|
AGILENT TECHNOLOGIES INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. This report contains forward-looking statements including, without
limitation, statements regarding trends, seasonality, cyclicality and growth in,
and drivers of, the markets we sell into, our strategic direction, our future
effective tax rate and tax valuation allowance, earnings from our foreign
subsidiaries, remediation activities, new product and service introductions, the
ability of our products to meet market needs, changes to our manufacturing
processes, the use of contract manufacturers, the impact of local government
regulations on our ability to pay vendors or conduct operations, our liquidity
position, our ability to generate cash from operations, growth in our
businesses, our investments, the potential impact of adopting new accounting
pronouncements, our financial results, our purchase commitments, our
contributions to our pension plans, the selection of discount rates and
recognition of any gains or losses for our benefit plans, our cost-control
activities, savings and headcount reduction recognized from our restructuring
programs, uncertainties relating to Food and Drug Administration ("FDA") and
other regulatory approvals, the integration of our acquisitions and other
transactions, our stock repurchase program, our declared dividends, our
transition to lower-cost regions, and the existence of economic instability,
that involve risks and uncertainties. Our actual results could differ materially
from the results contemplated by these forward-looking statements due to various
factors, including those discussed in Item 1A and elsewhere in this Form 10-K.
Overview and Executive Summary
Agilent is the world's premier measurement company, providing core
bio-analytical and electronic measurement solutions to the life sciences,
chemical analysis, diagnostics and genomics, communications and electronics
industries. Our fiscal year end is October 31. Unless otherwise stated, all
years and dates refer to our fiscal year.
Agilent's total orders in 2012 were $6,877 million, an increase of 2 percent
when compared to 2011. The increase in orders associated with the Dako
acquisition accounted for 2 percentage points of order growth for the year ended
October 31, 2012 when compared to 2011. Within each of our life sciences,
chemical analysis and electronic measurement businesses, orders were flat when
compared to the prior year. Orders within our diagnostics and genomics business
increased 44 percent when compared to last year and was attributable to the Dako
acquisition. Agilent's total orders in 2011 increased 18 percent when compared
to 2010. The increase in orders associated with the Varian acquisition less the
orders attributable to our divested businesses accounted for 5 percentage points
of order growth for the year ended October 31, 2011 when compared to 2010.
Agilent's net revenue of $6,858 million increased 4 percent when compared to
2011. The revenue increase associated with the Dako acquisition accounted for
approximately 2 percentage points of the revenue increase for the year ended
October 31, 2012 when compared to 2011. Foreign currency movements for 2012 had
an unfavorable impact of approximately1 percentage point compared to 2011. There
was modest growth in demand for life sciences products led by an increase in
revenue from the pharmaceutical and biotechnology market, but there was also a
corresponding decrease in revenue from the academic and government market for
the year ended October 31, 2012, when compared to the prior year. Within our
chemical analysis business revenue grew moderately compared with the prior year.
There were modest increases in revenue from the food safety and forensics
markets, but environmental and petrochemical markets were relatively flat when
compared to the prior year. The diagnostics and genomics business growth
compared to the prior year was attributable to the acquisition of Dako. Within
electronic measurement, total revenue from general purpose markets was flat in
2012 when compared to the prior year with a modest shortfall in revenue from
aerospace and defense offset by an increase in revenue from the computer and
semi-conductor market. Also within electronic measurement, the communications
test business was flat for the year ended October 31, 2012 when compared to the
prior year with wireless manufacturing reporting good revenue growth in the year
offset by a decline in the revenue from the wireless R&D market. Agilent's total
net revenue in 2011 increased 22 percent when compared to 2010. The revenue
increase associated with the Varian acquisition less the revenue attributable to
our divested businesses accounted for 5 percentage points of revenue increase
for the year ended October 31, 2011 when compared to 2010.
Net income was $1,153 million in 2012 compared to net income of $1,012 million
and $684 million in 2011 and 2010, respectively. In 2012, 2011 and 2010 we
generated operating cash flows of $1,228 million, $1,260 million and
$718 million, respectively. As of October 31, 2012 and 2011 we had cash and cash
equivalents balances of $2,351 million and $3,527 million, respectively.
On June 21, 2012, we completed our acquisition of Dako A/S through the
acquisition of 100% of the share capital of Dako A/S, a limited liability
company incorporated under the laws of Denmark ("Dako"), under the share
purchase agreement, dated May 16, 2012. Dako provides antibodies, reagents,
scientific instruments and software primarily to customers in pathology
laboratories. As a result of the acquisition, Dako became a wholly-owned
subsidiary of Agilent. The consideration paid was approximately $2,143 million,
of which $1,400 million was paid directly to the seller and $743 million was
paid to satisfy the
32--------------------------------------------------------------------------------
Table of Contents
outstanding debt of Dako. Agilent funded the acquisition using existing cash.
The acquisition has been accounted for in accordance with the authoritative
accounting guidance and the results of Dako are included in Agilent's
consolidated financial statements from the date of acquisition. The acquisition
of Dako and its portfolio is another step to increase our growth in several
rapidly expanding areas of diagnostics, including anatomic pathology and
molecular diagnostics, as well as strengthen our existing offerings with a focus
on product development to help in the fight against cancer. For additional
details related to the acquisition of Dako, see Note 3, "Acquisitions".
Looking forward, we believe we have entered a slow-growth environment where
continued uncertainty will dampen demand for our products and services. There
are improvements to be achieved in operating performance by leveraging our value
engineering, purchase power, logistics and manufacturing capabilities. We also
have a number of variable cost mechanisms that we are able to use moving
forward. We expect to continue to introduce innovative technologies and deliver
market-leading products, while we make progress in optimizing our order
fulfillment and manufacturing operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the U.S. requires management to make estimates and
assumptions that affect the amounts reported in our 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. 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. Our critical accounting policies are those that affect our
financial statements materially and involve difficult, subjective or complex
judgments by management. Those policies are revenue recognition, inventory
valuation, share-based compensation, retirement and post-retirement plan
assumptions, valuation of goodwill and purchased intangible assets and
accounting for income taxes.
Revenue recognition. We enter into agreements to sell products (hardware or
software), services, and other arrangements (multiple element arrangements) that
include combinations of products and services. Revenue from product sales, net
of trade discounts and allowances, is recognized provided that persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable, and collectability is reasonably assured. Delivery is considered
to have occurred when title and risk of loss have transferred to the customer.
Revenue is reduced for estimated product returns, when appropriate. For sales
that include customer-specified acceptance criteria, revenue is recognized after
the acceptance criteria have been met. For products that include installation,
if the installation meets the criteria to be considered a separate element,
product revenue is recognized upon delivery, and recognition of installation
revenue occurs when the installation is complete. Otherwise, neither the product
nor the installation revenue is recognized until the installation is complete.
Revenue from services is deferred and recognized over the contractual period or
as services are rendered and accepted by the customer. We allocate revenue to
each element in our multiple-element arrangements based upon their relative
selling prices. We determine the selling price for each deliverable based on a
selling price hierarchy. The selling price for a deliverable is based on our
vendor specific objective evidence (VSOE) if available, third-party evidence
(TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE
nor TPE is available. Revenue from the sale of software products that are not
required to deliver the tangible product's essential functionality are accounted
for under software revenue recognition rules. Revenue allocated to each element
is then recognized when the basic revenue recognition criteria for that element
have been met. The amount of product revenue recognized is affected by our
judgments as to whether an arrangement includes multiple elements.
We use VSOE of selling price in the selling price allocation in all instances
where it exists. VSOE of selling price for products and services is determined
when a substantial majority of the selling prices fall within a reasonable range
when sold separately. TPE of selling price can be established by evaluating
largely interchangeable competitor products or services in standalone sales to
similarly situated customers. As our products contain a significant element of
proprietary technology and the solution offered differs substantially from that
of competitors, it is difficult to obtain the reliable standalone competitive
pricing necessary to establish TPE. ESP represents the best estimate of the
price at which we would transact a sale if the product or service were sold on a
standalone basis. We determine ESP for a product or service by using historical
selling prices which reflect multiple factors including, but not limited to
customer type, geography, market conditions, competitive landscape, gross margin
objectives and pricing practices. The determination of ESP is made through
consultation with and approval by management. We may modify or develop new
pricing practices and strategies in the future. As these pricing strategies
evolve, we may modify our pricing practices in the future, which may result in
changes in ESP. The aforementioned factors may result in a different allocation
of revenue to the deliverables in multiple element arrangements, which may
change the pattern and timing of revenue recognition for these elements but will
not change the total revenue recognized for the arrangement.
33--------------------------------------------------------------------------------
Table of Contents
Inventory valuation. We assess the valuation of our inventory on a periodic
basis and make adjustments to the value for estimated excess and obsolete
inventory based upon estimates about future demand and actual usage. Such
estimates are difficult to make under most economic conditions. The excess
balance determined by this analysis becomes the basis for our excess inventory
charge. Our excess inventory review process includes analysis of sales
forecasts, managing product rollovers and working with manufacturing to maximize
recovery of excess inventory. If actual market conditions are less favorable
than those projected by management, additional write-downs may be required. If
actual market conditions are more favorable than anticipated, inventory
previously written down may be sold to customers, resulting in lower cost of
sales and higher income from operations than expected in that period.
Share-based compensation. We account for share-based awards in accordance with
the authoritative guidance. Under the authoritative guidance, share-based
compensation expense is primarily based on estimated grant date fair value and
is recognized on a straight line basis. 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 the Monte Carlo
simulation model. 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. On January 17, 2012, the company's
Board of Directors approved the initiation of quarterly cash dividends to the
company's shareholders. The fair value of all the awards granted prior to the
declaration of quarterly cash dividend was measured based on an expected
dividend yield of 0%. The ESPP allows eligible employees to purchase shares of
our common stock at 85 percent of the fair market value at the purchase date.
