale investments

 

20

 

 

17

 

3

 

Derivative instruments

 

18

 

 

18

 

 

Long-term

 

 

 

 

 

 

 

 

 

Trading securities

 

47

 

47

 

 

 

Available-for-sale investments

 

93

 

8

 

81

 

4

 

Restricted cash (commercial paper)

 

1,557

 

 

1,557

 

 

Total assets measured at fair value

 

$

2,331

 

$

651

 

$

1,673

 

$

7

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

Derivative instruments

 

$

13

 

$

 

$

13

 

$

 

Long-term

 

 

 

 

 

 

 

 

 

Deferred compensation liability

 

45

 

 

45

 

 

Total liabilities measured at fair value

 

$

58

 

$

 

$

58

 

$

 

 

Our money market funds, some publicly traded available-for-sale investments, and our trading securities investments are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.  Most 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.

 

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, derivative instruments, restricted cash and deferred compensation liabilities are reported at fair value, with unrealized gains and losses, net of tax, included in stockholders’ equity. Realized gains and losses from the sale of these instruments are recorded in earnings.

 

For assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during the three and nine months ended July 31, 2009:

 

 

 

Three Months Ended
July 31, 2009

 

Nine Months Ended
July 31, 2009

 

 

 

(in millions)

 

 

 

 

 

 

 

Balance, beginning of period

 

$

13

 

$

19

 

Realized losses related to amortization of premium

 

 

(2

)

Realized losses related to investment impairments

 

 

(4

)

Sales

 

 

(6

)

Transfers into (out of) level 3

 

(6

)

 

Balance, end of period

 

$

7

 

$

7

 

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

 

$

 

$

(2

)

 

13



Table of Contents

 

All of our investments, excluding trading securities, are subject to periodic impairment review. We recognize other-than-temporary impairments for available-for-sale debt instruments in accordance with FSP 115-2.  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, forecasted recovery, the financial condition and near-term prospects of the investee, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. The full amount of other than temporary impairments of $1 million and $9 million, in the three and nine months ended July 31, 2009, respectively, was recorded in other income (expense) as we did not expect to recover the cost of the assets. For the three and nine months ended July 31, 2008 we recorded other than temporary impairments of zero and $2 million, respectively.

 

9. 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.

 

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position on July 31, 2009, was $2 million. The credit-risk-related contingent features underlying these agreements had not been triggered on July 31, 2009.

 

There were 107 foreign exchange forward contracts and 7 foreign exchange option contracts open as of July 31, 2009 and designated as cash flow hedges. There were 151 foreign exchange forward contracts open as of July 31, 2009 not designated as hedging instruments. The aggregated notional amounts by currency and designation as of July 31, 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

 

$

50

 

$

 

$

351

 

British Pound

 

8

 

 

131

 

Swiss Francs

 

 

 

47

 

Australian Dollar

 

 

 

43

 

Malaysian Ringgit

 

87

 

 

20

 

Japanese Yen

 

(49

)

(101

)

5

 

Other

 

(15

)

 

22

 

 

 

$

81

 

$

(101

)

$

619

 

 

14



Table of Contents

 

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 July 31, 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

 

$

6

 

Other accrued liabilities

 

$

8

 

 

 

Other accrued liabilities

 

1

 

Other current assets

 

1

 

 

 

 

 

$

7

 

 

 

$

9

 

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

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Other current assets

 

$

15

 

Other accrued liabilities

 

$

6

 

 

 

Other accrued liabilities

 

 

Other current assets

 

2

 

 

 

 

 

$

15

 

 

 

$

8

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

 

 

$

22

 

 

 

$

17

 

 

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

July 31, 2009

 

 

 

(in millions)

 

Derivatives in Cash Flow Hedging Relationships under SFAS No. 133

 

 

 

Loss recognized in OCI on derivatives

 

$

(2

)

Loss reclassified from OCI into cost of sales

 

$

2

 

Derivatives Not Designated as Hedging Instruments under SFAS No. 133

 

 

 

Gain recognized in other income (expense)

 

$

49

 

 

The estimated net amount of existing losses at July 31, 2009 that is expected to be reclassified from other comprehensive income to the cost of sales within the next twelve months is $2 million.

