Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(MARK ONE)

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

 

FOR THE QUARTERLY PERIOD ENDED JULY 31, 2008

 

OR

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

 

FOR THE TRANSITION PERIOD FROM          TO

 

 

COMMISSION FILE NUMBER:  001-15405

 

AGILENT TECHNOLOGIES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

DELAWARE

 

77-0518772

(STATE OR OTHER JURISDICTION OF

 

(IRS EMPLOYER

INCORPORATION OR ORGANIZATION)

 

IDENTIFICATION NO.)

 

 

 

5301 STEVENS CREEK BLVD.,

 

 

SANTA CLARA, CALIFORNIA

 

95051

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

(ZIP CODE)

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:  (408) 553-2424

 

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

 

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

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER, OR A SMALLER REPORTING COMPANY. SEE DEFINITIONS OF “LARGE ACCELERATED FILER,” “ACCELERATED FILER,” AND “SMALLER REPORTING COMPANY” IN RULE 12b-2 OF THE EXCHANGE ACT.

 

Large accelerated filer  x

 

Accelerated filer  o

 

Non-accelerated filer  o

 

Smaller reporting company o

 

 

 

 

(do not check if a
smaller reporting company)

 

 

 

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

 

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

 

CLASS

 

OUTSTANDING JULY 31, 2008

COMMON STOCK, $0.01 PAR VALUE

 

 357,541,353 SHARES

 

 

 



Table of Contents

 

AGILENT TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

Page
Number

Part I.

Financial Information

 

 

 

3

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

 

3

 

 

 

Condensed Consolidated Statement of Operations

 

3

 

 

 

Condensed Consolidated Balance Sheet

 

4

 

 

 

Condensed Consolidated Statement of Cash Flows

 

5

 

 

 

Notes to Condensed Consolidated Financial Statements

 

6

 

Item 2.

 

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

 

18

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

28

 

Item 4.

 

Controls and Procedures

 

28

Part II.

Other Information

 

 

 

28

 

Item 1.

 

Legal Proceedings

 

28

 

Item 1A.

 

Risk Factors

 

29

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

Item 6.

 

Exhibits

 

38

Signature

 

39

Exhibit Index

 

40

 

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Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in millions, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

Net revenue:

 

 

 

 

 

 

 

 

 

Products

 

$

1,195

 

$

1,140

 

$

3,570

 

$

3,300

 

Services and other

 

249

 

234

 

723

 

674

 

Total net revenue

 

1,444

 

1,374

 

4,293

 

3,974

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of products

 

505

 

484

 

1,518

 

1,408

 

Cost of services and other

 

136

 

132

 

409

 

387

 

Total costs

 

641

 

616

 

1,927

 

1,795

 

Research and development

 

170

 

170

 

534

 

511

 

Selling, general and administrative

 

415

 

420

 

1,289

 

1,274

 

Total costs and expenses

 

1,226

 

1,206

 

3,750

 

3,580

 

Income from operations

 

218

 

168

 

543

 

394

 

Interest income

 

23

 

42

 

89

 

136

 

Interest expense

 

(31

)

(23

)

(90

)

(68

)

Other income (expense), net

 

5

 

3

 

16

 

7

 

Income before taxes

 

215

 

190

 

558

 

469

 

Provision for income taxes

 

46

 

5

 

96

 

11

 

Net income

 

$

169

 

$

185

 

$

462

 

$

458

 

 

 

 

 

 

 

 

 

 

 

Net income per share – basic:

 

$

0.47

 

$

0.47

 

$

1.27

 

$

1.15

 

Net income per share – diluted:

 

$

0.45

 

$

0.45

 

$

1.23

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

362

 

392

 

365

 

400

 

Diluted

 

372

 

407

 

375

 

412

 

 

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

 

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AGILENT TECHNOLOGIES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEET

(in millions, except par value and share amounts)

(Unaudited)

 

 

 

July 31,
2008

 

October 31,
2007

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,640

 

$

1,826

 

Short-term investments

 

29

 

 

Accounts receivable, net

 

761

 

735

 

Inventory

 

674

 

643

 

Restricted cash and cash equivalents

 

1,570

 

 

Other current assets

 

400

 

467

 

Total current assets

 

5,074

 

3,671

 

Property, plant and equipment, net

 

816

 

801

 

Goodwill

 

642

 

558

 

Other intangible assets, net

 

241

 

178

 

Restricted cash and cash equivalents

 

12

 

1,615

 

Long-term investments

 

251

 

194

 

Other assets

 

505

 

537

 

Total assets

 

$

7,541

 

$

7,554

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

293

 

$

323

 

