A-04.30.2015-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2015
OR
¨ 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)
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| | |
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) 345-8886
(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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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.
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Large accelerated filer x | | Accelerated filer ¨ |
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Non-accelerated filer ¨ | | Smaller reporting company ¨ |
(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 ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | |
CLASS | | OUTSTANDING AT APRIL 30, 2015 |
COMMON STOCK, $0.01 PAR VALUE | | 333,191,751 |
AGILENT TECHNOLOGIES, INC.
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 | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net revenue: | |
| | |
| | |
| | |
|
Products | $ | 759 |
| | $ | 778 |
| | $ | 1,574 |
| | $ | 1,581 |
|
Services and other | 204 |
| | 210 |
| | 415 |
| | 415 |
|
Total net revenue | 963 |
| | 988 |
| | 1,989 |
| | 1,996 |
|
Costs and expenses: | |
| | |
| | |
| | |
|
Cost of products | 365 |
| | 381 |
| | 760 |
| | 763 |
|
Cost of services and other | 118 |
| | 122 |
| | 236 |
| | 238 |
|
Total costs | 483 |
| | 503 |
| | 996 |
| | 1,001 |
|
Research and development | 81 |
| | 87 |
| | 169 |
| | 175 |
|
Selling, general and administrative | 292 |
| | 304 |
| | 602 |
| | 602 |
|
Total costs and expenses | 856 |
| | 894 |
| | 1,767 |
| | 1,778 |
|
Income from operations | 107 |
| | 94 |
| | 222 |
| | 218 |
|
Interest income | 2 |
| | 2 |
| | 4 |
| | 4 |
|
Interest expense | (17 | ) | | (30 | ) | | (33 | ) | | (59 | ) |
Other income (expense), net | 4 |
| | 3 |
| | 16 |
| | 3 |
|
Income from continuing operations before taxes | 96 |
| | 69 |
| | 209 |
| | 166 |
|
Provision for income taxes | 8 |
| | 29 |
| | 19 |
| | 5 |
|
Income from continuing operations | 88 |
| | 40 |
| | 190 |
| | 161 |
|
Income (loss) from discontinued operations (net of tax expense (benefit) of $0, $18, $(2) and $(38) | (5 | ) | | 99 |
| | (35 | ) | | 173 |
|
Net income | $ | 83 |
| | $ | 139 |
| | $ | 155 |
| | $ | 334 |
|
| | | | | | | |
Net income per share - basic: | |
| | |
| | | | |
Income from continuing operations | $ | 0.26 |
| | $ | 0.12 |
| | $ | 0.57 |
| | $ | 0.48 |
|
Income (loss) from discontinued operations | (0.01 | ) | | 0.30 |
| | (0.11 | ) | | 0.52 |
|
Net income per share - basic | $ | 0.25 |
| | $ | 0.42 |
| | $ | 0.46 |
| | $ | 1.00 |
|
| | | | | | | |
Net income per share - diluted: | | | | | | | |
Income from continuing operations | $ | 0.26 |
| | $ | 0.12 |
| | $ | 0.56 |
| | $ | 0.48 |
|
Income (loss) from discontinued operations | (0.01 | ) | | 0.29 |
| | (0.10 | ) | | 0.51 |
|
Net income per share - diluted | $ | 0.25 |
| | $ | 0.41 |
| | $ | 0.46 |
| | $ | 0.99 |
|
| | | | | | | |
Weighted average shares used in computing net income per share: | |
| | |
| | |
| | |
|
Basic | 334 |
| | 333 |
| | 335 |
| | 333 |
|
Diluted | 337 |
| | 337 |
| | 337 |
| | 338 |
|
| | | | | | | |
Cash dividends declared per common share | $ | 0.100 |
| | $ | 0.132 |
| | $ | 0.200 |
| | $ | 0.264 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| | | | | | | |
Net income | $ | 83 |
| | $ | 139 |
| | $ | 155 |
| | $ | 334 |
|
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on investments, net of tax benefit of $0, $0, $0 and $1 | — |
| | 3 |
| | — |
| | — |
|
Unrealized gain (loss) on derivative instruments, net of tax (expense) benefit of $1, $0, $(2) and $1 | (1 | ) | | 1 |
| | 6 |
| | (1 | ) |
Amounts reclassified into earnings related to derivative instruments, net of tax (expense) benefit of $2, $0, $3 and $(1) | (5 | ) | | — |
| | (8 | ) | | — |
|
Foreign currency translation, net of tax (expense) benefit of $1, $(5), $7 and $0 | (6 | ) | | 88 |
| | (271 | ) | | 33 |
|
Net defined benefit pension cost and post retirement plan costs: | | | | | | | |
Change in actuarial net loss, net of tax expense of $(2), $(2), $(4) and $(6) | 6 |
| | 12 |
| | 10 |
| | 25 |
|
Change in net prior service benefit, net of tax benefit of $1, $4, $3 and $8 | (3 | ) | | (8 | ) | | (5 | ) | | (16 | ) |
Other comprehensive income (loss) | (9 | ) | | 96 |
| | (268 | ) | | 41 |
|
Total comprehensive income (loss) | $ | 74 |
| | $ | 235 |
| | $ | (113 | ) | | $ | 375 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited) |
| | | | | | | |
| April 30, 2015 | | October 31, 2014 |
ASSETS | |
| | |
|
Current assets: | |
| | |
|
Cash and cash equivalents | $ | 2,197 |
| | $ | 2,218 |
|
Accounts receivable, net | 576 |
| | 626 |
|
Inventory | 556 |
| | 574 |
|
Other current assets | 291 |
| | 261 |
|
Current assets of discontinued operations | — |
| | 1,821 |
|
Total current assets | 3,620 |
| | 5,500 |
|
Property, plant and equipment, net | 593 |
| | 631 |
|
Goodwill | 2,341 |
| | 2,507 |
|
Other intangible assets, net | 516 |
| | 649 |
|
Long-term investments | 91 |
| | 96 |
|
Other assets | 251 |
| | 283 |
|
Non-current assets of discontinued operations | — |
| | 1,165 |
|
Total assets | $ | 7,412 |
| | $ | 10,831 |
|
LIABILITIES AND EQUITY | |
| | |
|
Current liabilities: | |
| | |
|
Accounts payable | $ | 261 |
| | $ | 302 |
|
Employee compensation and benefits | 208 |
| | 228 |
|
Deferred revenue | 271 |
| | 260 |
|
Other accrued liabilities | 190 |
| | 289 |
|
Current liabilities of discontinued operations | — |
| | 623 |
|
Total current liabilities | 930 |
| | 1,702 |
|
Long-term debt | 1,656 |
| | 1,663 |
|
Retirement and post-retirement benefits | 176 |
| | 209 |
|
Other long-term liabilities | 489 |
| | 522 |
|
Long-term liabilities of discontinued operations | — |
| | 1,434 |
|
Total liabilities | 3,251 |
| | 5,530 |
|
Commitments and contingencies (Note 13) |
|
| |
|
|
Total equity: | |
| | |
|
Stockholders’ equity: | |
| | |
|
Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding | — |
| | — |
|
Common stock; $0.01 par value; 2 billion shares authorized; 610 million shares at April 30, 2015 and 608 million shares at October 31, 2014 issued | 6 |
| | 6 |
|
Treasury stock at cost; 277 million shares at April 30, 2015 and 273 million shares at October 31, 2014 | (9,975 | ) | | (9,807 | ) |
Additional paid-in-capital | 9,000 |