 

15



Table of Contents

 

10. RESTRUCTURING COSTS, ASSET IMPAIRMENTS AND OTHER SPECIAL CHARGES

 

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

 

In the first quarter of 2009, we announced a new restructuring program (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 was conceived in response to deteriorating economic conditions and is designed to deliver sufficient savings to enable our businesses to reach their profitability targets. In the second quarter of 2009, we announced additional actions as part of the FY 2009 Plan to restructure our global infrastructure organization and our electronic measurement and semiconductor board test segments in response to the continuing deterioration of economic conditions. These additional actions will ultimately 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 positions. We expect to complete all the actions under the FY 2009 Plan by the second quarter of fiscal 2010, but the majority of actions should be complete by October 31, 2009. As of July 31, 2009 approximately 2,000 employees have left Agilent under the FY 2009 Plan.

 

Special charges related to inventory include estimated future payments that we are contractually obliged to make to our suppliers in connection with future inventory purchases and reserves taken against inventory on hand. In both cases, actions taken under our FY 2009 Plan, including exiting lines of business, have caused the value of this inventory to decrease below its cost.

 

A summary of total restructuring activity and other special charges for the nine months ended July 31, 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

 

154

 

10

 

24

 

22

 

210

 

Asset impairments/inventory charges

 

 

 

(24

)

(10

)

(34

)

Cash payments

 

(100

)

(6

)

 

(10

)

(116

)

Balance as of July 31, 2009

 

$

54

 

$

14

 

$

 

$

2

 

$

70

 

 

The restructuring and other special accruals for all plans, which totaled $70 million at July 31, 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. These balances reflect estimated future cash outlays.

 

We expect workforce reduction payments, primarily severance, to be largely complete by the end of the second quarter of fiscal  2010. Lease payments should be complete in approximately three years, and payments to suppliers in connection with inventory should be complete by the end of this fiscal year.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

(in millions)

 

Cost of products

 

$

16

 

$

 

$

71

 

$

 

Research and development

 

10

 

 

31

 

 

Selling, general and administrative

 

50

 

 

108

 

(4

)

Total restructuring, asset impairments and other special charges

 

$

76

 

$

 

$

210

 

$

(4

)

 

16



Table of Contents

 

11. PENSION PLANS AND OTHER POST RETIREMENT BENEFIT PLANS

 

Plan Amendments. On July 14, 2009 the Compensation Committee of the Board of Directors approved design changes to Agilent’s U.S. defined benefit pension plans (the “U.S. Plans”).  Effective October 31, 2009, benefits under the current U.S. Plans formula will be frozen and all future benefit accruals for existing employees and new hires will be calculated under a new formula. The new formula will allocate a percentage of each month’s eligible earnings to be payable as a lump sum at age 65 whereas the current formula defines a monthly annuity payable at age 65. In addition, effective November 1, 2009, the $5,000 life insurance benefit under the Agilent Survivor Protection Plan will be discontinued.

 

Due to these plan amendments as of July 31, 2009, we recorded gains of $117 million and $15 million in the U.S. Plans and U.S. post retirement benefit plans, respectively as required by SFAS No. 87, “Employers’ Accounting for Pensions,” (“SFAS No. 87”).  These gains were recorded in accumulated other comprehensive loss.

 

Components of net periodic costs. For the three and nine months ended July 31, 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 July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

8

 

$

9

 

$

8

 

$

10

 

$

1

 

$

1

 

Interest cost on benefit obligation

 

12

 

10

 

17

 

19

 

7

 

7

 

Expected return on plan assets

 

(10

)

(14

)

(19

)

(28

)

(5

)

(8

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

1

 

(3

)

9

 

5

 

1

 

 

Prior service cost

 

 

 

 

 

(3

)

(3

)

Net plan (income) costs

 

11

 

2

 

15

 

6

 

1

 

(3

)

Curtailments

 