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 expected
stock price volatility assumption was determined using the historical volatility
of Agilent's stock option over the most recent historical period equivalent to
the expected life. A 10 percent increase in our estimated volatility from
38 percent to 48 percent for our most recent employee stock option grant would
generally increase the value of an award and the associated compensation cost by
approximately 23 percent if no other factors were changed.
In 2010 the expected life of our employee stock options was 4.4 years. In the
first quarter of 2011, we revised our estimate of the expected life of our
employee stock options from 4.4 to 5.8 years. For the grants awarded under the
2009 stock plan after November 1, 2010, we increased the period available to
retirement eligible employees to exercise their options from three years at
retirement date to the full contractual term of ten years. In developing our
estimated life of our employee stock options of 5.8 years, we considered the
historical option exercise behavior of our executive employees who were granted
the majority of the options in the annual grants, which we believe is
representative of future behavior. There was no change to the expected life of
our employee stock options in 2012. See Note 4, "Share-based Compensation," to
the consolidated financial statements for more information.
The assumptions used in calculating the fair value of share-based awards
represent our best estimates, but these estimates involve inherent uncertainties
and the application of management judgment. Although we believe the assumptions
and estimates we have made are reasonable and appropriate, changes in
assumptions could materially impact our reported financial results.
Retirement and post-retirement benefit plan assumptions. Retirement and
post-retirement benefit plan costs are a significant cost of doing business.
They represent obligations that will ultimately be settled sometime in the
future and therefore are subject to estimation. Pension accounting is intended
to reflect the recognition of future benefit costs over the employees' average
expected future service to Agilent based on the terms of the plans and
investment and funding decisions. To estimate the impact of these future
payments and our decisions concerning funding of these obligations, we are
required to make assumptions using actuarial concepts within the framework of
accounting principles generally accepted in the U.S. Two critical assumptions
are the discount rate and the expected long-term return on plan assets. Other
important assumptions include, expected future salary increases, expected future
increases to benefit payments, expected retirement dates, employee turnover,
retiree mortality rates, and portfolio composition. We evaluate these
assumptions at least annually.
The discount rate is used to determine the present value of future benefit
payments at the measurement date - October 31 for both U.S. and non-U.S. plans.
For 2012 and 2011, the U.S. discount rates were based on the results of matching
expected plan benefit payments with cash flows from a hypothetically constructed
bond portfolio and decreased in 2012 from the previous year. For 2012 and 2011,
the discount rate for non-U.S. plans was generally based on published rates for
high quality corporate bonds and either remained unchanged or decreased. Lower
discount rates increase present values and subsequent year pension expense;
higher discount rates decrease present values and subsequent year pension
expense.
The company uses alternate methods of amortization as allowed by the
authoritative guidance which amortizes the actuarial gains and losses on a
consistent basis for the years presented. For U.S. Plans, gains and losses are
amortized over the average future working lifetime. For most Non-U.S. Plans and
U.S. Post-Retirement Benefit Plans, gains and losses are amortized using
34--------------------------------------------------------------------------------
Table of Contents
a separate layer for each year's gains and losses. The expected long-term return
on plan assets is estimated using current and expected asset allocations as well
as historical and expected returns. Plan assets are valued at fair value. If we
changed our estimated return on assets by 1 percent, the impact would be
$6 million on U.S. pension expense and $17 million on non-U.S. pension expense.
The net periodic pension and post-retirement benefit costs recorded in
operations excluding curtailments and settlements were $52 million in 2012,
$58 million in 2011, and $82 million in 2010.
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. As
defined in the authoritative guidance, a reporting unit is an operating segment,
or one level below an operating segment. We 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. Subsequent to
October 31, 2011, we formed a fourth segment, diagnostics and genomics, from a
portion of our life sciences segment. As a result, Agilent now has four
segments, life sciences, chemical analysis, diagnostics and genomics and
electronic measurement, which are the same as our reporting units
In September 2011, the FASB approved changes to the goodwill impairment guidance
which are intended to reduce the cost and complexity of the annual impairment
test. The changes provide entities an option to perform a qualitative assessment
to determine whether further impairment testing is necessary. The revised
standard gives an entity the option to first assess qualitative factors to
determine whether performing the current 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. > 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 revised 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.
The qualitative indicators replace those previously used to determine whether an
interim goodwill impairment test is required. Agilent opted to early adopt this
guidance for the year ended October 31, 2011.
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.
In fiscal year 2012, we assessed goodwill impairment for our four reporting
units; life sciences, chemical analysis, diagnostics and genomics and electronic
measurement. Based on our results of our qualitative test for goodwill
impairment, by reporting unit, as of September 30, 2012, we believe that it is
more-likely-than-not that the fair value of each of our four reporting units,
life sciences, chemical analysis, diagnostics and genomics and electronic
measurement, is greater than their respective carrying values. There was no
impairment of goodwill during the years ended October 31, 2012, 2011 and 2010.
Each quarter we review the events and circumstances to determine if goodwill
impairment is indicated.
Purchased intangible assets consist primarily of acquired developed
technologies, proprietary know-how, trademarks, and customer relationships and
are amortized using the straight-line method over estimated useful lives ranging
from 6 months to 15 years. In-process research and development (IPR&D) is
initially capitalized at fair value as an intangible asset with an indefinite
life and assessed for impairment thereafter. When the IPR&D project is complete,
it is reclassified as an amortizable purchased intangible asset and is amortized
over its estimated useful life. If an IPR&D project is abandoned, Agilent will
record a charge for the value of the related intangible asset to Agilent's
consolidated statement of operations in the period it is abandoned.
In July 2012, the FASB simplified the guidance for testing for impairment of
indefinite-lived intangible assets other than goodwill. The changes are intended
to reduce compliance costs. Agilent's indefinite-lived intangible assets are in
the IPR&D intangible assets. The revised guidance allows a qualitative approach
for testing indefinite-lived intangible assets for impairment, similar to the
recently 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 (meaning a likelihood of more than 50 percent) 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. The amendments are effective
for annual and
35--------------------------------------------------------------------------------
Table of Contents
interim impairment tests performed for fiscal years beginning after September
15, 2012. Early adoption is permitted. Agilent adopted this guidance for the
year ended October 31, 2012. We recorded an impairment of $1 million in 2012,
relating to an IPR&D project that was abandoned. No impairments were recorded in
2011 and 2010.
We continually monitor events and changes in circumstances that could indicate
carrying amounts of long-lived assets, including purchased intangible assets,
may not be recoverable. When such events or changes in circumstances occur, we
assess the recoverability of long-lived assets by determining whether the
carrying value of such assets will be recovered through undiscounted expected
future cash flows. If the total of the undiscounted future cash flows is less
than the carrying amount of those assets, we recognize an impairment loss based
on the excess of the carrying amount over the fair value of the assets. In 2012,
we recorded $1 million of impairments of other intangibles related to the
cancellation of an in-process research and development project. We performed
impairment analyses of purchased intangible assets in 2011 and recorded
$3 million of impairment charges primarily related to a business where we ceased
operations. We performed impairment analyses of purchased intangible assets in
2010 and recorded $13 million of impairment charges primarily related to a
divested business.
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 realized. We consider all available positive and negative evidence on
a jurisdiction-by-jurisdiction basis when assessing whether it is more likely
than not that deferred tax assets are recoverable. We consider evidence such as
our past operating results, the existence of losses in recent years and our
forecast of future taxable income. At October 31, 2012, we provided a valuation
allowance for certain U.S. state and foreign deferred tax assets. We intend to
maintain a valuation allowance in these jurisdictions until sufficient positive
evidence exists to support its reversal.
During the fourth quarter of 2012, we concluded that the valuation allowance for
most of our U.S. federal and state deferred tax assets is no longer needed
primarily due to the emergence from cumulative losses in recent years, the
return to sustainable U.S. operating profits and the expectation of sustainable
profitability in future periods. As of October 31, 2012, the cumulative positive
evidence outweighed the negative evidence regarding the likelihood that most of
the deferred tax asset for Agilent's U.S. consolidated income tax group will be
realized. Accordingly, we recognized a non-recurring, non-cash tax benefit of
$280 million relating to the valuation allowance reversal.
We have not provided for all U.S. federal income and foreign withholding taxes
on the undistributed earnings of some of our foreign subsidiaries because we
intend to reinvest such earnings indefinitely. Should we decide to remit this
income to the U.S. in a future period, our provision for income taxes will
increase materially in that period.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax law and regulations in a multitude of
jurisdictions. Although the guidance on the accounting for uncertainty in income
taxes prescribes the use of a recognition and measurement model, the
determination of whether an uncertain tax position has met those thresholds will
continue to require significant judgment by management. In accordance with the
guidance on the accounting for uncertainty in income taxes, for all U.S. and
other tax jurisdictions, we recognize potential liabilities for anticipated tax
audit issues based on our estimate of whether, and the extent to which,
additional taxes and interest will be due. The ultimate resolution of tax
uncertainties may differ from what is currently estimated, which could result in
a material impact on income tax expense. If our estimate of income tax
liabilities proves to be less than the ultimate assessment, a further charge to
expense would be required. If events occur and the payment of these amounts
ultimately proves to be unnecessary, the reversal of the liabilities would
result in tax benefits being recognized in the period when we determine the
liabilities are no longer necessary. We include interest and penalties related
to unrecognized tax benefits within the provision for income taxes on the
consolidated statements of operations.
As a part of our accounting for business combinations, intangible assets are
recognized at fair values and goodwill is measured as the excess of
consideration transferred over the net estimated fair values of assets acquired.