| | 8,967 |
|
Retained earnings | 5,397 |
| | 6,466 |
|
Accumulated other comprehensive loss | (270 | ) | | (334 | ) |
Total stockholders' equity | 4,158 |
| | 5,298 |
|
Non-controlling interest | 3 |
| | 3 |
|
Total equity | 4,161 |
| | 5,301 |
|
Total liabilities and equity | $ | 7,412 |
| | $ | 10,831 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| April 30, |
| 2015 | | 2014 |
Cash flows from operating activities: | |
| | |
|
Net income | $ | 155 |
| | $ | 334 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation and amortization | 131 |
| | 193 |
|
Share-based compensation | 33 |
| | 58 |
|
Excess tax benefit from share-based plans | — |
| | (3 | ) |
Deferred taxes | (3 | ) | | 8 |
|
Excess and obsolete inventory related charges | 13 |
| | 23 |
|
Other non-cash expenses, net | 5 |
| | 8 |
|
Changes in assets and liabilities: | |
| | |
|
Accounts receivable | 16 |
| | (3 | ) |
Inventory | (18 | ) | | (56 | ) |
Accounts payable | (35 | ) | | 44 |
|
Employee compensation and benefits | (7 | ) | | 4 |
|
Other assets and liabilities | (127 | ) | | (91 | ) |
Net cash provided by operating activities | 163 |
| | 519 |
|
| | | |
Cash flows from investing activities: | |
| | |
|
Investments in property, plant and equipment | (52 | ) | | (98 | ) |
Proceeds from sale of property, plant and equipment | 11 |
| | 2 |
|
Payment to acquire equity method investment | (1 | ) | | — |
|
Loan to equity method investment | — |
| | (4 | ) |
Change in restricted cash and cash equivalents, net | 1 |
| | — |
|
Proceeds from divestitures | 3 |
| | — |
|
Acquisitions of businesses and intangible assets, net of cash acquired | — |
| | (2 | ) |
Net cash used in investing activities | (38 | ) | | (102 | ) |
| | | |
Cash flows from financing activities: | |
| | |
|
Issuance of common stock under employee stock plans | 40 |
| | 95 |
|
Payment of dividends | (67 | ) | | (88 | ) |
Excess tax benefit from share-based plans | — |
| | 3 |
|
Net transfer of cash and cash equivalents to Keysight | (734 | ) | | — |
|
Treasury stock repurchases | (168 | ) | | (150 | ) |
Net cash used in financing activities | (929 | ) | | (140 | ) |
| | | |
Effect of exchange rate movements | (27 | ) | | (2 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | (831 | ) | | 275 |
|
| | | |
Change in cash and cash equivalents within current assets of discontinued operations | 810 |
| | — |
|
| | | |
Cash and cash equivalents at beginning of period | 2,218 |
| | 2,675 |
|
Cash and cash equivalents at end of period | $ | 2,197 |
| | $ | 2,950 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
1. | OVERVIEW, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Overview. Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that includes instruments, software, services and consumables for the entire laboratory workflow.
Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, these dates refer to our fiscal year and fiscal quarters.
Keysight Separation. On November 1, 2014, we completed the distribution of 100% of the outstanding common shares of Keysight Technologies, Inc. ("Keysight") to Agilent stockholders who received one share of Keysight common stock for every two shares of Agilent held as of the close of business on the record date, October 22, 2014. The historical results of operations and the financial position of Keysight are included in the consolidated financial statements of Agilent and are reported as discontinued operations within this Form 10-Q. See "Basis of Presentation".
New Segment Structure. In November 2014, we announced a change in organizational structure designed to better serve our customers. Our life sciences business, excluding the nucleic acid solutions division, together with the chemical analysis business combined to form a new segment called life sciences and applied markets business. Our diagnostics and genomics businesses combined with the nucleic acid solutions division from our life sciences business and became the diagnostics and genomics segment. Finally, the Agilent CrossLab segment was formed from the services and consumables businesses previously part of the life sciences and chemicals analysis businesses. Financial reporting under this new structure is included within this report on Form 10-Q and historical financial segment information has been recast to conform to this new presentation within our financial statements.
Basis of Presentation. We have prepared the accompanying financial data for the three and six months ended April 30, 2015 and 2014 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 accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of our condensed consolidated balance sheet as of April 30, 2015 and October 31, 2014, condensed consolidated statement of comprehensive income (loss) for the three and six months ended April 30, 2015 and 2014, condensed consolidated statement of operations for the three and six months ended April 30, 2015 and 2014, and condensed consolidated statement of cash flows for the six months ended April 30, 2015 and 2014.
The prior year results of operations and the prior year end financial position of Keysight are included in the consolidated financial statements of Agilent and reported as discontinued operations. The prior year statement of comprehensive income and prior year statement of cash flows have not been adjusted to reflect the effect of the separation of Keysight. Unless indicated otherwise, the information in the Notes to the condensed consolidated financial statements relates to our continuing operations.
Use of estimates. 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, valuation of goodwill and purchased intangible assets, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, restructuring and accounting for income taxes.
Update to Significant Accounting Policies. For the stock option and long term performance plan grants in 2015 we are now using a volatility measure derived from a selection of our peer companies. In prior periods, we used Agilent stock historical volatility. We now consider this method to not be reflective of our future volatility due to the separation of Keysight. See Note 4, "Share-based compensation" for additional information. There have been no other material changes to our significant accounting
policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014.