 

 

 

 

(13

)

 

Total net plan (income) costs

 

$

11

 

$

2

 

$

15

 

$

6

 

$

(12

)

$

(3

)

 

 

 

Pensions

 

 

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Nine Months Ended July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

23

 

$

27

 

$

24

 

$

29

 

$

3

 

$

3

 

Interest cost on benefit obligation

 

36

 

29

 

49

 

57

 

21

 

21

 

Expected return on plan assets

 

(29

)

(42

)

(58

)

(83

)

(15

)

(24

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

2

 

(9

)

26

 

15

 

3

 

 

Prior service cost

 

 

 

 

 

(9

)

(9

)

Net plan (income) costs

 

32

 

5

 

41

 

18

 

3

 

(9

)

Curtailments

 

 

 

 

 

(13

)

 

Total net plan (income) costs

 

$

32

 

$

5

 

$

41

 

$

18

 

$

(10

)

$

(9

)

 

Curtailments.   On April 30, 2009, due to workforce management under the FY 2009 Plan, (see Note 10, “Restructuring Costs, Asset Impairments and Other Special Charges”), we recorded a curtailment loss of 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 as compared to the previous measurement.

 

17



Table of Contents

 

As of July 31, 2009, we recorded net curtailment gains of $13 million related to the U.S. Plans, and another $13 million related to the U.S. post retirement benefit plans also due to workforce management under the FY 2009 Plan. The $13 million curtailment of the U.S. Plans was recorded in accumulated other comprehensive loss.  Relating to the U.S. post retirement benefit plans, $13 million was recorded in income (loss) from operations and $14 million was recorded in accumulated other comprehensive loss.   In connection with the remeasurement of the U.S. Plans and U.S. post retirement benefit plans, we recorded additional net losses of $56 million and $103 million in accumulated other comprehensive loss.  These losses were due to significant decreases in the discount rate which were partially offset by higher asset values as compared to the previous measurement which was done at October 31, 2008.

 

Contributions.  We contributed zero and $38 million to our U.S. defined benefit pension plans during the three and nine months ended July 31, 2009 and zero and $2 million respectively, for the same periods in 2008. We contributed approximately $16 million and $47 million to our non-U.S. defined benefit pension plans during the three and nine months ended July 31, 2009 and $16 million and $35 million, respectively, for the same periods in 2008. During the remainder of fiscal 2009, we expect to contribute approximately $11 million to our non-U.S. defined benefit plans and do not anticipate making further contributions to the U.S. defined benefit pension plans.

 

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

 

33

 

38

 

Changes in estimates

 

5

 

 

Settlements made during the period

 

(39

)

(38

)

Ending balance as of July 31,

 

$

28

 

$

29

 

 

13. 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 July 31, 2009 the company has no borrowings outstanding under the credit facility.

 

On August 17, 2009 the credit agreement was amended to provide additional financing flexibility in advance of the pending acquisition of Varian, Inc.  The amendment allows for up to $1 billion of additional indebtedness, incurred during the period from August 17, 2009 through the closing of the acquisition, to be excluded from the leverage ratio covenant until the later of the first day of the month following the ninth full calendar month after the closing of the acquisition or August 1, 2010; it also temporarily reduces the basket for other secured financing we are permitted to incur from $300 million to $75 million during this period. The amendment also increases by $500 million the amount of repurchase obligations (such as those of Agilent Technologies World Trade, Inc., a consolidated wholly-owned subsidiary of Agilent (“World Trade”) (see Note 15, “Long-Term Debt and Long-Term Restricted Cash and Cash Equivalents”)), that we are permitted  to incur.

 

14. 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.

 

18



Table of Contents

 

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.

 

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

 

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

 

 

 

July 31,
2009

 

October 31,
2008

 

 

 

(in millions)

 

World Trade debt

 

$

1,500

 

$

1,500

 

Other debt

 

15

 

14

 

Total long-term debt

 

$

1,515

 

$

1,514

 

 

World Trade Debt

 

In January 2006, World Trade entered into a five-year Master Repurchase Agreement with a counterparty in which World Trade sold 15,000 Class A preferred shares of Agilent Technologies (Cayco) Limited (“Cayco”) to the counterparty, having an aggregate liquidation preference of $1.5 billion. World Trade owns all of the outstanding common shares of Cayco, a separate legal entity.