Impairment charges associated with goodwill are generally not tax deductible and
will result in an increased effective income tax rate in the period that any
impairment is recorded. Amortization expenses associated with acquired
intangible assets are generally not tax deductible and therefore deferred tax
liabilities have been recorded for non-deductible amortization expenses as a
part of the accounting for business combinations.
36--------------------------------------------------------------------------------
Table of Contents
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the consolidated financial
statements for a description of new accounting pronouncements.
Restructuring Costs, Asset Impairments and Other Charges
Our 2009 restructuring program, the ("FY 2009 Plan"), announced in the first
half of 2009, was conceived in response to deteriorating economic conditions and
was designed to deliver sufficient savings to enable our businesses to reach
their profitability targets throughout the cycle. Workforce reduction payments,
primarily severance, were largely complete in fiscal year 2010. Lease payments
should primarily be complete by the end of fiscal 2014.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are
exposed to changes in foreign currency exchange rates as a result of our global
operating and financing activities. We hedge revenues, expenses and balance
sheet exposures that are not denominated in the functional currencies of our
subsidiaries on a short term and anticipated basis. We do experience some
fluctuations within individual lines of the consolidated statement of operations
and balance sheet because our hedging program is not designed to offset the
currency movements in each category of revenues, expenses, monetary assets and
liabilities. Our hedging program is designed to hedge currency movements on a
relatively short-term basis (up to a rolling twelve month period). Therefore, we
are exposed to currency fluctuations over the longer term. To the extent that we
are required to pay for all, or portions, of an acquisition price in foreign
currencies, Agilent may enter into foreign exchange contracts to reduce the risk
that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations
Orders and Net Revenue
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 % Change % Change
(in millions)
Orders $ 6,877 $ 6,769 $ 5,744 2% 18%
Net revenue:
Products $ 5,659 $ 5,482 $ 4,464 3% 23%
Services and other $ 1,199 $ 1,133 $ 980 6% 16%
Total net revenue $ 6,858 $ 6,615 $ 5,444 4% 22%
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Ppts Change Ppts Change
% of total net revenue:
Products 83 % 83 % 82 % - 1 ppt
Services and other 17 % 17 % 18 % - (1) ppt
Total 100 % 100 % 100 %
Agilent's total orders in 2012 were $6,877 million, an increase of 2 percent
when compared to 2011. The increase in orders associated with the Dako
acquisition accounted for 2 percentage points of order growth for the year ended
October 31, 2012 when compared to 2011. Within each of our life sciences,
chemical analysis and electronic measurement businesses, orders were flat when
compared to the prior year. Orders within our diagnostics and genomics business
increased 44 percent when compared to last year and was attributable to the Dako
acquisition. Agilent's total orders in 2011 increased 18 percent when compared
to 2010. The increase in orders associated with the Varian acquisition less the
orders attributable to our divested businesses accounted for 5 percentage points
of order growth for the year ended October 31, 2011 when compared to 2010.
Agilent's net revenue of $6,858 million increased 4 percent when compared to
2011. The revenue increase associated with the Dako acquisition accounted for
approximately 2 percentage points of the revenue increase for the year ended
October 31, 2012 when compared to 2011. Foreign currency movements for 2012 had
an unfavorable impact of approximately 1 percentage point
37--------------------------------------------------------------------------------
Table of Contents
compared to 2011. There was modest growth in demand for life sciences products
led by an increase in revenue from the pharmaceutical and biotechnology market,
but there was also a corresponding decrease in revenue from the academic and
government market for the year ended October 31, 2012, when compared to the
prior year. Within our chemical analysis business revenue grew moderately
compared with the prior year. There were modest increases in revenue from the
food safety and forensics markets, but environmental and petrochemical markets
were relatively flat when compared to the prior year. The diagnostics and
genomics business growth compared to the prior year was attributable to the
acquisition of Dako. Within electronic measurement, total revenue from general
purpose markets was flat in 2012 when compared to the prior year with a modest
shortfall in revenue from aerospace and defense offset by an increase in revenue
from the computer and semi-conductor market. Also within electronic measurement,
the communications test business was flat for the year ended October 31, 2012
when compared to the prior year with wireless manufacturing reporting good
revenue growth in the year offset by a decline in the revenue from the wireless
R&D market. Agilent's total net revenue in 2011 increased 22 percent when
compared to 2010. The revenue increase associated with the Varian acquisition
less the revenue attributable to our divested businesses accounted for
5 percentage points of revenue increase for the year ended October 31, 2011 when
compared to 2010. Note 21, "Segment Information" shows a reconciliation between
segment revenue and net revenue.
Services and other revenue include revenue generated from servicing our
installed base of products, warranty extensions and consulting. Services and
other revenue increased 6 percent in 2012 as compared to 2011. The service and
other revenue growth is higher than product revenue growth due to a portion of
the revenue being driven more by the previously installed base than current
period product sales. Services and other revenue increased 16 percent in 2011 as
compared to 2010. The increase in services and other revenue associated with the
Varian acquisition less the revenue attributable to the network solutions
divestiture accounted for 2 percentage points of revenue increase in 2011.
Backlog
Backlog represents the amount of revenue expected from orders that have already
been booked, including orders for goods and services that have not been
delivered to customers, orders invoiced but not yet recognized as revenue, and
orders for goods that were shipped but not invoiced, awaiting acceptance by
customers. Backlog amounts have been restated for the year ended October 31,
2011 to conform to this definition.
On October 31, 2012, our unfilled backlog for the electronic measurement
business was approximately $800 million, as compared to approximately
$850 million at October 31, 2011. On October 31, 2012, our unfilled backlog for
the chemical analysis business was approximately $360 million, as compared to
approximately $320 million at October 31, 2011. Within our life sciences
business, our unfilled backlog was approximately $500 million on October 31,
2012 as compared to approximately $490 million at October 31, 2011. On
October 31, 2012, our unfilled backlog for the diagnostics and genomics business
was approximately $30 million, as compared to approximately $30 million at
October 31, 2011. We expect that a majority of the unfilled backlog for all four
businesses will be delivered to customers within six months. On average, our
unfilled backlog represents approximately three months' worth of revenues. We
believe backlog on any particular date, while indicative of short-term revenue
performance, is not necessarily a reliable indicator of medium or long-term
revenue performance.
Costs and Expenses
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
Gross margin on products 53.9 % 54.9 % 55.7 % (1) ppt (1) ppt
Gross margin on services and other 46.1 % 45.9 % 45.1 % - 1 ppt
Total gross margin 52.6 % 53.3 % 53.8 % (1) ppt (1) ppt
Operating margin 16.3 % 16.2 % 10.3 % - 6 ppts
(in millions)
Research and development $ 668 $ 649 $ 612 3% 6%Selling, general and administrative $ 1,817 $ 1,809 $ 1,752 - 3%
In 2012, total gross margin decreased 1 percentage point in comparison to 2011.
The unfavorable impact of product mix, increased intangible amortization and
inventory fair value adjustments related to the Dako acquisition were offset by
lower variable and incentive pay. In 2011, total gross margins decreased 1
percentage point in comparison to 2010. The unfavorable impact of the Varian
acquisition (including fair value adjustments) and higher variable and incentive
pay were largely offset by the benefits of favorable volume impacts, decreased
business and infrastructure programs and lower restructuring costs. Operating
margins in
38--------------------------------------------------------------------------------
Table of Contents
2012 were flat when compared to 2011. This was the result of maintaining cost
control through a decrease in variable and incentive pay while absorbing
increases in expenditure from acquisitions and wage increases. Operating margins
in 2011 increased 6 percentage points as compared to 2010 due to higher volume
partly offset by increased variable and incentive pay.
Gross inventory charges were $30 million in 2012, 2011 and 2010. Sales of
previously written down inventory were $5 million in 2012, 2011 and 2010.
Our research and development efforts focus on potential new products and product
improvements covering a wide variety of technologies, none of which is
individually significant to our operations. We conduct five types of research
and development: basic research, foundation technologies, communications, life
sciences and measurement. Our research seeks to improve on various technical
competencies in electronics, software, systems and solutions, life sciences and
photonics. In each of these research fields, we conduct research that is focused
on specific product development for release in the short-term as well as other
research that is intended to be the foundation for future products over a longer
time-horizon. Some of our product development research is designed to improve on
the more than 20,000 products already in production, focus on major new product
releases, and develop new product segments for the future. Due to the breadth of
research and development projects across all of our businesses, there are a
number of drivers of this expense. We remain committed to invest about
10 percent of revenues in research and development and have focused our
development efforts on key strategic opportunities to align our business with
available markets and position ourselves to capture market share.
Research and development expenditures increased 3 percent in 2012 compared to
2011. Increased expenditure was due to our continued investment in new product
development and technologies and increased costs due to acquisitions, primarily
Dako, offset by lower variable and incentive pay. Research and development
expenditures increased 6 percent in 2011 compared to 2010. Increases were due to
new product development, the Varian acquisition and higher variable and
incentive pay. These increases were partly offset by the impact of the divested
businesses (the network solutions and Hycor businesses) and decreased
restructuring expenses.
Selling, general and administrative expenses were flat in 2012 when compared to
2011. Increases were due to the acquisition of Dako, wage increases and
investments in sales channel coverage offset by decreases in variable and
incentive pay and lower commissions. Selling general and administrative expenses
increased 3 percent in 2011 compared to 2010. Increased expenditure was due to
the Varian acquisition and higher variable and incentive pay offset by the
impact of decreased restructuring expenses and the costs associated with the
divested businesses (the network solutions and Hycor businesses).
For the year ended October 31, 2010 we recorded a $132 million gain on the sale
of our network solutions business and $54 million of other income in respect of
a tax sharing settlement with Hewlett Packard Company.
Interest expense for the years ended October 31, 2012, 2011 and 2010 was $101
million, $86 million and $96 million, respectively, and relates to the interest
charged on our senior notes offset by the amortization of deferred gains
recorded upon termination of interest rate swap contracts.