Employee compensation and benefits

 

359

 

432

 

Deferred revenue

 

310

 

249

 

Income and other taxes payable

 

116

 

522

 

Short-term debt

 

1,711

 

 

Other accrued liabilities

 

105

 

137

 

Total current liabilities

 

2,894

 

1,663

 

Long-term debt

 

 

1,500

 

Senior notes

 

604

 

587

 

Retirement and post-retirement benefits

 

121

 

141

 

Other long-term liabilities

 

737

 

429

 

Total liabilities

 

4,356

 

4,320

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock; $0.01 par value; 2 billion shares authorized; 560 million shares at July 31, 2008 and 551 million shares at October 31, 2007 issued

 

6

 

6

 

Treasury stock at cost; 203 million shares at July 31, 2008 and 181 million shares at October 31, 2007

 

(7,219

)

(6,469

)

Additional paid-in-capital

 

7,383

 

7,117

 

Retained earnings

 

2,560

 

2,172

 

Accumulated other comprehensive income

 

455

 

408

 

Total stockholders’ equity

 

3,185

 

3,234

 

Total liabilities and stockholders’ equity

 

$

7,541

 

$

7,554

 

 

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

 

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AGILENT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in millions)

(Unaudited)

 

 

 

Nine Months Ended
July 31,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

462

 

$

458

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

157

 

143

 

Share-based compensation

 

67

 

103

 

Deferred taxes

 

43

 

(29

)

Excess and obsolete inventory-related charges

 

15

 

13

 

Translation gain from liquidation of a subsidiary

 

(25

)

 

Asset impairment charges

 

4

 

8

 

Net loss (gain) on sale of investments

 

4

 

(2

)

Net loss (gain) on sale of assets

 

2

 

(13

)

Other

 

 

1

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

16

 

(9

)

Inventory

 

(38

)

(46

)

Accounts payable

 

(10

)

(14

)

Employee compensation and benefits

 

(74

)

(50

)

Income taxes and other taxes payable

 

(71

)

11

 

Other current assets and liabilities

 

43

 

23

 

Other long-term assets and liabilities

 

(97

)

(26

)

Net cash provided by operating activities

 

498

 

571

 

Cash flows from investing activities:

 

 

 

 

 

Investments in property, plant and equipment

 

(110

)

(115

)

Proceeds from sale of property, plant and equipment

 

14

 

12

 

Purchase of investments

 

(256

)

 

Proceeds from sale of investments

 

133

 

12

 

Change in restricted cash and cash equivalents, net

 

33

 

1

 

Purchase of minority interest

 

(14

)

 

Proceeds from sale of intangibles and assets, net

 

 

14

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

(171

)

(311

)

Net cash used in investing activities

 

(371

)

(387

)

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock under employee stock plans

 

198

 

344

 

Proceeds from revolving credit facility

 

490

 

 

Repayment of revolving credit facility

 

(280

)

 

Repayment of debt

 

 

(4

)

Treasury stock repurchases

 

(750

)

(1,313

)

Net cash used in financing activities

 

(342

)

(973

)

 

 

 

 

 

 

Effect of exchange rate movements

 

29

 

13

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(186

)

(776

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,826

 

2,262

 

Cash and cash equivalents at end of period

 

$

1,640

 

$

1,486

 

 

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

 

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AGILENT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1. OVERVIEW

 

Agilent Technologies, Inc. (“we”, “Agilent” or the “company”), incorporated in Delaware in May 1999, is a measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries.

 

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

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Reclassifications. Long-term investments as of October 31, 2007 have been reclassified from other assets to conform to the more detailed presentation used in 2008.

 

Basis of Presentation. We have prepared the accompanying financial data for the three and nine months ended July 31, 2008 and 2007 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The following discussion should be read in conjunction with our 2007 Annual Report on Form 10-K.

 

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present our condensed consolidated balance sheet as of July 31, 2008 and October 31, 2007, condensed consolidated statement of operations for the three and nine months ended July 31, 2008 and 2007, and condensed consolidated statement of cash flows for the nine months ended July 31, 2008 and 2007.

 

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

 

3. NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority and provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN No. 48 is effective for fiscal years beginning after December 15, 2006, and was effective for Agilent on November 1, 2007.  See Note 5, “Provision for Taxes”, for additional information, including the effects of adoption on our condensed consolidated financial statements.