 

In September 2008, Agilent and World Trade entered into an agreement (the “Lloyds Related Agreement”) with Lloyds TSB Bank plc (“Lloyds”). Under the Lloyds Related Agreement, on November 17, 2008 (the “Effective Date”), Lloyds accepted the transfer by novation of all of the rights and obligations of the counterparty under a revised Master Repurchase Agreement. On the Effective Date, Lloyds paid $1.5 billion to the prior counterparty in consideration of the novation and World Trade’s repurchase obligation was extended to January 27, 2011 (the “Extended Repurchase Date”). World Trade is obligated to make aggregate quarterly payments to Lloyds at a rate per annum, reset quarterly, with reference to LIBOR plus 175 basis points beginning on the Effective Date.

 

Lloyds can accelerate the Extended Repurchase Date or cause a redemption of the preferred Cayco shares only upon certain events of default, but neither World Trade nor Agilent has the right to accelerate the Extended Repurchase Date. The World Trade obligation of $1.5 billion is recorded and classified as a long-term debt on our condensed consolidated balance sheet.

 

Other Debt

 

On August 11, 2008 a consolidated wholly-owned subsidiary of Agilent, borrowed Indian Rupees equivalent to $15 million from Citibank N.A. at 12.75 percent per annum interest rate for 5 years, maturing on August 9, 2013 to finance a capital project in India. The loan is recorded and classified as long-term debt on our condensed consolidated balance sheet.

 

Long-Term Restricted Cash & Cash Equivalents

 

As of July 31, 2009 and October 31, 2008, $1,568 million and $1,582 million were reported as long-term restricted cash and cash equivalents in our condensed consolidated balance sheet, respectively. Of these amounts, $1,557 million and $1,571 million were held in commercial paper maintained in connection with our World Trade debt obligation as of July 31, 2009 and October 31, 2008, respectively.

 

16. COMPREHENSIVE INCOME (LOSS)

 

The following table presents the components of comprehensive income (loss):

 

19



Table of Contents

 

 

 

Three Months Ended
July 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Net income (loss)

 

$

(19

)

$

169

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain and loss on investments

 

6

 

(5

)

Change in unrealized gain and loss on derivative instruments

 

(2

)

(6

)

Losses reclassified into earnings related to derivative instruments

 

2

 

 

Foreign currency translation

 

92

 

(11

)

Change in deferred net pension cost

 

(24

)

(2

)

Deferred taxes

 

(27

)

2

 

Comprehensive income

 

$

28

 

$

147

 

 

 

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

 

 

(in millions)

 

Net income (loss)

 

$

(56

)

$

462

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain and loss on investments

 

(4

)

(26

)

Change in unrealized gain and loss on derivative instruments

 

(2

)

2

 

Translation gain reclassified into earnings related to liquidation of a subsidiary

 

 

(25

)

Losses reclassified into earnings related to derivative instruments

 

21

 

 

Foreign currency translation

 

114

 

103

 

Change in deferred net pension cost

 

(54

)

(5

)

Deferred taxes

 

(38

)

(2

)

Comprehensive income (loss)

 

$

(19

)

$

509

 

 

17. STOCK REPURCHASE PROGRAM

 

On November 14, 2007 the Audit and Finance Committee of the Board of Directors approved a share-repurchase program of up to $2 billion of Agilent’s common stock over a two year period.

 

The following repurchases under this program are, based on settlement date:

 

 

 

Number of
Common
Stock Repurchased

 

Amount of
Common
Stock Repurchased

 

 

 

(in millions)

 

Fiscal Year 2008

 

 

 

 

 

Balance as of October 31, 2008

 

30

 

$

1,000

 

 

 

 

 

 

 

Fiscal Year 2009

 

 

 

 

 

Three months ended

 

 

 

 

 

January 31, 2009

 

7

 

125

 

April 30, 2009

 

2

 

32

 

July 31, 2009

 

 

 

Program to date as of July 31, 2009

 

39

 

$

1,157

 

 

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 $843 million. On March 26, 2009, the company announced that it was suspending its stock repurchase program until the end of the 2009 fiscal year.