At October 31, 2012, our headcount was approximately 20,500 compared to 18,700
in 2011 and 18,500 in 2010. A significant proportion of the increase in our
headcount in 2012, compared to 2011, was due to the Dako acquisition.
Income Taxes
Years Ended October 31,
2012 2011 2010
(in millions)Provision (benefit) for income taxes $ (110 ) $ 20 $ 8
For 2012, the effective tax rate reflects a favorable benefit of 11 percent. The
11 percent effective tax rate benefit reflects tax on earnings in jurisdictions
that have low effective tax rates and includes a $280 million tax benefit due to
the reversal of a valuation allowance for most U.S. federal and state deferred
tax assets. Valuation allowances require an assessment of both positive and
negative evidence when determining whether it is more likely than not that
deferred tax assets are recoverable. Such assessment is required on a
jurisdiction by jurisdiction basis. In the fourth quarter of 2012, management
concluded that the valuation allowance for most of Agilent's U.S. federal and
state deferred tax assets is no longer needed primarily due to the emergence
from cumulative losses in recent years, the return to sustainable U.S. operating
profits and the expectation of sustainable profitability in future periods. As
of October 31, 2012, the cumulative positive evidence outweighed the negative
evidence regarding the likelihood that most of the deferred tax asset for
Agilent's U.S. consolidated income tax group will be realized. Accordingly, we
recognized a
39--------------------------------------------------------------------------------
Table of Contents
non-recurring tax benefit of $280 million relating to the valuation allowance
reversal. The effective tax rate also includes a non-recurring tax expense of
$88 million relating to an increase in the overall residual U.S. tax expected to
be imposed upon the repatriation of unremitted foreign earnings previously
considered permanently reinvested. During the fourth quarter of 2012, we
assessed the forecasted cash needs and overall financial position of our foreign
subsidiaries and determined that a portion of previously permanently reinvested
earnings would no longer be reinvested overseas. The effective tax rate is also
reduced by a $68 million tax benefit primarily associated with the recognition
of previously unrecognized tax benefits and the reversal of the related interest
accruals due to the reassessment of certain uncertain tax positions relating to
foreign jurisdictions.
For 2011, the effective tax rate was 2 percent. The 2 percent effective tax rate
reflects tax on earnings in jurisdictions that had low effective tax rates and
includes a $97 million net tax benefit primarily associated with a refund in
Canada and the recognition of previously unrecognized tax benefits and the
reversal of the related interest accruals due to the reassessment of certain
uncertain tax positions. The income tax provision also included a $26 million
out of period adjustment to reduce the carrying value of certain U.K. deferred
tax assets for which the majority was recorded in the quarter ended April 30,
2011. The overstatement of these deferred tax assets resulted in an
overstatement of the U.K. valuation allowance release in the fourth quarter of
2010. For the full year, this out of period adjustment was substantially offset
by other out of period adjustments. The net impact of all out of period
adjustments on the effective tax rate was immaterial. Without considering
interest and penalties, the effective rate reflected taxes in all jurisdictions
except the U.S. and certain foreign jurisdictions in which income tax expense or
benefit continued to be offset by adjustments to valuation allowances.
For 2010, the effective tax rate was 1 percent. The 1 percent effective tax rate
included a $101 million beneficial release of the U.K. valuation allowance, a
$32 million current year increase in prior year tax reserves, and tax on
earnings in jurisdictions that had low effective tax rates. Also included is a
$17 million tax benefit related to a $54 million non-taxable settlement payment
received in connection with a tax sharing agreement between Agilent and Hewlett
Packard Company. Without considering interest and penalties, the effective rate
reflected taxes in all jurisdictions except the U.S. and certain foreign
jurisdictions in which income tax expense or benefit continued to be offset by
adjustments to valuation allowances.
Agilent enjoys tax holidays in several different jurisdictions, most
significantly in Singapore and Malaysia. The tax holidays provide lower rates of
taxation on certain classes of income and require various thresholds of
investments and employment or specific types of income in those jurisdictions.
The tax holidays are due for renewal between 2015 and 2023. As a result of the
incentives, the impact of the tax holidays decreased income taxes by $122
million, $127 million, and $62 million in 2012, 2011, and 2010, respectively.
The benefit of the tax holidays on net income per share (diluted) was
approximately $0.35, $0.36, and $0.18 in 2012, 2011 and 2010, respectively.
In accordance with the guidance on the accounting for uncertainty in income
taxes, for all U.S. and other tax jurisdictions, we recognize potential
liabilities for anticipated tax audit issues based on our estimate of whether,
and the extent to which, additional taxes and interest will be due. If our
estimate of income tax liabilities proves to be less than the ultimate
assessment, a further charge to expense would be required. If events occur and
the payment of these amounts ultimately proves to be unnecessary, the reversal
of the liabilities would result in tax benefits being recognized in the period
when we determine the liabilities are no longer necessary. We include interest
and penalties related to unrecognized tax benefits within the provision for
income taxes on the consolidated statements of operations.
In the U.S., tax years remain open back to the year 2006 for federal income tax
purposes and the year 2000 for significant states. In 2011, Agilent and the
Internal Revenue Service ("IRS") reached an agreement on transfer pricing issues
covering years 2003 - 2007. Tax adjustments resulting from these agreements
were offset with net operating losses and tax credit carryforwards. Agilent's
U.S. federal income tax returns for 2006 through 2007 are currently under audit
by the IRS. During the three months ended July 31, 2012, we received a Revenue
Agents Report ("RAR") for these years and filed a protest to dispute certain
adjustments, the most significant of which pertains to the amount of a gain from
the disposition of a business that was allocated to the U.S. for income tax
purposes. There can be no assurance that the outcome of this dispute will not
have a material adverse effect on our operating results or financial condition.
In other major jurisdictions where we conduct business, the tax years generally
remain open back to the year 2003. With these jurisdictions and the U.S., it is
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, we are
unable to estimate the range of possible changes to the balance of our
unrecognized tax benefits.
Segment Overview
Agilent is a measurement company providing core bio-analytical and electronic
measurement solutions to the life sciences, chemical analysis, communications
and electronics, diagnostics and genomics industries. In the third fiscal
quarter of 2012, we formed a new operating segment. The new diagnostics and
genomics segment was formed from a portion of our pre-existing life
40--------------------------------------------------------------------------------
Table of Contents
sciences business plus the business of our recent acquisition of Dako A/S
("Dako"). Following this reorganization, Agilent has four business segments
comprised of the life sciences business, the chemical analysis business,
diagnostics and genomics business and the electronic measurement business. The
historical segment numbers for both the life sciences and diagnostics and
genomics segments have been recast to conform to this new reporting structure in
our financial statements.
Life Sciences
Our life sciences business provides application-focused solutions that include
instruments, software, consumables, and services that enable customers to
identify, quantify and analyze the physical and biological properties of
substances and products. Key product categories in life sciences include: liquid
chromatography ("LC") systems, columns and components; liquid chromatography
mass spectrometry ("LCMS") systems; laboratory software and informatics systems;
laboratory automation and robotic systems; dissolution testing; nucleic acid
solutions; Nuclear Magnetic Resonance ("NMR"), Magnetic Resonance Imaging
("MRI"), and X-Ray Diffraction ("XRD") systems; and services and support for the
aforementioned products.
Orders and Net Revenue
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
(in millions)
Orders $ 1,594 $ 1,597 $ 1,279 - 25%
Net revenue from products $ 1,180 $ 1,147 $ 926 3% 24%
Net revenue from services and other 402 368 300 9% 23%
Total net revenue $ 1,582 $ 1,515 $ 1,226 4% 24%
Life sciences orders in 2012 were flat compared to 2011. Foreign currency
movements had an unfavorable impact of 2 percentage point on order growth when
compared to the prior year. Order results were led by demand in the informatics,
automation, nucleic acid, and services portfolios. Geographically, orders grew
6 percent in the Americas, declined 10 percent in Europe, grew 19 percent in
Japan, and were flat in other Asia Pacific during 2012 when compared to 2011.
Budget constraints and cautious spending weighed on the results in Europe. Life
sciences orders in 2011 increased 25 percent compared to 2010, driven by
strength in the LCMS, automation, and informatics portfolios, along with
consumables and services. Excluding the impact of the Varian and Biocius
acquisitions and the Hycor divestiture, orders grew 13 percent year over year.
Life sciences net revenue in 2012 increased 4 percent compared to 2011. Foreign
currency movements for 2012 had an unfavorable impact of 2 percentage points
compared to 2011. Revenue growth was led by strength in the LCMS, informatics,
automation, nucleic acid solutions, and services portfolios. Services business
was strong due to demand for service contracts, maintenance, and multi-vendor
services. Geographically, revenue grew 6 percent in the Americas, 1 percent in
Europe, 4 percent in Japan, and 7 percent in other Asia Pacific during 2012 when
compared to 2011. Life sciences revenue in 2011 increased 24 percent compared to
2010, with growth in the Americas helped by an expanded sales channel selling a
broader portfolio of products to our customers. Excluding the impact of the
Varian and Biocius acquisitions and the Hycor divestiture, revenue grew 13
percent year over year.
During this fiscal year, revenue grew in the pharmaceutical and biotech markets,
food testing, and all other applied markets including forensics, petrochemical,
and environmental. Despite tightening of budgets, growth in the pharmaceutical
market was driven by technology refresh programs leading to replacement
business, quality assurance, and quality control. The food market saw moderate
growth as global food regulations continue to drive demand. LCMS food testing
was driven by the continued uptake of metabolomics LCMS Quadrupole
Time-of-Flight (Q-TOF) based solutions in the food industry and improved
software analysis tools. Applied markets also grew from last year, with
forensics, petrochemical, and environmental applications all making moderate
gains. The academia and government market was rather weak, reflecting the
macroeconomic environment.