 

Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS No. 157”) is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of SFAS No. 157 on our condensed consolidated financial statements. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (“FSP No. 157-1”) and FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”). FSP No. 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP No. 157-2 delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS No. 157 on our

 

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condensed consolidated financial statements for items within the scope of FSP No. 157-2 which will become effective for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133”, (“SFAS No. 161”), which requires additional disclosures about objectives and strategies for using derivative instruments, how the derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and related interpretations, and how the derivative instruments and related hedged items affect our financial statements. SFAS No. 161 also requires disclosures about credit risk-related contingent features in derivative agreements.  SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and will be applied prospectively. We are currently evaluating the impact of SFAS No. 161 on our condensed consolidated financial statements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).  FSP No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and will be applied prospectively. We are currently evaluating the impact of adopting FSP No. 142-3 on our condensed consolidated financial statements.

 

4. SHARE-BASED COMPENSATION

 

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

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in millions, except

 

(in millions, except

 

 

 

per share data)

 

per share data)

 

Cost of products

 

$

3

 

$

6

 

$

14

 

$

27

 

Research and development

 

3

 

4

 

11

 

18

 

Selling, general and administrative

 

12

 

17

 

42

 

58

 

Total share-based compensation expense

 

$

18

 

$

27

 

$

67

 

$

103

 

 

Share-based compensation capitalized within inventory at July 31, 2008 and 2007 was zero. The windfall tax benefit realized from exercised stock options and similar awards was immaterial for the three and nine months ended July 31, 2008 and 2007.

 

The following assumptions were used to estimate the fair value of the options granted, ESPP purchases and LTPP grants. During the three months ended July 31, 2008 we had no option or LTPP grants.

 

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Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Stock Option Plans:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

 

5.0

%

3.2

%

4.6

%

Dividend yield

 

 

0

%

0

%

0

%

Weighted average volatility

 

 

25

%

33

%

29

%

Expected life

 

 

4.6 yrs

 

4.6 yrs

 

4.6 yrs

 

 

 

 

 

 

 

 

 

 

 

ESPP:

 

 

 

 

 

 

 

 

 

Weighted average risk-free interest rate

 

1.7

%

5.1

%

2.9

%

4.8

%

Dividend yield

 

0

%

0

%

0

%

0

%

Weighted average volatility

 

30

%

23

%

31

%

31

%

Expected life

 

0.5 yrs

 

0.5-1.5 yrs

 

0.5-1 yr

 

0.5-2 yrs

 

 

 

 

 

 

 

 

 

 

 

LTPP:

 

 

 

 

 

 

 

 

 

Volatility of Agilent shares

 

 

30

%

27

%

31

%

Volatility of selected peer-company shares

 

 

15%-57

%

17%-52

%

15%-57

%

Price-wise correlation with selected peers

 

 

29

%

24

%

29

%

 

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

 

The expected stock price volatility assumption for employee stock option awards and our employee stock purchases made under our ESPP was determined using the implied volatility for the three and nine months ended July 31, 2008 and 2007. We estimate the stock price volatility using the implied volatility of Agilent’s publicly traded, similarly priced, stock options. We have determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than using historical volatility or a combined method of determining volatility.

 

5. PROVISION FOR TAXES

 

We recorded $46 million and $96 million of income tax provision for the three and nine months ended July 31, 2008. The tax provision for the three and nine months ended July 31, 2008, includes a benefit of zero and $12 million, respectively, for effectively settled issues related to foreign audits. The tax provision for the three and nine months ended July 31, 2008, includes an expense of $7 million and $10 million, respectively, for interest and penalties. We recorded $5 million and $11 million of income tax provision for the three and nine months ended July 31, 2007. The tax provision for the three months ended July 31, 2007, includes a benefit of $30 million related to valuation allowance adjustments based on changes in other comprehensive income (“OCI”) items during the nine months ended July 31, 2007. The tax provision for the nine months ended July 31, 2007, includes the same valuation allowance adjustments for OCI items and a benefit of $50 million related to the reversal of a tax reserve for potential non-U.S. exposures where the statute of limitations expired. These benefits were treated as discrete events during the first and third quarters of fiscal 2007, respectively. The provision for taxes was recorded for income generated in jurisdictions other than the U.S., U.K., Puerto Rico and the Netherlands in which we have partial or full valuation allowances. We intend to maintain partial or full valuation allowances in the U.S., U.K., Puerto Rico and the Netherlands until sufficient positive evidence exists to support the reversal of the valuation allowances.

 

Effective at the beginning of the first quarter of 2008, we adopted FIN No. 48. FIN No. 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement.

 

As a result of the implementation of FIN No. 48, we increased the liability for net unrecognized tax benefits by $74 million, and accounted for the increase as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $74 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $909

 

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million. We historically classified unrecognized tax benefits in current taxes payable, or as reductions to tax receivables or net deferred tax assets. As a result of adopting FIN No. 48, approximately $355 million of unrecognized tax benefits and related interest and penalties were reclassified to long-term income taxes payable from current taxes payable. Most of these gross unrecognized tax benefits would affect the effective tax rate, if realized.