 

20



Table of Contents

 

18. 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. In the first quarter of 2009, we formed a new operating segment from our existing businesses; the semiconductor and board test segment. Following this re-organization, Agilent has three primary businesses — bio-analytical measurement, electronic measurement and semiconductor and board test— each of which comprises a reportable segment. The segments were determined based 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. All historical segment numbers have been recast to conform to this new reporting structure in our financial statements

 

In the first quarter of 2009, we also moved microscopy measurement from the bio-analytical measurement segment to the electronic measurement segment. Microscopy measurement combined with existing units in the electronic measurement segment for increased synergy with product lines and operational resources.

 

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.

 

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 adjusted income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.

 

The profitability of each of the segments is measured after excluding restructuring, asset impairment charges and other related costs, investment gains and losses, interest income, interest expense, non-cash amortization and impairment of other intangibles and other items as noted in the reconciliation below:

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Semiconductor & Board Test

 

Total

 

 

 

(in millions)

 

Three months ended July 31, 2009:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

524

 

$

496

 

$

37

 

$

1,057

 

Segment income (loss) from operations

 

$

(1

)

$

91

 

$

(10

)

$

80

 

Three months ended July 31, 2008:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

814

 

$

540

 

$

90

 

$

1,444

 

Segment income from operations

 

$

123

 

$

102

 

$

11

 

$

236

 

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Semiconductor & Board Test

 

Total

 

 

 

(in millions)

 

Nine months ended July 31, 2009:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

1,675

 

$

1,519

 

$

120

 

$

3,314

 

Segment income (loss) from operations

 

$

(2

)

$

281

 

$

(37

)

$

242

 

Nine months ended July 31, 2008:

 

 

 

 

 

 

 

 

 

Total net revenue

 

$

2,413

 

$

1,601

 

$

279

 

$

4,293

 

Segment income from operations

 

$

315

 

$

274

 

$

26

 

$

615

 

 

21



Table of Contents

 

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

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

(in millions)

 

Total reportable segments’ income from operations

 

$

80

 

$

236

 

$

242

 

$

615

 

Restructuring and other related costs

 

(70

)

(5

)

(201

)

(23

)

Asset impairment

 

(11

)

 

(34

)

 

Net translation gain from liquidation of a subsidiary

 

 

 

 

11

 

Acceleration of debt issuance costs

 

 

(8

)

 

(13

)

Interest income

 

5

 

23

 

25

 

89

 

Interest expense

 

(21

)

(23

)

(67

)

(77

)

Other income (expense), net

 

(24

)

5

 

(6

)

5

 

Amortization of intangibles and other

 

 

(13

)

(31

)

(49

)

Income (loss) from operations before taxes, as reported

 

$

(41

)

$

215

 

$

(72

)

$

558

 

 

For the three months ended July 31, 2009, other income (expense), net included $23 million of loss on divestitures. For the nine months ended July 31, 2009, other income (expense), net included $23 million of loss on divestitures and $6 million gain in respect of a patent litigation judgment.

 

The following table reflects segment assets under our management reporting system. Segment assets include allocations of corporate assets, including deferred tax assets, goodwill, other intangibles and other assets.

 

In the first quarter of 2009, we refined the methodology for allocating company assets which has resulted in an increase in segment assets. All segment numbers have been reclassified to conform to the current period presentation.