Fair Value of Financial Instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the cost or equity method, their carrying value approximates their estimated fair value. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. The fair value of our long-term debt, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the carrying value by approximately $72 million and $53 million as of April 30, 2015 and October 31, 2014, respectively. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 9, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Goodwill and Purchased Intangible Assets. Under the authoritative guidance we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregate components of an operating segment that have similar economic characteristics into our reporting units.
In fiscal year 2014, we assessed goodwill impairment for three reporting units under our previous reporting structure. The chemical analysis segment contained one reporting unit and there were two reporting units under the life sciences and diagnostics segment. Within the life sciences and diagnostic business the first reporting unit related to our life sciences business and the second related to our diagnostics business. We performed a qualitative test for goodwill impairment of our previous three reporting units as of September 30, 2014. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these reporting units are greater than their respective carrying values. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated. In connection with our goodwill impairment testing in 2015, we assess for potential impairment of goodwill within our three new reporting units resulting from our reorganization. In the three and six months ended April 30, 2015 and 2014, there was no triggering event that would indicate that there was an impairment of goodwill therefore there was no impairment of goodwill during the three and six months ended April 30, 2015 and 2014.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the economic benefits are consumed or used up or a straight-line method ranging from 6 months to 15 years. In-process research and development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's condensed consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e. greater than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative
assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed a qualitative test for impairment of indefinite-lived intangible assets as of September 30, 2014. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible asset is indicated. There was no impairment of indefinite-lived intangible asset during the three and six months ended April 30, 2015 and 2014.
2. NEW ACCOUNTING PRONOUNCEMENTS
There were no changes to the new accounting pronouncements as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014 except for the following:
In April 2014, FASB issued amendments to the guidance on discontinued operations. The guidance changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, expenses of discontinued operations and of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The new guidance is effective for Agilent prospectively for all disposals (or classifications as held for sale) of components of an entity that occur after November 1, 2016.
The disclosure of Keysight meets the definition of a discontinued operation under both the existing and amended accounting guidance.
In January 2015, FASB issued guidance on simplifying income statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively and retrospectively to all periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have evaluated the accounting guidance and determined that there is no impact of this update to our consolidated financial statements.
In February 2015, FASB issued an amendment to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We do not expect to have an impact to our consolidated financial statements by adopting this amended guidance.
In April 2015, FASB issued an amendment to simplify the presentation of debt issuance costs. The amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs remain unchanged. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Earlier adoption is permitted and we are currently evaluating when we will implement the guidance. We do not expect the impact of adopting this guidance to be material to our consolidated financial statements.
Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
3. DISCONTINUED OPERATIONS
On September 19, 2013, Agilent announced its intention to separate its electronic measurement business, Keysight, which was previously a separate reportable segment, into a stand-alone publicly traded company. Keysight was incorporated in Delaware as a wholly-owned subsidiary of Agilent on December 6, 2013. On November 1, 2014, we completed the distribution of 100% of the outstanding common stock of Keysight to Agilent stockholders, who received one share of Keysight common stock for every two shares of Agilent common stock held as of the close of business on the record date, October 22, 2014. The separation agreement ensured that Keysight had approximately $700 million of total cash immediately following distribution.
The historical results of operations and statement of financial position of Keysight have been presented as discontinued operations in the condensed consolidated financial statements and prior periods have been restated. Discontinued operations include results of Keysight's business except for certain allocated corporate overhead costs and certain costs associated with transition services provided by Agilent to Keysight. Discontinued operations also includes other costs incurred by Agilent to separate Keysight. These costs include transaction charges, advisory and consulting fees and information system expenses.
The following table summarizes results from discontinued operations of Keysight included in the condensed consolidated statement of operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in millions) |
Net revenue | $ | — |
| | $ | 743 |
| | $ | — |
| | $ | 1,414 |
|
Costs and expenses | 5 |
| | 627 |
| | 37 |
| | 1,204 |
|
Operating income (loss) | (5 | ) | | 116 |
| | (37 | ) | | 210 |
|
Other income (expense), net | — |
| | 1 |
| | — |
| | 1 |
|
Income (loss) from discontinued operations before tax | (5 | ) | | 117 |
| | (37 | ) | | 211 |
|
Provision (benefit) for income taxes | — |
| | 18 |
| | (2 | ) | | 38 |
|
Net income (loss) from discontinued operations | $ | (5 | ) | | $ | 99 |
| | $ | (35 | ) | | $ | 173 |
|
Net income (loss) from discontinued operations includes transaction, information systems and other costs to effect the separation of $5 million and $37 million for the three and six months ended April 30, 2015, respectively. Net income (loss) from discontinued operations includes transaction, information systems and other costs to effect the separation of $39 million and $57 million for the three and six months ended April 30, 2014, respectively. In the three and six months ended April 30, 2015 only those costs incurred to effect the separation have been included. No income or expense has been recorded for the Keysight business after separation from Agilent on November 1, 2014.
The following table presents Agilent's electronic measurement business assets and liabilities removed from the condensed consolidated balance sheet as of November 1, 2014 and presented as discontinued operations as of October 31, 2014:
|
| | | |
| October 31, 2014 |
| (in millions) |
Assets: | |
Cash and cash equivalents | $ | 810 |
|
Accounts receivable, net | 357 |
|
Inventory | 498 |
|
Other current assets | 156 |
|
Current assets of discontinued operations | 1,821 |
|
Property, plant and equipment, net | 470 |
|
Goodwill | 392 |
|
Other intangible assets, net | 18 |
|
Long-term investments | 63 |
|
Other assets | 222 |
|
Non-current assets of discontinued operations | 1,165 |
|
Total assets of discontinued operations | $ | 2,986 |
|
Liabilities: | |
Accounts payable | $ | 173 |
|
Employee compensation and benefits | 167 |
|
Deferred revenue | 175 |
|
Other accrued liabilities | 108 |
|
Current liabilities of discontinued operations | 623 |
|
Long-term debt | 1,099 |
|
Retirement and post-retirement benefits | 213 |
|
Other long-term liabilities | 122 |
|
Long-term liabilities of discontinued operations | 1,434 |
|
Total liabilities of discontinued operations | $ | 2,057 |
|
In addition, $332 million of accumulated other comprehensive loss, net of income taxes, primarily related to pension and other post retirement benefits plans and currency translation was also transferred to Keysight together with $28 million of additional paid in capital related to share based compensation windfall tax benefits. The removal of Keysight net assets and equity related adjustments is presented as a reduction in Agilent's retained earnings and represents a non cash financing activity excluding cash transferred. See Note 5 “Income Taxes” for tax implications of the distribution and Note 4 “Share Based Compensation” for changes to share based compensation awards as a result of the distribution of Keysight.