The overall macroeconomic weakness has affected demand for our instruments and
application solutions, and we expect that to continue at the start of the next
fiscal year. Despite this weakness, we continue to invest in expanding and
improving our life sciences applications and solutions portfolio. Our new
products released during the year, such as the 1290 Infinity Quaternary LC
System, continue our technology leadership in the LC market by setting new
benchmarks for performance, versatility and cost-of-ownership. In addition, we
continue to focus on application-specific solutions in emerging countries and
markets.
41--------------------------------------------------------------------------------
Table of Contents
Gross Margin and Operating Margin
The following table shows the life sciences business' margins, expenses and
income from operations for 2012 versus 2011, and 2011 versus 2010.
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
Total gross margin 50.8 % 50.4 % 52.4 % - (2) ppts
Operating margin 14.5 % 13.3 % 16.6 % 1 ppt (3) ppts
(in millions)
Research and development $ 141 $ 134 $ 104 5% 29%
Selling, general and administrative $ 433 $ 427 $ 335 1% 28%
Income from operations
$ 230 $ 202 $ 203 14% (1)%
Gross margins in 2012 remained flat compared to 2011. Favorable revenue volume
and lower material costs were offset by higher infrastructure costs and
unfavorable product mix. Gross margins declined by 2 percentage points in 2011
compared to 2010 mainly due to the impact of the Varian portfolio, which has
lower gross margins, higher logistics costs, and higher consumables costs
partially offset by favorable volume impact.
Research and development expenses increased 5 percent in 2012 compared to 2011.
The increase was mainly due to continued investment in new products and
technologies. Research and development expenses increased 29 percent in 2011
compared to 2010, mostly due to our Varian and Biocius acquisitions and
investments in new product development.
Selling, general and administrative expenses increased 1 percent in 2012
compared to 2011. The increase was due to investments in sales channel coverage
with a focus on emerging markets, partially offset by lower commissions and
discretionary spending. Selling, general and administrative expenses increased
28 percent in 2011 compared to 2010. The increase was due to acquisitions
(Varian and Biocius), higher commissions, and investments in sales channel
coverage.
Operating margins increased by 1 percentage point in 2012 compared to 2011. The
increase was mainly due to favorable gross profit from higher revenue outpacing
operating expense growth. Operating margins declined by 3 percentage points in
2011 compared to 2010 as the operating expense growth slightly outpaced the
increased gross profit.
Income from Operations
Income from operations in 2012 increased by $28 million or 14 percent on a
revenue increase of $67 million, a 41 percent year-over-year operating margin
incremental. Income from operations in 2011 decreased by $1 million or 1 percent
despite a revenue increase of $289 million. Operating margin incremental is
measured by the increase in income from operations compared to the prior period
divided by the increase in revenue compared to the prior period.
Chemical Analysis
Our chemical analysis business provides application-focused solutions that
include instruments, software, consumables, and services that enable customers
to identify, quantify and analyze the physical and biological properties of
substances and products. Key product categories in chemical analysis include:
gas chromatography (GC) systems, columns and components; gas chromatography mass
spectrometry (GC-MS) systems; inductively coupled plasma mass spectrometry
(ICP-MS) instruments; atomic absorption (AA) instruments; inductively coupled
plasma optical emission spectrometry (ICP-OES) instruments; molecular
spectroscopy instruments; software and data systems; vacuum pumps and
measurement technologies; services and support for our products.
42--------------------------------------------------------------------------------
Table of Contents
Orders and Net Revenue
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
(in millions)
Orders $ 1,604 $ 1,589 $ 1,224 1% 30%
Net revenue from products $ 1,219 $ 1,194 $ 954 3% 25%
Net revenue from services and other 340 324 246 5% 32%
Total net revenue $ 1,559 $ 1,518 $ 1,200 3% 27%
Chemical analysis orders in 2012 increased 1 percent compared to 2011. Foreign
currency movements for 2012 had an unfavorable impact of 1 percentage point
compared to 2011. Order results were led by solid performance in services and
consumables, along with GC-MS and ICP-MS instruments. Service orders were led by
strength in contracts and lab management services. ICP-MS orders were led by our
7700 Series ICP-MS and 8800 ICP-MS Triple Quadrupole (ICP-QQQ). Growth was
largely offset by declines in GC instruments and the vacuum pump portfolio.
Geographically, orders grew 5 percent in the Americas, declined 5 percent in
Europe, declined 4 percent in Japan, and grew 4 percent in other Asia Pacific
during 2012 when compared to 2011. Europe was negatively impacted by the budget
constraints and cautious spending. Chemical analysis orders in 2011 increased 30
percent compared to 2010, driven by strength in the GC, GC-MS, ICP-MS
portfolios, along with consumables and services. Excluding the impact of the
Varian and A2 Technologies acquisitions, orders grew 11 percent year over year.
Chemical analysis net revenue in 2012 increased 3 percent compared to 2011.
Foreign currency movements for 2012 had an unfavorable impact of 2 percentage
points compared to 2011. Revenue growth was led by services and consumables,
along with the strength in ICP-MS instruments. However, we continue to face
challenges in the vacuum pump portfolio as weakness in semiconductor and
industrial markets affected results. Geographically, revenue grew 2 percent in
the Americas, declined 1 percent in Europe, declined 2 percent in Japan, and
grew 8 percent in other Asia Pacific during 2012 when compared to 2011. Many
U.S. government purchases have been slowed or put on hold due to continued
weakness at the federal, state, and local levels, which slowed growth in the
Americas. Other Asia Pacific was a bright spot, boosted by a strong finish in
China during the last quarter. Chemical analysis revenue in 2011 increased 27
percent compared to 2010, with particularly strong growth in other Asia Pacific
including China. Excluding the impact of the Varian and A2 Technologies
acquisitions, revenues grew 8 percent year over year.
Growth was mixed in core end markets. The worldwide food market remains strong
in all sectors, and demand to export safe and high quality food in the emerging
markets remains robust. The food safety segment continues to drive increased
testing capacity and instrument purchases in all product categories,
consumables, and services. Forensics market growth was encouraging, particularly
in developing countries. Increasing demand for screening and identification of
abused prescription pharmaceuticals and designer drugs is driving purchasing of
new, high resolution mass spectrometry technologies. Environmental has softened
as government budget constraints impacted demand. Petrochemical market results
were relatively flat. Weak industrial demand in chemical and energy end markets,
along with declining prices, have negatively impacted profitability of companies
in the energy and chemical market segment. This has resulted in customer cut
backs on capital spending, and some slowing in the replacement business,
particularly in the Americas and Europe. Other applied markets showed net growth
as growth in the pharmaceutical and biotech markets was partially offset by
decline in the academic and government markets.
The overall macroeconomic weakness has affected demand for our instruments and
application solutions, and we expect that to continue in the near term. Despite
this weakness, we will continue to invest in research and development and seek
to expand our position in developing countries and emerging markets. Our new
products released during the year, such as the GC-MS Q-TOF, ICP-QQQ, and MP-AES,
have demonstrated strong market acceptance. In addition, we are focusing on
improvements in profitability of the Varian portfolio by refreshing products and
consolidating supply chain activities.
43--------------------------------------------------------------------------------
Table of Contents
Gross Margin and Operating Margin
The following table shows the chemical analysis business's margins, expenses and
income from operations for 2012 versus 2011, and 2011 versus 2010.
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
Total gross margin 51.4 % 51.1 % 53.5 % - (2) ppts
Operating margin 21.7 % 20.6 % 23.3 % 1 ppt (3) ppts
(in millions)
Research and development $ 93 $ 92 $ 68 - 35%
Selling, general and administrative $ 371 $ 371 $ 294 - 26%
Income from operations
$ 338 $ 313 $ 279 8% 12%
Gross margins in 2012 remained flat compared to 2011. Higher product discounts
were offset by favorable revenue volume and lower material costs. Gross margins
declined by 2 percentage points in 2011 compared to 2010 due to the addition of
the Varian portfolio, which has lower gross margins and higher logistics costs.
Research and development expenses remained flat in 2012 compared to 2011. We
continue to make investments in product R&D. Research and development expenses
increased 35 percent in 2011 compared to 2010, primarily driven by the Varian
acquisition.
Selling, general and administrative expenses remained flat in 2012 compared to
2011. Investments in sales channel coverage with a focus on emerging markets
were offset by lower commissions and discretionary spending. Selling, general
and administrative expenses increased 26 percent in 2011 compared to 2010,
primarily driven by the Varian acquisition.
Operating margins increased by 1 percentage point in 2012 compared to 2011. The
increase was mainly due to favorable gross profit from higher revenue while
holding expenses flat. Operating margins declined by 3 percentage points in 2011
compared to 2010 due to decline in gross margins and increase in incremental
operating expenses.
Income from Operations
Income from operations in 2012 increased by $25 million or 8 percent on a
revenue increase of $41 million, a 60 percent year-over-year operating margin
incremental. Income from operations in 2011 increased by $34 million or
12 percent compared to 2010 on a revenue increase of $318 million, an 11 percent
year-over-year operating margin incremental.
Diagnostics and Genomics
Our diagnostics and genomics business provides solutions that include reagents,
instruments, software and consumables that enable customers in the clinical and
life sciences research areas to interrogate samples at the molecular level. With
the acquisition of Dako, a new group of solutions have been added that extend
our product offerings to cancer diagnostics with anatomic pathology
workflows. Our broad portfolio of offerings include immunohistochemistry
("IHC"), In Situ Hybridization ("ISH"), Hematoxylin and Eosin Staining, special
staining, DNA mutation detection, genotyping, gene copy number determination,
identification of gene rearrangements, DNA methylation profiling, gene
expression profiling, as well as automated gel electrophoresis-based sample
analysis systems. We also collaborate with a number of major pharmaceutical
companies to develop new potential pharmacodiagnostics, also called companion
diagnostics, which may be used to identify patients most likely to benefit from
a specific targeted therapy.