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Semiconductor & Board Test

 

Total

 

 

 

(in millions)

 

Assets:

 

 

 

 

 

 

 

 

 

As of July 31, 2009

 

$

1,722

 

$

1,449

 

$

366

 

$

3,537

 

As of October 31, 2008

 

$

2,014

 

$

1,505

 

$

387

 

$

3,906

 

 

22



Table of Contents

 

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

 

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements that involve risks and uncertainties including, without limitation, statements regarding trends, seasonality, cyclicality and growth in the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, our expectations with respect to the outcome of our current tax audits, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position and level of debt, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, our stock repurchase program, our transition to lower-cost regions, our restructuring activities, including our current estimates of the scope, timing and cost of those activities, the acquisition of Varian, Inc. and the existence or length of an economic recovery. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed below in “Risks, Uncertainties and Other Factors That May Affect Future Results” and elsewhere in this Form 10-Q.

 

Basis of Presentation

 

The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

 

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.

 

Executive Summary

 

Agilent Technologies, Inc. (“we”, “Agilent” or the “company”) is the world’s premier measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. Agilent has three primary businesses that are focused on the bio-analytical measurement market, the electronic measurement market and the semiconductor and board test market.

 

We continued to experience overall weakness in the bio-analytical measurement business; however, the food safety market continued to show improvement and increased revenue in the three and nine months ended July 31, 2009 when compared to last year. For the three and nine months ended July 31, 2009 conditions in our electronic measurement and semiconductor and board test businesses remained depressed with continued weakness across all end markets and regions.

 

For the three and nine months ended July 31, 2009, total orders were $1,071 million and $3,212 million, respectively, a decrease of  23 percent and 26 percent in comparison to the same periods last year. For the three and nine months ended July 31, 2009, bio-analytical orders decreased 14 percent and 11 percent, respectively, electronic measurement orders decreased 26 percent and 31 percent, respectively, and semiconductor and board test orders decreased 56 percent and 66 percent, respectively, when compared to the same periods last year.

 

Net revenue of $1,057 million and $3,314 million for the three and nine months ended July 31, 2009, respectively, decreased 27 percent and 23 percent, respectively, from the same periods last year. Bio-analytical revenues decreased 8 percent and 5 percent in the three and nine months ended July 31, 2009, respectively, with foreign currency movements accounting for 4 and 5 percentage points of the revenue decline, respectively. Within bio-analytical measurement, chemical analysis was down 11 percent and 6 percent, in the three and nine months ended July 31, 2009 respectively, with food safety showing continued strength, but other markets down compared to last year. Also within bio-analytical measurement, life science was down 5 percent and 4 percent, in the three and nine months ended July 31, 2009, respectively, compared to the same periods last year with declines in both pharmaceutical and biotechnology markets. Electronic measurement revenues decreased 36 percent and 31 percent in the three and nine months ended July 31, 2009, respectively, when compared to last year. Within electronic measurement, revenues in general purpose test decreased

 

23



Table of Contents

 

25 percent in both the three and nine months ended July 31, 2009 when compared to last year. There was some relative strength in the aerospace and defense market, but declines in computer and semiconductor markets.  Also within electronic measurement, revenues in communications test decreased 48 percent and 37 percent in the three and nine months ended July 31, 2009, respectively, compared to the same period last year with weakness in all markets. Semiconductor and board test measurement revenues decreased 59 percent and 57 percent in the three and nine months ended July 31, 2009, respectively, with all markets down compared to the same periods last year.

 

Net loss for the three and nine months ended July 31, 2009 was $19 million and $56 million, respectively, as compared to net income of $169 million and $462 million for the corresponding periods last year. In the nine months ended July 31, 2009, we generated $195 million of cash from operations compared with $498 million generated in the nine months of last year.

 

We announced restructuring activities in December 2008, February 2009 and March 2009 in response to the deterioration of economic conditions. The restructuring activities were combined under a single restructuring plan and are part of a series of actions being taken by Agilent in response to the current economic situation. In connection with the combined restructuring plan, we expect to record in aggregate approximately $315 million in pre-tax restructuring and other charges related to business and infrastructure cost reduction. Total restructuring and other special charges of $210 million have been incurred in the nine months ended July 31, 2009 with respect to these actions. A significant proportion of these charges has resulted and will continue to result in cash expenditures. When completed, these actions together are expected to result in future annual operating savings of approximately $525 million and workforce reductions of approximately 3,800 regular positions. Of the expected 3,800 reduction in regular positions, approximately 2,000 employees have left Agilent as of July 31, 2009.