In order to effect the separation and govern our relationship with Keysight after the separation, we entered into a Separation and Distribution Agreement and other agreements including a Tax Matters Agreement, an Employee Matters Agreement and a Transition Services Agreement. The Separation and Distribution Agreement governs the separation of the electronic measurement business, the transfer of assets and other matters related to our relationship with Keysight.
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of Keysight and Agilent with respect to taxes, tax attributes, tax returns, tax proceedings and certain other tax matters.
The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Keysight and Agilent, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Keysight will no longer participate in benefit plans sponsored or maintained by Agilent. In addition, the Employee Matters
Agreement provides that each of the parties will be responsible for their respective former and current employees and compensation plans for such current employees.
Under the terms of the Transition Services Agreement, we agreed to provide administrative, site services, information technology systems and various other corporate and support services to Keysight over the period of 12-18 months after the separation on a cost or cost-plus basis. The most significant component of the service income is the provision of IT services that were largely completed by the end of the second quarter of 2015. In total we expect to receive income for all services provided to Keysight of approximately $12 million. In addition, Agilent expects to receive lease income from Keysight over the next 4-5 years of approximately $13 million per year. In the three and six months ended April 30, 2015 other income (expense), net includes $7 million and $18 million, respectively, of income in respect of the provision of services to, and lease income from Keysight.
4. SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the authoritative accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.
The impact on our results for share-based compensation was as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| Six Months Ended |
| April 30, |
| April 30, |
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| (in millions) |
Cost of products and services | $ | 2 |
|
| $ | 3 |
|
| $ | 7 |
| | $ | 9 |
|
Research and development | 1 |
|
| 1 |
|
| 3 |
| | 5 |
|
Selling, general and administrative | 9 |
|
| 9 |
|
| 24 |
| | 23 |
|
Share-based compensation expense in continuing operations | $ | 12 |
|
| $ | 13 |
|
| $ | 34 |
|
| $ | 37 |
|
Share-based compensation expense in discontinued operations | — |
| | 9 |
| | — |
| | 22 |
|
Total share-based compensation expense | $ | 12 |
| | $ | 22 |
| | $ | 34 |
| | $ | 59 |
|
At April 30, 2015 and October 31, 2014, there was no share-based compensation capitalized within inventory. For the three and six months ended April 30, 2015, the windfall tax benefit realized from exercised stock options and similar awards was zero. For the three and six months ended April 30, 2014, the windfall tax benefit realized from exercised stock options and similar awards was zero and $3 million, respectively.
The following assumptions were used to estimate the fair value of the options and LTPP grants.
|
| | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock Option Plans: | |
| | |
| | |
| | |
|
Weighted average risk-free interest rate | 1.5 | % | | — |
| | 1.7 | % | | 1.7 | % |
Dividend yield | 1 | % | | — |
| | 1 | % | | 1 | % |
Weighted average volatility | 29 | % | | — |
| | 28 | % | | 39 | % |
Expected life | 5.5 yrs
|
| | — |
| | 5.5 yrs |
| | 5.8 yrs |
|
LTPP: | | | | | | | |
Volatility of Agilent shares | 25 | % | | 36 | % | | 25 | % | | 36 | % |
Volatility of selected peer-company shares | 12%-57% |
| | 13%-57% |
| | 12%-57% |
| | 13%-57% |
|
Price-wise correlation with selected peers | 37 | % | | 47 | % | | 37 | % | | 47 | % |
In connection with the separation of Keysight on November 1, 2014 and in accordance with the Employee Matters Agreement we made certain adjustments to the exercise price and number of our share-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable and non-exercisable stock options converted to
those of the entity where the employee is working post-separation. Restricted stock units awards and long-term performance plan grants were adjusted to provide holders restricted stock units and long-term performance plan grants in the company that employs such employee following the separation. These adjustments to our stock-based compensation awards did not have a material impact on compensation expense.
The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to the separation of Keysight on November 1, 2014, expected volatility for grants of options in fiscal 2015 was based on a 5.5 year average historical stock price volatility of a group of our peer companies. For the volatility of our 2015 LTPP grants, we used the 3 year average historical stock price volatility of a group of our peer companies. We believe our historical volatility prior to the separation of Keysight is no longer relevant to use. For the grants of options and LTPP prior to November 1, 2014, the expected stock price volatility assumption was determined using the historical volatility of Agilent’s stock over the most recent historical period equivalent to the expected life of the stock options and LTPP.
In developing our estimated life of our employees' stock options of 5.5 years, we considered the separation of Keysight and the historical option exercise behavior for our executive employees who were granted the majority of the options in the annual grants made which we believe is representative of future behavior.
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 adjusted for expected dividend yield. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.
5. INCOME TAXES
The company’s effective tax rate from continuing operations was 8.3 percent and 9.1 percent for the three and six months ended April 30, 2015, respectively. The company's effective tax rate from continuing operations was 42.0 percent and 3.0 percent for the three and six months ended April 30, 2014, respectively. The income tax expense from continuing operations was $8 million and $19 million for the three and six months ended April 30, 2015, respectively. The income tax expense from continuing operations was $29 million and $5 million for the three and six months ended April 30, 2014.
The income tax provision from continuing operations for the three and six months ended April 30, 2015 included net discrete tax benefits of $9 million and $21 million, respectively. The net discrete tax benefit for the three months ended April 30, 2015 included $16 million of tax benefit related to the de-registration of certain foreign branches, an out of period adjustment for $4 million tax expense related to foreign deferred tax assets and $3 million of other discrete tax expense. In addition to the aforementioned, the net discrete tax benefit for the six months ended April 30, 2015 included $6 million of tax benefit for the extension of the U.S. research and development tax credit attributable to the company's prior fiscal year, out of period adjustments for $13 million of tax benefit related to a tax rate change in Denmark and $4 million of tax expense attributable to an error discovered on a prior year U.S. tax return, and $3 million of other discrete tax expense. The out of period adjustments are not considered to be material to current or prior periods.
The income tax provision for the three and six months ended April 30, 2014 included a net discrete expense of $13 million and net discrete benefit of $31 million, respectively. The net discrete tax expense for the three months ended April 30, 2014 included $12 million out of period adjustment of tax expense for corrections to transfer pricing for tax years 2012 and 2013. The out of period adjustment is not considered to be material to total liabilities or tax expense in the current or prior periods. In addition to the aforementioned, the net discrete tax benefit for the six months ended April 30, 2014 included $50 million primarily due to the settlement of an Internal Revenue Service ("IRS") audit in the U.S. and the recognition of tax expense related to the repatriation of dividends to the U.S.