 

We continue to include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the condensed consolidated statement of operations. As of the date of adoption of FIN No. 48, we had accrued $35 million for the payment of interest and penalties relating to unrecognized tax benefits.

 

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

 

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

 

We are subject to ongoing tax examinations of our tax returns by the IRS and other tax authorities in various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. These assessments can require considerable judgments. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the accrual of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

 

6. NET INCOME PER SHARE

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31,

 

July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in millions)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

169

 

$

185

 

$

462

 

$

458

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted-average shares

 

362

 

392

 

365

 

400

 

Potentially dilutive common stock equivalents

 

10

 

15

 

10

 

12

 

Diluted weighted-average shares

 

372

 

407

 

375

 

412

 

 

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

 

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

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

Options to purchase shares of common stock (in millions)

 

6

 

4

 

6

 

5

 

Weighted-average exercise price

 

$

45

 

$

50

 

$

45

 

$

47

 

Average common stock price

 

$

36

 

$

38

 

$

34

 

$

35

 

 

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

 

The following table summarizes the company’s short-term debt as of July 31, 2008:

 

 

 

July 31,
2008

 

 

 

(in millions)

 

World Trade debt

 

$

1,500

 

Credit facility

 

210

 

Other debt

 

1

 

Total short-term debt

 

$

1,711

 

 

World Trade Debt

 

In January 2006, Agilent Technologies World Trade, Inc., a consolidated wholly owned subsidiary of Agilent (“World Trade”), entered into a five-year Master Repurchase Agreement and related Confirmation (together, the “Repurchase Agreement”) with a counterparty pursuant to which World Trade sold 15,000 Class A preferred shares of one of its wholly owned subsidiaries to the counterparty, having an aggregate liquidation preference of $1.5 billion. (the “Purchased Securities”).  Subsequent to an amendment signed in December 2007, the $1.5 billion obligation of World Trade to repurchase the preferred shares has been classified as short-term debt on our condensed consolidated balance sheet.  In March 2008, World Trade received a notice of acceleration to obligate World Trade to repurchase the Purchased Securities on July 16, 2008. In June 2008, World Trade entered into an amendment to the Repurchase Agreement to extend the obligation of World Trade to repurchase the Purchased Securities from July 16, 2008 to November 17, 2008.

 

On August 7, 2008 World Trade entered into a further amendment to provide World Trade the right to accelerate the date of repurchase of all or any portion of the Purchased Securities from November 17, 2008 to October 20, 2008, provided that World Trade gives notice by September 15, 2008. World Trade is obligated to make quarterly payments to the counterparty at a rate per annum, reset quarterly, equal to the three-month London inter-bank offered rate (“LIBOR”) plus 52 basis points for the period through July 16, 2008 and 235 basis points for the period from July 17, 2008 through November 17, 2008. The amortization of debt issuance costs was $16 million for the nine months ended July 31, 2008.

 

Credit Facility

 

On May 11, 2007, we entered into a five-year credit agreement, which provides for a $300 million unsecured credit facility that will expire on May 11, 2012. As of July 31, 2008, we had an outstanding balance of $210 million on the credit facility and it has been classified as short-term debt in our condensed consolidated balance sheet.

 

On June 13, 2008, we entered into a Second Amendment to our five-year credit agreement.  Pursuant to the Second Amendment, the existence of the accelerated obligation of World Trade to repurchase the Purchased Securities by November 17, 2008 will constitute an event of default, unless Agilent shall have satisfied the obligation or entered into definitive principal documentation with one or more counterparties regarding a transaction which would satisfy the World Trade repurchase obligation on or prior to that date that is at least three business days prior to the date upon which the World Trade repurchase obligation is due. If a default were to occur under the credit agreement, the lenders could require Agilent to immediately repay any outstanding debt under the credit facility.

 

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Table of Contents

 

Short-Term Restricted Cash & Cash Equivalents

 

As of July 31, 2008, $1,570 million was reported as short-term restricted cash and cash equivalents on our condensed consolidated balance sheet. This amount consists of short-term restricted commercial paper maintained in connection with our World Trade debt obligations per the Repurchase Agreement mentioned above.