44--------------------------------------------------------------------------------
Table of Contents
Orders and Net Revenue
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
(in millions)
Orders $ 399 $ 278 $ 247 44% 13%
Net revenue from products $ 398 $ 277 $ 253 45% 9%Net revenue from services and other $ 4 $ - $ -
- -
Total net revenue $ 402 $ 277 $ 253 45% 9%
Diagnostics and genomics orders in 2012 increased 44 percent compared to 2011.
The incremental orders associated with the acquisition of Dako accounted for 32
percent of our diagnostics and genomics business, and 45 percentage points of
the order growth in 2012. Foreign currency movements had an unfavorable currency
impact of 1 percentage points on the year-over-year. Excluding the impact of the
Dako acquisition, the 2012 order growth was led by strength in CGH array,
HaloPlex, GeneSpring and Bioanalyzer Chips & Reagents. Geographically, excluding
the impact of the Dako acquisition, orders declined 5 percent in the Americas, 2
percent in Europe and 2 percent in other Asia Pacific as a result of
macro-economic pressures in the Americas and Europe. Japan saw order growth of
12 percent compared to 2011 driven by the strong order performance as the
country recovers from the triple disaster (tsunami, earthquake and nuclear
reactor meltdown) in 2011. Diagnostics and genomics orders in 2011 increased
13 percent compared to 2010. Order results were led by strength in SureSelect,
microarrays and Bioanalyzer sales. Geographically, orders grew 5 percent in the
Americas, 15 percent in Europe, 21 percent in Japan, and 32 percent in other
Asia Pacific during 2011 when compared to 2010.
Diagnostics and genomics net revenue in 2012 increased 45 percent compared to
2011. There was $126 million in revenue associated with the acquisition of Dako
in 2012. The incremental revenue associated with the acquisition of Dako
accounted for 31 percent of our diagnostics and genomics business, and 45
percentage points of revenue growth in 2012 compared to 2011. Foreign currency
movements for 2012 had an unfavorable impact of 1 percentage point compared to
2011. The increase in services and other revenue in 2012 was due to the Dako
acquisition. Excluding the impact of the Dako acquisition, revenue growth was
led by TapeStations, HaloPlex, Bioanalyzer consumables and CGH arrays, offset by
declines in microarrays and SureSelect. Revenue associated with the Dako
acquisition consisted primarily of IHC product offerings. Geographically,
excluding the impact of the Dako acquisition, revenues declined 1 percent in the
Americas, 4 percent in Europe, 36 percent in other Asia Pacific, and grew
74 percent in Japan during 2012 when compared to 2011. Diagnostics and genomics
net revenue in 2011 increased 9 percent compared to 2010. Foreign currency
movements for 2011 had a favorable impact of 3 percentage points compared to
2010. Revenue growth was led by SureSelect and followed by solid performance in
CGH and gene expression microarrays as well as Bioanalyzers. Geographically,
revenues declined 2 percent in the Americas, grew 19 percent in Europe,
17 percent in Japan, and 26 percent in other Asia Pacific during 2011 when
compared to 2010.
During 2012, we saw strong revenue growth in the clinical, diagnostics, and the
pharmaceutical and biotech markets, with offsetting declines in the academic and
government market. Solid growth in the clinical market reflected increased
investments in genomics applications driven by aging populations all over the
world and greater use of next generation sequencing within clinical centers. The
cancer diagnostics market remained robust within pathology staining as the
fundamental socio-demographic growth drivers continued to increase test volumes,
while the more efficient automation solutions and test procedure standardization
drove demand due to its cost and labor reduction advantages. Growth in the
pharmaceutical and biotech market was strong, reflecting worldwide outsourcing
demand for preclinical research and development as patents expire and generic
drugs expand rapidly. The academia and government market remained soft in 2012
due to the U.S. and European cautious funding environments. However, next
generation sequencing continues to attract government funding in many fields,
including medical science, microbiology, and bio-agriculture. In 2011, we saw
positive revenue growth in the pharmaceutical and biotech, academic and
government markets, as well as solid growth in the clinical market.
Looking forward, we are optimistic about our growth opportunities in the
clinical research market as our broad portfolio of products especially SureFISH,
HaloPlex and CGH microarrays are well suited to address customer needs. The
addition of HaloPlex has strengthened our target enrichment offerings and sales
have exceeded our expectation. We have plans to continue investing in target
enrichment as next generation sequencing moves into the research clinic. We are
committed to the microarray business and have partnered with a former competitor
who is exiting the microarray business to transition their customers onto
Agilent microarrays, further growing our installed base. We continue to expand
our SureFISH menu of probes and are now at over 450 probes targeting both cancer
and constitutional applications including translocation probes targeting
leukemia for cancer market. We are always looking selectively at acquisition
opportunities to better serve our customers and to drive future growth.
45--------------------------------------------------------------------------------
Table of Contents
Gross Margin and Operating Margin
The following table shows diagnostics and genomics' margins, expenses and income
from operations for 2012 versus 2011, and 2011 versus 2010.
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
Total gross margin 62.9 % 61.0 % 58.7 % 2 ppts 2 ppts
Operating margin 16.1 % 12.5 % 7.1 % 4 ppts 5 ppts
(in millions)
Research and development $ 54 $ 40 $ 38 37% 4%Selling, general and administrative $ 134 $ 95 $ 93 41% 3%
Income from operations
$ 65 $ 35 $ 18 88% 92%
Gross margins improved by 2 percentage points in 2012 compared to 2011. The
improved gross margins were due to the acquisition of Dako, lower royalty
expenses, due to a decline of certain key royalty-bearing products, and a
favorable hedging impact in 2012. Gross margins improved by 2 percentage points
in 2011 compared to 2010 mainly due to favorable currency impacts, lower royalty
expenses, due to a decline of certain key royalty-bearing products, and
favorable product mix in favor of higher margin consumable and reagent revenues.
Research and development expenses increased 37 percent in 2012 compared to 2011,
due to the acquisition of Dako offset by lower project expenses. Research and
development expenses increased 4 percent in 2011 compared to 2010, driven mainly
by the Lab901 acquisition.
Selling, general and administrative expenses increased 41 percent in 2012
compared to 2011. The increase was due to the acquisition of Dako, partially
offset by decreases in commission expenses and infrastructure expenses. Selling,
general and administrative expenses increased 3 percent in 2011 compared to 2010
due to the Lab901 acquisition.
Operating margins improved by 4 percentage points in 2012 compared to 2011.
Operating margins improved by 5 percentage points in 2011 compared to 2010.
Factors which led to operating margin improvement over both periods have been
explained in the above discussions on better gross margins and well controlled
operating expenses.
Income from Operations
Income from operations in 2012 increased by $30 million or 88 percent on a
revenue increase of $125 million, a 24 percent year-over-year operating margin
incremental. Income from operations in 2011 increased by $17 million or
92 percent compared to 2010 on a revenue increase of $24 million, a 69 percent
year-over-year operating margin incremental.
Electronic Measurement
Our electronic measurement business provides electronic measurement instruments
and systems, software design tools and related services that are used in the
design, development, manufacture, installation, deployment and operation of
electronics equipment, and microscopy products. Related services include
start-up assistance, instrument productivity and application services and
instrument calibration and repair. We also offer customization, consulting and
optimization services throughout the customer's product lifecycle.
46--------------------------------------------------------------------------------
Table of Contents
Orders and Net Revenue
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
(in millions)
Orders $ 3,280 $ 3,305 $ 2,994 (1)% 10%
Net revenue from products $ 2,862 $ 2,875 $ 2,345 - 23%
Net revenue from services and other 453 441 439 3% -
Total net revenue $ 3,315 $ 3,316 $ 2,784 - 19%
Electronic measurement orders declined 1 percent in 2012 compared to 2011.
Foreign currency movements had a slightly unfavorable impact on the
year-over-year growth rate. Growth in our communications test business reflected
solid wireless communications demand partially offset by a decline in broadband
communications orders. General purpose test was lower year-over-year on weaker
industrial and lower aerospace and defense business partially offset by higher
computer and semiconductor test orders. On a geographic basis, orders increased
13 percent in the Americas but declined by 3 percent in Japan, 7 percent in
Europe, and 11 percent in Asia Pacific excluding Japan. Year-over-year changes
in communications test demand contributed to the order growth in the Americas
and the decline in Asia Pacific excluding Japan. Electronic measurement orders
increased 10 percent in 2011 compared to 2010. Order growth in wireless
manufacturing, industrial, and computers and semiconductor test was partially
offset by a decline in network monitoring orders associated with the divestiture
of the network solutions business.
Electronic measurement revenue was flat in 2012 compared to 2011 on flat demand
for both general purpose and communications test. Foreign currency movements had
minimal impact on year-over-year growth. Regionally, revenue from the Americas
increased 10 percent, reflecting strong communications test business, offset by
declines of 1 percent in Japan, 5 percent in Asia Pacific excluding Japan, and
11 percent in Europe. The decline in Europe reflected a broader market slowdown
and general economic weakness. Revenue from products was flat year-over-year
while service related revenue increased 3 percent due to our installed base.
Electronic measurement revenue increased 19 percent in 2011 compared to 2010 on
strong demand from industrial, computers and semiconductor, and wireless
communications test partially offset by a decrease in network monitoring
associated with the divestiture of the networks solutions business.