On November 1, 2014, Agilent transferred deferred tax assets of $238 million, deferred tax liabilities of $37 million, current income tax payable of $40 million, and other long-term liabilities related to uncertain tax positions totaling $8 million to Keysight as part of its separation from Agilent. A current prepaid income tax asset of $19 million and long-term prepaid income tax asset of $3 million related to sales of intercompany assets was also transferred to Keysight upon separation from Agilent.
In the U.S., tax years remain open back to the year 2008 for federal income tax purposes and the year 2000 for significant states. On January 29, 2014 we reached an agreement with the IRS for the tax years 2006 through 2007. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $111 million, offset by a tax liability on foreign distributions of approximately $61 million principally related to additional foreign earnings that were recognized in
conjunction with the settlement. Agilent's U.S. federal income tax returns for 2008 through 2011 are currently under audit by the IRS.
In connection with the settlement of the 2006-2007 IRS audit, we identified during the first quarter of fiscal year 2014 an overstatement of approximately $65 million in our long-term tax liabilities. The overstatement was recorded in 2008 as a cumulative effect of a change in accounting principle when we adopted Accounting Standard Codification 740-10, Income Taxes. Accordingly, we corrected the error by reducing long-term tax liabilities and increasing retained earnings by $65 million in the first quarter of fiscal 2014. The correction had no impact on net income or cash flows in any prior period and is not considered material to total liabilities or equity in any prior period.
In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2003. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
6. NET INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in millions) |
Numerator: | |
| | |
| | |
| | |
|
Income from continuing operations | $ | 88 |
| | $ | 40 |
| | $ | 190 |
| | $ | 161 |
|
Income (loss) from discontinued operations | (5 | ) | | 99 |
| | (35 | ) | | 173 |
|
Net income | $ | 83 |
| | $ | 139 |
| | $ | 155 |
| | $ | 334 |
|
Denominator: | | | | | | | |
Basic weighted-average shares | 334 |
| | 333 |
| | 335 |
| | 333 |
|
Potential common shares— stock options and other employee stock plans | 3 |
| | 4 |
| | 2 |
| | 5 |
|
Diluted weighted-average shares | 337 |
| | 337 |
| | 337 |
| | 338 |
|
In connection with the separation of Keysight on November 1, 2014 and in accordance with the Employee Matters Agreement we made certain adjustments to the exercise price and number of our share-based compensation awards. These adjustments to our share-based awards did not have a material impact on our dilutive weighted average shares.
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense, the tax benefits or shortfalls recorded to additional paid-in capital and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense and tax benefits or shortfalls collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the three and six months ended April 30, 2015, 66,200 and 672,500 options to purchase shares were excluded from the calculation of diluted earnings per share, respectively. For the three and six months ended April 30, 2014, no options to purchase shares were excluded from the calculation of diluted earnings per share for both periods. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined exercise price, unamortized fair value and excess tax benefits or shortfalls collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. For the three and six months ended April 30, 2015, 1.4 million and 690,200 additional options to purchase shares were excluded from the calculation of diluted earnings per share. For the three and six months ended April 30, 2014, 1.3 million and 657,400 additional shares were excluded from the calculation of diluted earnings per share, respectively.
7. INVENTORY
|
| | | | | | | |
| April 30, 2015 | | October 31, 2014 |
| (in millions) |
Finished goods | $ | 367 |
| | $ | 366 |
|
Purchased parts and fabricated assemblies | 189 |
| | 208 |
|
Inventory | $ | 556 |
| | $ | 574 |
|
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents goodwill balances and the movements for each of our reportable segments during the six months ended April 30, 2015:
|
| | | | | | | | | | | | | | | |
| Life Sciences and Applied Markets | | Diagnostics and Genomics | | Agilent CrossLab | | Total |
| (in millions) |
Goodwill as of October 31, 2014 | $ | 668 |
| | $ | 1,345 |
| | $ | 494 |
| | $ | 2,507 |
|
Foreign currency translation impact | (10 | ) | | (149 | ) | | (7 | ) | | (166 | ) |
Goodwill as of April 30, 2015 | $ | 658 |
| | $ | 1,196 |
| | $ | 487 |
| | $ | 2,341 |
|
The components of other intangibles as of April 30, 2015 and October 31, 2014 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, 2014: | |
| | |
| | |
|
Purchased technology | $ | 880 |
| | $ | 475 |
| | $ | 405 |
|
Trademark/Tradename | 167 |
| | 52 |
| | 115 |
|
Customer relationships | 368 |
| | 257 |
| | 111 |
|
Total amortizable intangible assets | 1,415 |
| | 784 |
| | 631 |
|
In-Process R&D | 18 |
| | — |
| | 18 |
|
Total | $ | 1,433 |
| | $ | 784 |
| | $ | 649 |
|
As of April 30, 2015: | |
| | |
| | |
|
Purchased technology | 845 |
| | 527 |
| | 318 |
|
Trademark/Tradename | 156 |
| | 58 |
| | 98 |
|
Customer relationships | 361 |
| | 280 |
| | 81 |
|
Total amortizable intangible assets | 1,362 |
| | 865 |
| | 497 |
|
In-Process R&D | 19 |
| | — |
| | 19 |
|
Total | $ | 1,381 |
| | $ | 865 |
| | $ | 516 |
|
During the six months ended April 30, 2015, there were no additions to goodwill or to other intangible assets. During the six months ended April 30, 2015, other intangible assets decreased $52 million, due to the impact of foreign exchange translation. During the six months ended April 30, 2014, there were no additions to goodwill or to other intangible assets.
Amortization of intangible assets was $38 million and $81 million for the three and six months ended April 30, 2015, respectively. Amortization of intangible assets was $49 million and $98 million for the three and six months ended April 30, 2014, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $75 million for the remainder of 2015, $132 million for 2016, $92 million for 2017, $61 million for 2018, $46 million for 2019, $36 million for 2020, and $55 million thereafter.
9. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of April 30, 2015 were as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurement at April 30, 2015 Using |
| April 30, 2015 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Short-term | |
| | |
| | |
| | |
|
Cash equivalents (money market funds) | $ | 1,553 |
| | $ | 1,553 |
| | $ | — |
| | $ | — |
|
Derivative instruments (foreign exchange contracts) | 16 |
| | — |
| | 16 |
| | — |
|
Long-term | | | | | | | |
Trading securities | 35 |
| | 35 |
| | — |
| | — |
|
Total assets measured at fair value | $ | 1,604 |
| | $ | 1,588 |
| | $ | 16 |
| | $ | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 9 |
| | $ | — |
| | $ | 9 |
| | $ | — |
|
Long-term | | | | | | | |
Deferred compensation liability | 35 |
| | — |
| | 35 |
| | — |
|
Total liabilities measured at fair value | $ | 44 |
| | $ | — |
| | $ | 44 |
| | $ | — |
|
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2014 were as follows:
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurement at October 31, 2014 Using |
| October 31, 2014 | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (in millions) |
Assets: | |
| | |
| | |
| | |
|
Short-term | |
| | |
| | |
| | |
|
Cash equivalents (money market funds) | $ | 1,117 |
| | $ | 1,117 |
| | $ | — |
| | $ | — |
|
Derivative instruments (foreign exchange contracts) | 10 |
| | — |
| | 10 |
| | — |
|
Long-term | | | | | | | |
Trading securities | 35 |
| | 35 |
| | — |
| | — |
|
Total assets measured at fair value | $ | 1,162 |
| | $ | 1,152 |
| | $ | 10 |
| | $ | — |
|
Liabilities: | |
| | |
| | |
| | |
|
Short-term | | | | | | | |
Derivative instruments (foreign exchange contracts) | $ | 4 |
| | $ | — |
| | $ | 4 |
| | $ | — |
|
Long-term | | | | | | | |
Deferred compensation liability | 35 |
| | — |
| | 35 |
| | — |
|
Total liabilities measured at fair value | $ | 39 |
| | $ | — |
| | $ | 39 |
| | $ | — |
|
Our money market funds and 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. Our deferred compensation liability is classified as level 2 because, although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in other comprehensive income.
Impairment of Investments. There were no impairments for investments for the three and six months ended April 30, 2015 and 2014.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
For the three and six months ended April 30, 2015 and 2014, there were no impairments of long-lived assets held and used. For the three and six months ended April 30, 2015 and 2014, there were no impairments of long-lived assets held for sale.
10. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of risk management strategy, we use derivative instruments, primarily forward contracts, purchased options to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. The fair value of our fixed rate debt changes when the underlying market rates of interest change, and, in the past, we have used interest rate swaps to change our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from our cash, cash equivalents and other short term investments. As of April 30, 2015, all interest rate swap contracts had either been terminated or had expired.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented the notional amount of $400 million. On October 20, 2014 we prepaid $500 million out of $600 million principal of
our 2017 senior notes and fully amortized the associated proportionate deferred gain to other income (expense). The remaining gain to be amortized related to the $100 million of 2017 senior notes at April 30, 2015 was $2 million. On August 9, 2011, we terminated five interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million. The gain to be amortized at April 30, 2015 was $20 million. All deferred gains from terminated interest rate swaps are being amortized over the remaining life of the respective senior notes.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income (loss). Amounts associated with cash flow hedges are reclassified to cost of sales in the condensed consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income (loss) will be reclassified to other income (expense) in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized in other income (expense) in the condensed consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in other income (expense) over the life of the option contract. Ineffectiveness in the three and six months ended April 30, 2015 and 2014 was not significant. For the three and six months ended April 30, 2015 and 2014 gains and losses recognized in other income (expense) due to de-designation of cash flow hedge contracts were not significant.
In July 2012, Agilent executed treasury lock agreements for $400 million in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income of $3 million which is being amortized to interest expense over the life of the 2022 senior notes.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense) in the condensed consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number 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. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of April 30, 2015, was $4 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of April 30, 2015.
There were 58 foreign exchange forward contracts open as of April 30, 2015 and designated as cash flow hedges. There were 154 foreign exchange forward contracts open as of April 30, 2015 not designated as hedging instruments. The aggregated notional amounts by currency and designation as of April 30, 2015 were as follows:
|
| | | | | | | | | | | | |
| | Derivatives Designated as Cash Flow Hedges | | Derivatives Not Designated as Hedging Instruments |
| | Forward Contracts USD | | Forward Contracts USD | | Forward Contracts DKK |
Currency | | Buy/(Sell) | | Buy/(Sell) | | Buy/(Sell) |
| | (in millions) |
Euro | | $ | (49 | ) | | $ | 124 |
| | $ | (58 | ) |
British Pound | | (39 | ) | | (2 | ) | | (5 | ) |
Canadian Dollar | | (31 | ) | | — |
| | (2 | ) |
Australian Dollar | | 1 |
| | 16 |
| | (2 | ) |
Malaysian Ringgit | | — |
| | (1 | ) | | — |
|
Japanese Yen | | (66 | ) | | (10 | ) | | (1 | ) |
American Dollar | | — |
| | — |
| | 37 |
|
Other | | (1 | ) | | 3 |
| | — |
|
Totals | | $ | (185 | ) | | $ | 130 |
| | $ | (31 | ) |
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance with the authoritative guidance. The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of April 30, 2015 and October 31, 2014 were as follows:
|
| | | | | | | | | | | | | | | | | | |
Fair Values of Derivative Instruments |
Asset Derivatives | | Liability Derivatives |
| | Fair Value | | | | Fair Value |
Balance Sheet Location | | April 30, 2015 | | October 31, 2014 | | Balance Sheet Location | | April 30, 2015 | | October 31, 2014 |
(in millions) |
Derivatives designated as hedging instruments: | | |
| | |
| | | | |
| | |
|
Cash flow hedges | | | | | | | | | | |
Foreign exchange contracts | | | | | | | | | | |
Other current assets | | $ | 7 |
| | $ | 9 |
| | Other accrued liabilities | | $ | 2 |
| | $ | 1 |
|
Derivatives not designated as hedging instruments: | | |
| | |
| | | | |
| | |
|
Foreign exchange contracts | | |
| | |
| | | | |
| | |
|
Other current assets | | $ | 9 |
| | $ | 1 |
| | Other accrued liabilities | | $ | 7 |
| | $ | 3 |
|
Total derivatives | | $ | 16 |
| | $ | 10 |
| | | | $ | 9 |
| | $ | 4 |
|
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| April 30, | | April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
| (in millions) |
Derivatives designated as hedging instruments: | |
| | |
| | |
| | |
|
Cash Flow Hedges | | | | | | | |
Foreign exchange contracts: | | | | | | | |
Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | (2 | ) | | $ | 1 |
| | $ | 8 |
| | $ | (2 | ) |
Gain (loss) reclassified from accumulated other comprehensive income (loss) into cost of sales | $ | 7 |
| | $ | — |
| | $ | 11 |
| | $ | (1 | ) |
Derivatives not designated as hedging instruments: | | | | | | | |
Gain (loss) recognized in other income (expense) | $ | (4 | ) | | $ | 5 |
| | $ | (17 | ) | | $ | 4 |
|
The estimated amount of existing net gain at April 30, 2015 that is expected to be reclassified from other comprehensive income to cost of sales within the next twelve months is $5 million.