 

8. INVENTORY

 

 

 

July 31,
2008

 

October 31,
2007

 

 

 

(in millions)

 

Finished goods

 

$

330

 

$

313

 

Work in progress

 

44

 

44

 

Raw materials

 

300

 

286

 

Total inventory

 

$

674

 

$

643

 

 

9. GOODWILL AND OTHER INTANGIBLE ASSETS

 

The following table presents goodwill balances and the movements for each of our reportable segments during the nine months ended July 31, 2008:

 

 

 

Electronic
Measurement

 

Bio-
analytical
Measurement

 

Total

 

 

 

(in millions)

 

Goodwill as of October 31, 2007

 

$

317

 

$

241

 

$

558

 

Foreign currency translation impact

 

16

 

1

 

17

 

Goodwill arising from acquisitions

 

8

 

59

 

67

 

Goodwill as of July 31, 2008

 

$

341

 

$

301

 

$

642

 

 

The components of other intangibles as of July 31, 2008 and October 31, 2007 are shown in the table below:

 

 

 

Purchased Other Intangible Assets

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net Book
Value

 

 

 

(in millions)

 

As of October 31, 2007:

 

 

 

 

 

 

 

Purchased technology

 

$

280

 

$

173

 

$

107

 

Trademark/tradename

 

31

 

1

 

30

 

Customer relationships

 

82

 

41

 

41

 

Total

 

$

393

 

$

215

 

$

178

 

As of July 31, 2008:

 

 

 

 

 

 

 

Purchased technology

 

$

364

 

$

199

 

$

165

 

Trademark/tradename

 

32

 

3

 

29

 

Customer relationships

 

100

 

53

 

47

 

Total

 

$

496

 

$

255

 

$

241

 

 

We recorded $67 million of goodwill and $103 million of other intangibles during the nine months ended July 31, 2008, related primarily to seven acquisitions and a purchase of the remaining unowned portion of a joint venture. The larger acquisition is described below.  Pro forma disclosures are not presented for these acquisitions, as they are not required.

 

On December 18, 2007, we completed the acquisition of Velocity11, a designer, manufacturer, and marketer of robotic solutions. The aggregate purchase price was approximately $111 million in cash used to purchase 100 percent of Velocity11’s outstanding common shares and vested common stock options that Velocity11 employees held on the close date.

 

Amortization of intangible assets was $14 million and $40 million for the three and nine months ended July 31, 2008 and $13 million and $29 million for the same periods in the prior year.  Future amortization expense related to existing purchased intangible assets is estimated to be $13 million for the remainder of 2008, $48 million for 2009, $43 million for 2010, $39 million for 2011, $31 million for 2012, $20 million for 2013 and $47 million thereafter.

 

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10. INVESTMENTS

 

The following table summarizes the company’s investments as of July 31, 2008 and October 31, 2007:

 

 

 

July 31,
2008

 

October 31,
2007

 

 

 

(in millions)

 

Short-Term

 

 

 

 

 

Available-for-sale investments

 

$

29

 

$

 

Long-Term

 

 

 

 

 

Cost method investments

 

$

20

 

$

24

 

Trading securities

 

62

 

72

 

Available-for-sale investments

 

169

 

98

 

Total

 

$

251

 

$

194

 

 

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

 

Available-for-sale investments at estimated fair value were as follows as of July 31, 2008 and October 31, 2007:

 

 

 

July 31, 2008

 

October 31, 2007

 

 

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

 

 

(in millions)

 

Debt securities

 

$

120

 

$

 

$

(3

)

$

117

 

$

 

$

 

$

 

$

 

Equity securities

 

4

 

10

 

 

14

 

4

 

22

 

 

26

 

Other

 

61

 

6

 

 

67

 

55

 

17

 

 

72

 

 

 

$

185

 

$

16

 

$

(3

)

$

198

 

$

59

 

$

39

 

$

 

$

98

 

 

Other represents shares we own in two special funds that target underlying investments of approximately 40 percent in debt securities and 60 percent in equity securities.  These funds are held for employee benefits in Germany.

 

In February 2008, Agilent traded an externally managed short-term investment for the underlying securities of the investment and now manages those investments internally. The securities received were fixed income debt securities and are held as available-for-sale.  Agilent estimated the fair values based on quoted market prices or pricing models using current market rates. These estimated fair values may not be representative of actual values that could have been realized as of July 31, 2008 or that will be realized in the future.

 

Contractual maturities of available-for-sale debt securities were as follows at July 31, 2008:

 

 

 

Cost

 

Estimated Fair
Value

 

 

 

(in millions)

 

 

 

 

 

 

 

Due in less than 1 year

 

$

29

 

$

29

 

Due in 1-5 years

 

53

 

52

 

Due after 5 years

 

38

 

36

 

 

 

$

120

 

$

117

 

 

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Table of Contents

 

All of our investments, excluding trading securities, are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have a significant adverse effect on the future value of the investment.