General purpose test revenue, representing approximately 63 percent of
electronic measurement revenue, reflected slight growth in computers and
semiconductor business, flat industrial test demand, and a slight decline in
aerospace and defense. Growth in the computers and semiconductor business
reflected continuing demand for digital test driven in part by the proliferation
of high speed data transmission and increased investments in new semiconductor
processes and technology partially offset by a decline in semiconductor
manufacturing. Uncertain global economic conditions contributed to flat revenue
for industrial or general purpose application test. Our aerospace and defense
business reflected stronger demand from the United States government offset by
softer demand from international customers, including Asia. In 2011, general
purpose test represented 63 percent of electronic measurement revenue with
strong demand from industrial, computer, and semiconductor test customers.
Communications test revenue, representing approximately 37 percent of electronic
measurement revenue, reflected strong wireless manufacturing test demand offset
by lower wireless R&D and broadband communications business. Strength in
wireless manufacturing was driven by capacity expansion for smartphones and the
associated supply chain. Though investments continued in high data rate
applications including long-term evolution ("LTE"), economic uncertainty and
cautious spending by customers contributed to soft wireless R&D demand.
Broadband communications moderated following a period of strong investment
associated with the evolution to data-driven services. In 2011, communications
test represented 37 percent of electronic measurement revenue, reflecting growth
in wireless and broadband communications partially offset by a decline in
network monitoring revenue due to the divestiture of the network solutions
business.
Looking forward, we expect a cautious spending environment driven by ongoing
global economic uncertainty. There continues to be downward pressure on the
aerospace and defense market with near-term uncertainty relating to the budget
for the United States government. We anticipate continued interest in high-speed
digital test applications with limited investment in semiconductor manufacturing
capacity. Communications test demand is expected to moderate on decelerating
smartphone capacity expansion and conservative spending in R&D.
47--------------------------------------------------------------------------------
Table of Contents
Gross Margin and Operating Margin
The following table shows the electronic measurement business's margins,
expenses and income from operations for 2012 versus 2011 and 2011 versus 2010.
Years Ended October 31, 2012 over 2011 2011 over 2010
2012 2011 2010 Change Change
Total gross margin 56.9 % 58.4 % 58.4 % (2) ppts -
Operating margin 22.7 % 22.9 % 15.7 % - 7 ppts
(in millions)
Research and development $ 375 $ 379 $ 391 (1)% (3)%Selling, general and administrative $ 761 $ 798 $ 798 (5)% -
Income from operations
$ 751 $ 760 $ 438 (1)% 74%
Gross margins declined 2 percentage points in 2012 compared to 2011 on flat
revenue. The unfavorable impact of a higher proportion of lower gross margin
wireless manufacturing business and slightly higher expenses were partially
offset by lower variable and incentive pay. Gross margins were flat in 2011
compared to 2010 with the favorable impact of volume offset by the unfavorable
impact of currency movements, unfavorable mix with a higher proportion of lower
gross margin wireless manufacturing business, increased variable and incentive
pay, and higher infrastructure costs.
Research and development expenses declined 1 percent in 2012 compared to 2011.
Decreases in variable and incentive pay and infrastructure costs were partially
offset by incremental spending associated with new acquisitions and wage
increases. Research and development expenses declined 3 percent in 2011 compared
to 2010. Lower infrastructure costs and spending reductions of which a portion
related to the network solutions business divestiture were partially offset by
higher variable and incentive pay and the unfavorable impact of currency
movements.
Selling, general and administrative expenses decreased 5 percent in 2012
compared to 2011. Lower variable and incentive pay, infrastructure costs, and
commissions were partially offset by wage increases. Selling, general and
administrative expenses were flat in 2011 compared to 2010. Lower infrastructure
costs and spending reductions partially related to the network solutions
divestiture were offset by the unfavorable impact of currency movements and
higher variable and incentive pay.
Operating margins were approximately the same in 2012 compared to 2011 on flat
revenue; lower gross margins were mostly offset by reductions in operating
expenses. Operating margins improved by 7 percentage points in 2011 compared to
2010. Higher revenue volume and lower infrastructure costs were partially offset
by increased variable and incentive pay and the unfavorable impact of currency
movements.
Income from Operations
Income from operations in 2012 decreased by $9 million or 1 percent compared to
2011 on flat revenue, reflecting the net impact of lower gross margins mostly
offset by reductions in expenses. Income from operations in 2011 increased by
$322 million or 74 percent compared to 2010 on a revenue increase of
$532 million, a 61 percent year-over-year operating margin incremental that
reflected the benefits of higher revenue volume and limited expense growth.
Financial Condition
Liquidity and Capital Resources
Our financial position as of October 31, 2012 consisted of cash and cash
equivalents of $2,351 million as compared to $3,527 million as of October 31,
2011.
As of October 31, 2012, approximately $2,245 million of our cash and cash
equivalents is held outside of the U.S. in our foreign subsidiaries. Most of the
amounts held outside of the U.S. could be repatriated to the U.S. but, under
current law, would be subject to U.S. federal and state income taxes, less
applicable foreign tax credits. Agilent has accrued for U.S. federal and state
48--------------------------------------------------------------------------------
Table of Contents
tax liabilities on the earnings of its foreign subsidiaries except when the
earnings are considered indefinitely reinvested outside of the U.S. Repatriation
could result in additional material U.S. federal and state income tax payments
in future years. We utilize a variety of funding strategies in an effort to
ensure that our worldwide cash is available in the locations in which it is
needed.
On June 21, 2012, we completed the acquisition of Dako A/S through the
acquisition of 100% of the share capital of Dako A/S, a limited liability
company incorporated under the laws of Denmark ("Dako"), under the share
purchase agreement, dated May 16, 2012. As a result of the acquisition, Dako has
become a wholly-owned subsidiary of Agilent. The consideration paid was
approximately $2,143 million, $1,400 million was paid directly to the seller and
$743 million was paid to satisfy the outstanding debt of Dako. Agilent funded
the acquisition using our existing cash. The acquisition has been accounted for
in accordance with the authoritative accounting guidance and the results of Dako
are included in Agilent's consolidated financial statements from the date of
acquisition.
We believe our cash and cash equivalents, cash generated from operations, and
ability to access capital markets and credit lines will satisfy, for the
foreseeable future, our liquidity requirements, both globally and domestically,
including the following: working capital needs, capital expenditures, business
acquisitions, stock repurchases, cash dividends, contractual obligations,
commitments, principal and interest payments on debt, and other liquidity
requirements associated with our operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $1,228 million in 2012 as compared
to $1,260 million provided in 2011. We received $65 million in interest rate
swap proceeds and $61 million in respect of a tax sharing settlement with
Hewlett Packard Company during the year ended October 31, 2011. We paid
approximately net $86 million in taxes in 2012 as compared to net $22 million in
2011. In 2010, we generated $718 million in net cash provided by operating
activities.
In 2012, accounts receivable provided cash of $19 million, provided cash of
$11 million in 2011 and used cash of $166 million in 2010. Days' sales
outstanding were 47 days in 2012, 45 days in 2011 and 50 days in 2010. Accounts
payable used cash of $31 million in 2012, used cash of $35 million in 2011 and
provided cash of $113 million in 2010. Cash used in inventory was $52 million in
2012, $208 million in 2011 and $51 million in 2010. Inventory days on-hand
increased to 108 days in 2012 compared to 100 days in 2011 and 87 days in 2010.
We contributed $30 million, $33 million and $30 million to our U.S. defined
benefit plans in 2012, 2011 and 2010, respectively. We contributed $54 million,
$59 million and $47 million to our non-U.S. defined benefit plans in 2012, 2011
and 2010, respectively. We did not contribute to our U.S. post-retirement
benefit plans in 2012 or 2011 and contributed $1 million in 2010. Our non-U.S.
defined benefit plans are generally funded ratably throughout the year. Total
contributions in 2012 were $84 million or 9 percent less than 2011. Total
contributions in 2011 were $14 million or 18 percent more than in 2010. Our
annual contributions are highly dependent on the relative performance of our
assets versus our projected liabilities, among other factors. We expect to
contribute approximately $84 million to our U.S. and non-U.S. defined benefit
plans and $2 million to our U.S. post-retirement benefit plans during 2013.
Net Cash Provided by/Used in Investing Activities
Net cash used in investing activities in 2012 was $2,372 million primarily due
to acquisition of Dako and other smaller acquisitions as compared to net cash
provided of $1,294 million in 2011. In 2010, we used $1,174 million of net cash
in the investing activities of operations.
Investments in property, plant and equipment were $194 million in 2012,
$188 million in 2011 and $121 million in 2010. Proceeds from sale of property,
plant and equipment were zero in 2012, $18 million in 2011 and $7 million in
2010. In 2012, we invested $2,257 million in acquisitions of businesses and
intangible assets compared to $98 million in 2011. In 2010, we invested $1,313
million in acquisitions of businesses and purchase of intangible assets which
was primarily related to our acquisition of Varian. Proceeds from the sale of
investment securities in 2012 were $5 million, $16 million in 2011 and $38
million in 2010. The amounts of and changes in restricted cash were not material
for the fiscal year ended 2012. In 2011 restricted cash decreased $1,545 million
mostly due to the reclassification of restricted cash to cash and cash
equivalents following the settlement of the World Trade repurchase obligation.
Proceeds from divestitures were zero in 2012, $1 million in 2011 and $205
million in 2010.
Net Cash Provided by/Used in Financing Activities
Net cash used in financing activities in 2012 was $31 million compared to
$1,693 million in 2011 and $601 million net cash provided in 2010, respectively.
We satisfied the $1,500 million financing obligation of World Trade in its
entirety on December 10, 2010.
49--------------------------------------------------------------------------------
Table of Contents
Treasury stock repurchases and dividends
On November 19, 2009 our Board of Directors approved a share-repurchase program
to reduce or eliminate dilution of basic outstanding shares in connection with
issuances of stock under the company's equity incentive plans. The
share-repurchase program does not require the company to acquire a specific
number of shares and may be suspended or discontinued at any time. There is no
fixed termination date for the new share-repurchase program. For the year ended
October 31, 2012 we repurchased approximately 5 million shares for $172 million.