11. EXIT OF NMR BUSINESS
During the fourth quarter of fiscal year 2014, we made the decision to cease the manufacture and sale of our NMR product line within our life sciences and applied markets segment. The exit of the NMR business was primarily due to the lack of growth and profitability of the product line. These actions involved severance and other personnel costs related to the workforce reduction of approximately 300 employees primarily located in the United Kingdom and California and non-cash charges related to intangible asset impairments and other asset write-downs including inventory. We expect to substantially complete these restructuring activities by the end of fiscal 2016. As of April 30, 2015, approximately 180 employees are pending termination under the above actions.
A summary of total “NMR” restructuring activity and other special charges is shown in the table below:
|
| | | | | | | | | |
| Workforce Reduction | Special Charges Related to Inventory and Others | Total |
| (in millions) |
Balance as of October 31, 2014 | $ | 14 |
| $ | 3 |
| $ | 17 |
|
Income statement expense | 2 |
| 7 |
| 9 |
|
Inventory charges and other | — |
| (5 | ) | (5 | ) |
Cash payments | (7 | ) | — |
| (7 | ) |
Balance as of April 30, 2015 | $ | 9 |
| $ | 5 |
| $ | 14 |
|
The restructuring and other special accruals related to the NMR closure, which totaled $14 million at April 30, 2015, are recorded in other accrued liabilities on the condensed consolidated balance sheet. These balances reflect estimated future cash outlays.
12. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
In connection with the separation of Keysight on November 1, 2014, Agilent transferred certain liabilities and assets of the U.S. and Non-U.S. defined benefit pension plans, and U.S. Post-Retirement Benefit Plans to similar plans created for Keysight employees as follows:
|
| | | | | | | | | | | |
| U.S. Defined Benefit Plans | | Non-U.S. Defined Benefit Plans | | U.S. Post-Retirement Benefit Plans |
| (in millions) |
Fair value of plan assets transferred to Keysight | $ | 491 |
| | $ | 1,318 |
| | $ | 187 |
|
Benefit obligation transferred to Keysight | $ | 514 |
| | $ | 1,429 |
| | $ | 206 |
|
Plan Amendments. Effective November 1, 2014, Agilent’s U.S. defined benefit retirement plan closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. These employees are instead eligible for an enhanced 6 percent employer match in the Agilent 401(k) plan. In addition, any new employee hired on or after November 1, 2014, is not eligible to participate in the retiree medical plans upon retiring. Current eligible employees will continue to participate in the U.S. defined benefit retirement plan and retiree medical programs in place today and will remain eligible for the 401(k) plan with the current 4 percent employer match. Retirees will maintain the retirement benefits and retiree medical benefits they are eligible for today.
Components of net periodic costs. For the three and six months ended April 30, 2015 and 2014, our net pension and post retirement benefit costs were comprised of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pensions | | |
| U.S. Plans | | Non-U.S. Plans | | U.S. Post Retirement Benefit Plans |
| Three Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
| (in millions) |
Service cost—benefits earned during the period | $ | 6 |
| | $ | 12 |
| | $ | 4 |
| | $ | 9 |
| | $ | 1 |
| | $ | 1 |
|
Interest cost on benefit obligation | 3 |
| | 8 |
| | 6 |
| | 19 |
| | 1 |
| | 3 |
|
Expected return on plan assets | (7 | ) | | (16 | ) | | (10 | ) | | (29 | ) | | (2 | ) | | (6 | ) |
Amortization: | | | | | | | | | | | |
Actuarial losses | 1 |
| | — |
| | 6 |
| | 11 |
| | 1 |
| | 4 |
|
Prior service cost | (1 | ) | | (3 | ) | | — |
| | — |
| | (3 | ) | | (9 | ) |
Total net plan costs | $ | 2 |
| | $ | 1 |
| | $ | 6 |
| | $ | 10 |
| | $ | (2 | ) | | $ | (7 | ) |
Summary of net plan costs: | | | | | | | | | | | |
Continuing operations | 2 |
| | — |
| | 6 |
| | 7 |
| | (2 | ) | | (4 | ) |
Discontinued operations | — |
| | 1 |
| | — |
| | 3 |
| | — |
| | (3 | ) |
Total net plan costs | $ | 2 |
| | $ | 1 |
| | $ | 6 |
| | $ | 10 |
| | $ | (2 | ) | | $ | (7 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Pensions | | |
| U.S. Plans | | Non-U.S. Plans | | U.S. Post Retirement Benefit Plans |
| Six Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
| (in millions) |
Service cost—benefits earned during the period | $ | 12 |
| | $ | 24 |
| | $ | 8 |
| | $ | 18 |
| | $ | 2 |
| | $ | 2 |
|
Interest cost on benefit obligation | 7 |
| | 16 |
| | 12 |
| | 37 |
| | 2 |
| | 6 |
|
Expected return on plan assets | (14 | ) | | (32 | ) | | (21 | ) | | (58 | ) | | (4 | ) | | (11 | ) |
Amortization: | | | | | | | | | | | |
Actuarial losses | 2 |
| | — |
| | 13 |
| | 22 |
| | 2 |
| | 7 |
|
Prior service cost | (2 | ) | | (6 | ) | | — |
| | — |
| | (6 | ) | | (18 | ) |
Total net plan costs | $ | 5 |
| | $ | 2 |
| | $ | 12 |
| | $ | 19 |
| | $ | (4 | ) | | $ | (14 | ) |
Summary of net plan costs: | | | | | | | | | | | |
Continuing operations | 5 |
| | — |
| | 12 |
| | 13 |
| | (4 | ) | | (8 | ) |
Discontinued operations | — |
| | 2 |
| | — |
| | 6 |
| | — |
| | (6 | ) |
Total net plan costs | $ | 5 |
| | $ | 2 |
| | $ | 12 |
| | $ | 19 |
| | $ | (4 | ) | | $ | (14 | ) |
| | | | | | | | | | | |
We contributed $15 million and $15 million to our U.S. defined benefit plans during the three and six months ended April 30, 2015, respectively. We contributed $6 million and $11 million to our non-U.S. defined benefit plans during the three and six months ended April 30, 2015, respectively.