 

Charges related to other than temporary impairments were zero and $5 million for the three months ended July 31, 2008 and 2007, respectively. For the nine months ended July 31, 2008 and 2007, charges related to other than temporary impairments were $2 million and $7 million, respectively. These impairment charges were recorded in other income (expense), net in the condensed consolidated statement of operations.

 

Unrealized gains and losses on our trading securities portfolio were $2 million unrealized losses and $4 million unrealized gains for the three months ended July 31, 2008 and 2007, respectively. For the nine months ended July 31, 2008 and 2007, unrealized gains and losses on our trading securities were unrealized losses of $10 million and unrealized gains of $8 million, respectively. These amounts have been included in other income (expense), net in the condensed consolidated statement of operations.

 

Realized gains and losses from the sale of available-for-sale securities were zero for both the three months ended July 31, 2008 and 2007. Realized gains and losses from the sale of available-for-sale securities were $4 million of realized losses and $2 million of realized gains for the nine months ended July 31, 2008 and 2007, respectively. Realized gains and losses from the sale of cost method securities were immaterial for the three and nine months ended July 31, 2008 and 2007, respectively. These amounts have been included in other income (expense), net in the condensed consolidated statement of operations.

 

11. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS

 

Components of net periodic costs. For the three and nine months ended July 31, 2008 and 2007, our net pension and post retirement benefit costs were comprised of the following:

 

 

 

Pensions

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Three Months Ended July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

9

 

$

10

 

$

10

 

$

9

 

$

1

 

$

1

 

Interest cost on benefit obligation

 

10

 

10

 

19

 

16

 

7

 

6

 

Expected return on plan assets

 

(14

)

(14

)

(28

)

(23

)

(8

)

(7

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

(3

)

(1

)

5

 

8

 

 

1

 

Prior service cost

 

 

 

 

 

(3

)

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net plan (income) costs

 

$

2

 

$

5

 

$

6

 

$

10

 

$

(3

)

$

(1

)

 

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Table of Contents

 

 

 

Pensions

 

 

 

 

 

U.S. Plans

 

Non-U.S.
Plans

 

U.S. Post Retirement
Benefit Plans

 

 

 

Nine Months Ended July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

 

 

(in millions)

 

Service cost—benefits earned during the period

 

$

27

 

$

30

 

$

29

 

$

27

 

$

3

 

$

3

 

Interest cost on benefit obligation

 

29

 

30

 

57

 

48

 

21

 

20

 

Expected return on plan assets

 

(42

)

(42

)

(83

)

(69

)

(24

)

(21

)

Amortization and deferrals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial (gain) loss

 

(9

)

(3

)

15

 

24

 

 

1

 

Prior service cost

 

 

 

 

 

(9

)

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net plan costs (income)

 

5

 

15

 

18

 

30

 

(9

)

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailments and settlements

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net plan (income) costs

 

$

5

 

$

14

 

$

18

 

$

30

 

$

(9

)

$

(3

)

 

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

 

We contributed approximately zero and $2 million to our U.S. defined benefit plans during the three and nine months ended July 31, 2008 and zero and $8 million respectively, for the same periods in 2007. We contributed approximately $16 million and $35 million to our non-U.S. defined benefit plans during the three and nine months ended July 31, 2008 and $10 million and $26 million, respectively, for the same periods in 2007. We expect to contribute approximately $5 million to our non-U.S. defined benefit plans during the remainder of fiscal 2008.

 

12. WARRANTIES

 

We accrue for warranty costs in accordance with SFAS No. 5, “Accounting for Contingencies”, based on historical trends in warranty charges as a percentage of gross product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. Our warranty terms typically extend for one year from the date of delivery.

 

 

 

FY 2008

 

FY 2007

 

 

 

(in millions)

 

Beginning balance as of November 1,

 

$

29

 

$

29

 

Accruals for warranties issued during the period

 

38

 

42

 

Changes in estimates

 

 

(1

)

Settlements made during the period

 

(38

)

(41

)

Ending balance as of July 31,

 

$

29

 

$

29

 

 

13. RESTRUCTURING

 

Our FY2005 Plan, announced in the fourth quarter of 2005, is complete.  The remaining obligations under this and previous plans relate primarily to lease obligations that are expected to be satisfied over approximately the next four years.