For the year ended October 31, 2011 we repurchased 12 million shares for
$497 million. For the year ended October 31, 2010 we repurchased 13 million
shares for $411 million.
We paid our first quarterly dividend on April 25, 2012 to shareholders of record
as of the close of business on April 3, 2012. During the year ended October 31,
2012, cash dividends of $0.30 per share, or $104 million were declared and paid
on the company's outstanding common stock. On November 16, 2012, we declared a
quarterly dividend of $0.10 per share of common stock, or approximately $35
million which will be paid on January 23, 2013 to shareholders of record as of
close of business on December 31, 2012. The timing and amounts of any future
dividends are subject to determination and approval by our board of directors.
Credit Facility
On October 20, 2011, we entered into a five-year credit agreement, which
provides for a $400 million unsecured credit facility that will expire on
October 20, 2016. The company may use amounts borrowed under the facility for
general corporate purposes. As of October 31, 2012 the company has no borrowings
outstanding under the facility. We were in compliance with the covenants for the
credit facilities during the year ended October 31, 2012.
As a result of the Dako acquisition, we have a credit facility in Danish Krone
equivalent of $9 million with a Danish financial institution. During the year
ended October 31, 2012 $1 million was repaid and no borrowings were outstanding
under the facility as of October 31, 2012.
Short-term debt
On September 9, 2009, the company issued an aggregate principal amount of $250
million in senior notes ("2012 senior notes"). The 2012 senior notes matured on
September 14, 2012 and were fully redeemed.
In July 2010, the company issued an aggregate principal amount of $250 million
in senior notes ("2013 senior notes"). The 2013 senior notes were issued at
99.82% of their principal amount. The notes will mature on July 15, 2013, and
bear interest at a fixed rate of 2.50% per annum. The interest is payable
semi-annually on January 15th and July 15th of each year, payments commenced on
January 15, 2011. The 2013 senior notes are repayable within one year and have
been classified to short-term as of October 31, 2012, see Note 18, "Short-term
debt".
All notes issued are unsecured and rank equally in right of payment with all of
Agilent's other senior unsecured indebtedness. The company incurred issuance
costs of $2 million in connection with the 2013 senior notes. These costs were
capitalized in other assets on the consolidated balance sheet and the costs are
being amortized to interest expense over the term of the senior notes.
Long-term debt
On October 24, 2007, the company issued an aggregate principal amount of
$600 million in senior notes maturing in 2017 ("2017 senior notes"). The 2017
senior notes were issued at 99.60% of their principal amount, bear interest at a
fixed rate of 6.50% per annum, and mature on November 1, 2017. Interest is
payable semi-annually on May 1st and November 1st of each year and payments
commenced on May 1, 2008.
On November 25, 2008, we terminated two interest rate swap contracts associated
with our 2017 senior notes that represented the notional amount of $400 million.
The asset value, including interest receivable, upon termination was
approximately $43 million and the amount to be amortized at October 31, 2012 was
$26 million. The gain is being deferred and amortized to interest expense over
the remaining life of the 2017 senior notes.
On September 9, 2009, the company issued an aggregate principal amount of
$500 million in senior notes maturing in 2015 ("2015 senior notes"). The 2015
senior notes were issued at 99.69% of their principal amount, bear interest at a
fixed rate of 5.50% per annum, and mature on September 14, 2015. Interest is
payable semi-annually on March 14th and September 14th of each year, and
payments commenced on March 14, 2010.
50--------------------------------------------------------------------------------
Table of Contents
On June 6, 2011, we terminated our interest rate swap contracts related to our
2015 senior notes that represented the notional amount of $500 million. The
asset value, including interest receivable, upon termination for these contracts
was approximately $31 million and the amount to be amortized at October 31, 2012
was $18 million. The gain is being deferred and amortized to interest expense
over the remaining life of the 2015 senior notes.
In July 2010, the company issued an aggregate principal amount of $500 million
in senior notes ("2020 senior notes"). The 2020 senior notes were issued at
99.54% of their principal amount. The notes will mature on July 15, 2020, and
bear interest at a fixed rate of 5.00% per annum. The interest is payable
semi-annually on January 15th and July 15th of each year, payments commenced on
January 15, 2011.
On August 9, 2011, we terminated our interest rate swap contracts related to our
2020 senior notes that represented the notional amount of $500 million. The
asset value, including interest receivable, upon termination for these contracts
was approximately $34 million and the amount to be amortized at October 31, 2012
was $29 million. The gain is being deferred and amortized to interest expense
over the remaining life of the 2020 senior notes.
In September 2012, the company issued an aggregate principal amount of $400
million in senior notes ("2022 senior notes"). The senior notes were issued at
99.80% of their principal amount. The notes will mature on October 1, 2022, and
bear interest at a fixed rate of 3.20% per annum. The interest is payable
semi-annually on April 1st and October 1st of each year, payments commence on
April 01, 2013. We used part of the proceeds from the issuance of the 2022
senior notes to redeem the 2012 senior notes.
All notes issued 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 2017 senior notes and incurred $3
million each in connection with the 2015, 2020 and 2022 senior notes. These
costs were capitalized in other assets on the consolidated balance sheet and the
costs are being amortized to interest expense over the term of the senior notes.
As of October 31, 2012, and as a result of the Dako acquisition, we have a
mortgage debt, secured on buildings in Denmark, in Danish Krone equivalent of
$44 million aggregate principal outstanding with a Danish financial institution.
The loan has 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.
Off Balance Sheet Arrangements and Other
We have contractual commitments for non-cancelable operating leases. See Note 17
"Commitments and Contingencies", to our consolidated financial statements for
further information on our non-cancelable operating leases.
Our liquidity is affected by many factors, some of which are based on normal
ongoing operations of our business and some of which arise from fluctuations
related to global economics and markets. Our cash balances are generated and
held in many locations throughout the world. Local government regulations may
restrict our ability to move cash balances to meet cash needs under certain
circumstances. We do not currently expect such regulations and restrictions to
impact our ability to pay vendors and conduct operations throughout our global
organization.
Contractual Commitments
Our cash flows from operations are dependent on a number of factors, including
fluctuations in our operating results, accounts receivable collections,
inventory management, and the timing of tax and other payments. As a result, the
impact of contractual obligations on our liquidity and capital resources in
future periods should be analyzed in conjunction with such factors.
51--------------------------------------------------------------------------------
Table of Contents
The following table summarizes our total contractual obligations at October 31,
2012 for operations and excludes amounts recorded in our consolidated balance
sheet (in millions):
Less than one
year One to three years Three to five years More than five years
Operating leases $ 51 $ 79 $ 36 $ 16
Commitments to contract
manufacturers and suppliers 771 47 9 -
Other purchase commitments 84 1 - -
Retirement plans 86 - - -
Total $ 992 $ 127 $ 45 $ 16
Operating leases. Commitments under operating leases relate primarily to
leasehold property, see Note 17, "Commitments and Contingencies".
Commitments to contract manufacturers and suppliers. We purchase components
from a variety of suppliers and use several contract manufacturers to provide
manufacturing services for our products. During the normal course of business,
we issue purchase orders with estimates of our requirements several months ahead
of the delivery dates. However, our agreements with these suppliers usually
provide us the option to cancel, reschedule, and adjust our requirements based
on our business needs prior to firm orders being placed. Typically purchase
orders outstanding with delivery dates within 30 days are non-cancelable.
Therefore, only approximately 55 percent of our reported purchase commitments
arising from these agreements are firm, non-cancelable, and unconditional
commitments. We expect to fulfill most of our purchase commitments for inventory
within one year.
In addition to the above mentioned commitments to contract manufacturers and
suppliers, we record a liability for firm, non-cancelable and unconditional
purchase commitments for quantities in excess of our future demand forecasts
consistent with our policy relating to excess inventory. As of October 31, 2012,
the liability for our firm, non-cancelable and unconditional purchase
commitments was $5 million, compared to $5 million as of October 31, 2011. These
amounts are included in other accrued liabilities in our consolidated balance
sheet.
Other purchase commitments. We have categorized "other purchase commitments"
related to contracts with professional services suppliers. Typically we can
cancel these contracts within 90 days without penalties. For those contracts
that are not cancelable within 90 days without penalties, we are disclosing the
amounts we are obligated to pay to a supplier under each contract in that period
before such contract can be cancelled. Our contractual obligations with these
suppliers under "other purchase commitments" were approximately $84 million
within the next year and $1 million thereafter.
Retirement Plans. Commitments under the retirement plans relate to expected
contributions to be made to our U.S. and non-U.S. defined benefit plans and to
our post-retirement medical plans for the next year only. Contributions after
next year are impractical to estimate.
We had no material off-balance sheet arrangements as of October 31, 2012 or
October 31, 2011.
On Balance Sheet Arrangements
The following table summarizes our total contractual obligations recorded in our
consolidated balance sheet pertaining to our short-term and long-term debt as of
October 31, 2012 (in millions):
Less than one
year One to three years Three to five years More than five years
Senior notes $ 250 $ 500 $ 600 $ 900
Other debt - - - 44
Total $ 250 $ 500 $ 600 $ 944
We have contractual obligations for interest payments on the above debts.
Interest rates and payment dates are detailed in "Short-term debt" and
"Long-term debt".
Other long-term liabilities include $320 million and $356 million of liabilities
for uncertain tax positions as of October 31, 2012 and October 31, 2011,
respectively. We are unable to accurately predict when these amounts will be
realized or released.
52--------------------------------------------------------------------------------
Table of Contents
[ Back To asia.tmcnet.com's Homepage 's Homepage ]
|
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