We contributed $15 million and $15 million to our U.S. defined benefit plans during the three and six months ended April 30, 2014, respectively. We contributed $8 million and $15 million to our non-U.S. defined benefit plans during the three and six months ended April 30, 2014, respectively.
We do not expect to contribute to our U.S. defined benefit plans during the remainder of 2015 and we expect to contribute $15 million to our non-U.S. defined benefit plans during the remainder of 2015.
13. WARRANTIES AND CONTINGENCIES
Warranties
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty
charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our condensed consolidated balance sheet. Our standard warranty terms typically extend to one year from the date of delivery, depending on the product.
A summary of the standard warranty accrual activity is shown in the table below:
|
| | | | | | | |
| Six Months Ended |
| April 30, |
| 2015 | | 2014 |
| (in millions) |
Beginning balance as of November 1 | $ | 30 |
| | $ | 31 |
|
Accruals for warranties including change in estimate | 22 |
| | 20 |
|
Settlements made during the period | (24 | ) | | (23 | ) |
Ending balance as of April 30 | $ | 28 |
|
| $ | 28 |
|
| | | |
Accruals for warranties due within one year | $ | 26 |
| | $ | 25 |
|
Accruals for warranties due after one year | 2 |
| | 3 |
|
Ending balance as of April 30 | $ | 28 |
| | $ | 28 |
|
Contingencies
We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters. There are no matters pending that we currently believe are probable of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
14. SHORT-TERM DEBT
Credit Facilities
On September 15, 2014 Agilent entered into a credit agreement with a financial institution which provides for a $400 million five-year unsecured credit facility that will expire on September 15, 2019. As of April 30, 2015, the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit facility during the three and six months ended April 30, 2015.
As a result of the Dako acquisition, we have a credit facility in Danish Krone equivalent of $8 million with a Danish financial institution. No borrowings were outstanding under the facility as of April 30, 2015.
15. LONG-TERM DEBT
Senior Notes
The following table summarizes the company’s long-term senior notes and the related interest rate swaps:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| April 30, 2015 | | October 31, 2014 |
| Amortized Principal | | Swap | | Total | | Amortized Principal | | Swap | | Total |
| (in millions) |
2017 Senior Notes | $ | 100 |
| | $ | 2 |
| | $ | 102 |
| | $ | 100 |
| | $ | 3 |
| | $ | 103 |
|
2020 Senior Notes | 499 |
| | 20 |
| | 519 |
| | 499 |
| | 22 |
| | 521 |
|
2022 Senior Notes | 399 |
| | — |
| | 399 |
| | 399 |
| | — |
| | 399 |
|
2023 Senior Notes | 598 |
| | — |
| | 598 |
| | 598 |
| | — |
| | 598 |
|
Total | $ | 1,596 |
| | $ | 22 |
| | $ | 1,618 |
| | $ | 1,596 |
| | $ | 25 |
| | $ | 1,621 |
|
All outstanding notes listed above are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the Agilent senior notes, detailed in the table above, in the six months ended April 30, 2015 as compared to the senior notes described
in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014. All swap contracts have been terminated and amounts to be amortized over the remaining life of the senior notes as of April 30, 2015 and October 31, 2014 are detailed above.
Other Debt
As of April 30, 2015 and October 31, 2014, we have mortgage debt, secured on buildings in Denmark, in Danish Krone equivalent of $38 million and $42 million, respectively, aggregate principal outstanding with a Danish financial institution. The loans have a variable interest rate based on 3 months Copenhagen Interbank Rate ("Cibor") and will mature on September 30, 2027. Interest payments are made in March, June, September and December of each year.
16. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program effective in the first quarter of fiscal year 2014, upon the conclusion of the company's $1 billion repurchase program. The program is designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs to target maintaining a weighted average share count of approximately 335 million diluted shares.
For the six months ended April 30, 2015, we repurchased 4 million shares for $168 million. For the six months ended April 30, 2014, 3 million shares were repurchased for $150 million. All such shares and related costs are held as treasury stock and accounted for using the cost method.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program. The new share repurchase program authorizes the purchase of up to $1.14 billion of our common stock through and including November 1, 2018. See also Note 18, "Subsequent Events".
Cash Dividends on Shares of Common Stock
During the six months ended April 30, 2015, we paid cash dividends of $0.200 per common share or $67 million on the company's common stock. During the six months ended April 30, 2014, we paid cash dividends of $0.264 per common share or $88 million on the company's common stock.
On May 20, 2015 our board of directors declared a quarterly cash dividend of $0.100 per share of common stock, or approximately $33 million which will be paid on July 22, 2015 to all shareholders of record at close of business on June 30, 2015.
The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component and related tax effects were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Net defined benefit pension cost and post retirement plan costs | | | | |
Three Months Ended April 30, 2015 | | Unrealized gain on investments | | Foreign currency translation | | Prior service credits | | Actuarial Losses | | Unrealized gains (losses) on derivatives | | Total |
| | (in millions) |
As of January 31, 2015 | | $ | — |
| | $ | (118 | ) | | $ | 170 |
| | $ | (323 | ) | | $ | 10 |
| | $ | (261 | ) |
| | | | | | | | | | | | |
Other comprehensive loss before reclassifications | | — |
| | (7 | ) | | — |
| | — |
| | (2 | ) | | (9 | ) |
| | | | | | | | | | | | |
Amounts reclassified out of accumulated other comprehensive income (loss) | | — |
| | — |
| | (4 | ) | | 8 |
| | (7 | ) | | (3 | ) |
| | | | | | | | | | | | |
Tax (expense) benefit | | — |
| | 1 |
| | 1 |
| | (2 | ) | | 3 |
| | 3 |
|
| | | | | | | | | | | | |
Other comprehensive income (loss) | | — |
| | (6 | ) | | (3 | ) | | 6 |
| | (6 | ) | | (9 | ) |
| | | | | | | | | | | | |
As of April 30, 2015 | | $ | — |
| | $ | (124 | ) | | $ | 167 |
| | $ | (317 | ) | | $ | 4 |
| | $ | (270 | ) |
| | | | | | | | | | | | |
Six Months Ended April 30, 2015 | | | | | | | | | | | | |
| | | | | | | | | | | | |
As of October 31, 2014 | | $ | 17 |
| | $ | 156 |
| | $ | 255 |
| | $ | (771 | ) | | $ | 9 |
| | $ | (334 | ) |
Transfer to Keysight | | (17 | ) | | (9 | ) | | (83 | ) | | 444 |
| |