 

A summary of restructuring activity for the nine months ended July 31, 2008 is shown in the table below:

 

 

 

Workforce
Reduction

 

Consolidation
of Excess
Facilities

 

Total

 

 

 

(in millions)

 

Ending balance as of October 31, 2007

 

$

1

 

$

31

 

$

32

 

Income statement expense

 

 

(4

)

(4

)

Cash payments

 

(1

)

(15

)

(16

)

Ending balance as of July 31, 2008

 

$

 

$

12

 

$

12

 

 

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Table of Contents

 

The restructuring accrual for all plans, which totaled $12 million as of July 31, 2008 and $32 million as of October 31, 2007, is recorded in other accrued liabilities and other long-term liabilities on the condensed consolidated balance sheet and represents estimated future cash outlays.

 

In the first quarter of 2008, we reduced our estimated liability relating to the consolidation of excess facilities by $4 million due to changes in the underlying property markets. There were no charges in the condensed consolidated statement of operations for both the three months ended July 31, 2008 and the three months ended July 31, 2007 from all restructuring plans.

 

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

 

 

 

Nine Months Ended

 

 

 

July 31,

 

 

 

2008

 

2007

 

 

 

(in millions)

 

Cost of products

 

$

 

$

6

 

Research and development

 

 

1

 

Selling, general and administrative

 

(4

)

9

 

Total restructuring and asset impairment charges

 

$

(4

)

$

16

 

 

14. SENIOR NOTES

 

In October 2007, the company issued an aggregate principal amount of $600 million in senior notes. The senior notes were issued at 99.60% of their principal amount. The notes will mature on November 1, 2017, bear interest at a fixed rate of 6.50% per annum, payable semi-annually on May 1st and November 1st of each year, commencing on May 1, 2008. The senior notes are unsecured and will rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. The company incurred issuance costs of $5 million in connection with the senior notes which have been included in “Other assets” in the condensed consolidated balance sheet. These debt issuance costs are being amortized to interest expense over the term of the senior notes.

 

Upon the closing of the offering of the senior notes, we entered into interest rate swaps with an aggregate notional amount of $600 million. Under the interest rate swaps, we will receive fixed-rate interest payments and will make payments based on the six month US dollar LIBOR. The economic effect of these swaps will be to convert the fixed-rate interest expense on the senior notes to a variable LIBOR-based interest rate. The swaps are accounted for as a fair value hedge of the interest rate risk inherent in the senior notes and therefore the fair value of the swap will be recorded on our condensed consolidated balance sheet at each period end until maturity in 2017. In addition, as a result of the fair value hedge, the senior notes are reflected on our condensed consolidated balance sheet at fair value, reflecting the change in their value attributable to interest rate risk. The hedging relationship qualifies for the shortcut method of assessing hedge effectiveness, and consequently we do not expect any ineffectiveness during the life of the swap and any movement in the value of the swap would be reflected in the movement in fair value of the senior notes. At July 31, 2008, the fair value of the swap was an asset of $6 million. As a result, the carrying value of the senior notes now reflects the $6 million to reflect the increase in fair value attributable to interest rate risk.

 

15. COMPREHENSIVE INCOME

 

The following table presents the components of comprehensive income:

 

 

 

Three Months Ended
July 31,

 

 

 

2008

 

2007

 

 

 

(in millions)

 

Net income

 

$

169

 

$

185

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain (loss) on investments

 

(5

)

22

 

Change in unrealized loss on derivative instruments

 

(6

)

(8

)

Foreign currency translation

 

(11

)

17

 

Change in deferred net pension cost

 

(2

)

 

Deferred taxes

 

2

 

(28

)

Comprehensive income

 

$

147

 

$

188

 

 

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Table of Contents

 

 

 

Nine Months Ended
July 31,

 

 

 

2008

 

2007

 

 

 

(in millions)

 

Net income

 

$

462

 

$

458

 

Other comprehensive income:

 

 

 

 

 

Change in unrealized gain (loss) on investments

 

(26

)

23

 

Change in unrealized gain (loss) on derivative instruments

 

2

 

(6

)

Translation gain reclassified into earnings related to liquidation of a subsidiary

 

(25

)

 

Foreign currency translation

 

103

 

62

 

Change in deferred net pension cost

 

(5

)

 

Deferred taxes

 

(2

)

(31

)

Comprehensive income

 

$

509

 

$

506

 

 

16. STOCK REPURCHASE PROGRAM

 

On November 14, 2007 the Audit and Finance Committee of the Board of Directors approved a share-repurchase program of up to $2 billion of Agilent’s common stock over a two year period. The following repurchases under the above program were completed in the periods presented below:

 

Three months ended

 

Number of
Common
Stock Repurchased

 

Amount of
Common
Stock Repurchased

 

 

 

(in millions)

 

January 31, 2008

 

6.6

 

$

237

 

April 30, 2008

 

8.3

 

263

 

July 31, 2008

 

7.0

 

250

 

Program to date as of July 31, 2008

 

21.9

 

$

750

 

 

All such shares and related costs are held as treasury stock and accounted for using the cost method. The remaining amount that is authorized under the plan is $1.25 billion.