 

On July 26, 2009, Agilent, Varian, Inc. (“Varian”), and Cobalt Acquisition Corp., a direct, wholly-owned subsidiary of Agilent, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, Varian would become a wholly-owned subsidiary of Agilent. Varian is a leading worldwide supplier of scientific instrumentation and associated consumables for life science and applied market applications. The estimated $1.5 billion total purchase price of Varian includes $52 cash per share of Varian’s common stock, the cashing out of in the money stock options (after acceleration) and assumed debt. The transaction is subject to approval by shareholders of Varian and will be completed after achieving customary closing conditions and regulatory approvals, which we expect before calendar year-end.

 

Looking forward, we face continued challenging business conditions as the global economic environment remains depressed, but we have seen signs that our businesses may have reached the bottom of the downturn. We remain committed to delivering performance consistent with Agilent’s operating model. We have announced that in the beginning of the first quarter of 2010, we will report Agilent in three segments: electronic measurement, chemical analysis and life sciences.

 

Critical Accounting Policies and Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, 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; certain of which are described below. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

 

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.

 

Share-based compensation. The expected stock price volatility assumption is determined using the historical volatility for our stock. We estimate the stock price volatility using the historical volatility of Agilent’s stock options over the most recent historical period equivalent to the expected life of stock options. In reaching the decision to move to historical volatility effective November 1, 2008, we considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. A 10 percent increase in our estimated historical volatility from 36 percent to 46 percent would generally increase the value of an award and the associated compensation cost by approximately 23 percent if no other factors were changed.

 

24



Table of Contents

 

Goodwill and purchased intangible assets. Agilent reviews goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable in accordance with SFAS No.142. 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. We have three reporting units for goodwill impairment testing purposes: electronic measurement, bio-analytical measurement, and semiconductor and board test. We test goodwill for possible impairment by first determining the fair value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including goodwill.

 

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. Estimates of the future cash flows associated with the businesses are critical to these assessments. The assumptions used in the fair value calculation change from year to year and include revenue growth rates, operating margins, risk adjusted discount rates and future economic and market conditions. Changes in these assumptions based on changed economic conditions or business strategies could result in material impairment charges in future periods.

 

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 step 1 of the goodwill impairment test: 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.

 

We have considered the negative effects of the current downturn in the business environment in evaluating whether we should perform interim goodwill impairment testing. Due to the significant business downturn in the semiconductor and board test reporting unit, we performed step 1 of the goodwill impairment test during the first quarter of 2009 and determined that there was no impairment at that time.  The estimated fair value of our semiconductor and board test reporting unit exceeded its carrying value by a range of approximately $100 million. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment testing, we applied a hypothetical 10 percent decrease to the fair value of the semiconductor and board test reporting unit which we believe represented a reasonable possible change when we performed the test. This hypothetical 10 percent decrease did not change the results of our impairment testing. We continue to assess the overall environment to determine if we would trigger and fail step 1 of the goodwill impairment test.  There was no impairment of goodwill during the nine months ended July 31, 2009.

 

Restructuring and asset impairment charges.  The three main components of our restructuring plans are related to workforce reductions, the consolidation of excess facilities and asset impairments. Workforce reduction charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments. Plans to consolidate excess facilities result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for consolidation of excess facilities when we have vacated the premises. These estimates were derived using the guidance of SFAS No. 144, Staff Accounting Bulletin 100, “Restructuring and Impairment Charges” (“SAB 100”) and  SFAS No. 146 “Accounting for Exit or Disposal Activities” (“SFAS No. 146”). The charges related to inventory include estimated future inventory disposal payments that we are contractually obliged to make to our suppliers and reserves taken against inventory on hand. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

 

Accounting for income taxes.  We must make certain estimates and judgments in determining income tax expense for financial statement purposes.  These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

 

Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be

 

25



Table of Contents

 

<