 

17. SEGMENT INFORMATION

 

We are a measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. Agilent has two primary businesses — bio-analytical measurement and electronic measurement — each of which comprises a reportable segment. The segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining our reportable segments.

 

A significant portion of the segments’ expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments, and the allocations have been determined on a basis that we considered to be a reasonable reflection of the utilization of services provided to or benefits received by the segments.

 

Upon the adoption of SFAS No. 123 (R) in the first quarter of 2006, we included share-based compensation expense in our GAAP results but did not include such expense in our segment reporting. In the third quarter of 2008, we included share-based compensation expense in our segment results. All segment numbers have been reclassified to conform to the current period presentation.

 

The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily in conformity with generally accepted accounting principles in the U.S. The performance of each segment is measured based on several metrics, including adjusted income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.

 

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

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Three months ended July 31, 2008:

 

 

 

 

 

 

 

Total net revenue

 

$

878

 

$

566

 

$

1,444

 

Segment income from operations

 

$

135

 

$

101

 

$

236

 

Three months ended July 31, 2007:

 

 

 

 

 

 

 

Total net revenue

 

$

874

 

$

500

 

$

1,374

 

Segment income from operations

 

$

116

 

$

82

 

$

198

 

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Nine months ended July 31, 2008:

 

 

 

 

 

 

 

Total net revenue

 

$

2,614

 

$

1,679

 

$

4,293

 

Segment income from operations

 

$

340

 

$

276

 

$

616

 

Nine months ended July 31, 2007:

 

 

 

 

 

 

 

Total net revenue

 

$

2,527

 

$

1,447

 

$

3,974

 

Segment income from operations

 

$

279

 

$

223

 

$

502

 

 

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

 

 

 

Three Months Ended
July 31,

 

Nine Months Ended
July 31,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

(in millions)

 

Total reportable segments’ income from operations

 

$

236

 

$

198

 

$

616

 

$

502

 

Restructuring and asset impairment

 

(5

)

(11

)

(23

)

(30

)

Donation to Agilent Foundation

 

 

 

 

(20

)

Net translation gain from liquidation of a subsidiary

 

 

 

11

 

 

Acceleration of debt issuance costs

 

(8

)

 

(13

)

 

Interest income

 

23

 

42

 

89

 

136

 

Interest expense

 

(23

)

(23

)

(77

)

(68

)

Other income (expense), net

 

5

 

3

 

5

 

7

 

Amortization of intangibles and other

 

(13

)

(19

)

(50

)

(58

)

Income from operations before taxes, as reported

 

$

215

 

$

190

 

$

558

 

$

469

 

 

In the three months ended April 30, 2008 we liquidated a subsidiary and recorded a net translation gain of $11 million which consists of $25 million cumulative translation gain offset by a $14 million loss on a net investment hedge.

 

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

 

 

 

Electronic
Measurement

 

Bio-analytical
Measurement

 

Total

 

 

 

(in millions)

 

Assets:

 

 

 

 

 

 

 

As of July 31, 2008

 

$

2,090

 

$

1,549

 

$

3,639

 

As of October 31, 2007

 

$

2,025

 

$

1,307

 

$

3,332

 

 

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

 

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

 

Basis of Presentation

 

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

 

Executive Summary

 

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

 

For the three and nine months ended July 31, 2008, total orders were $1.39 billion and $4.31 billion, respectively, an increase of  6 percent and 9 percent in comparison to the same periods last year.  Excluding the acquisitions of Stratagene and Velocity 11, which closed in June 2007 and December 2007, respectively, order growth was 4 percent and 7 percent for the three and nine months ended July 31, 2008, respectively, when compared to the same periods last year.

 

 Net revenue of $1.44 billion and $4.29 billion for the three and nine months ended July 31, 2008 was up 5 percent and 8 percent, respectively, when compared to the same periods last year. Excluding the acquisitions of Stratagene and Velocity11, revenue growth was 4 percent and 6 percent for the three and nine months ended July 31, 2008, respectively, when compared to 2007. The movement in currency accounted for approximately 4 percentage points of the revenue growth in both the three and nine months ended July 31, 2008 when compared to the same periods last year.

 

Net income for the three and nine months ended July 31, 2008 was $169 million and $462 million, respectively, and $185 million and $458 million for the corresponding periods last year.  For the three and nine months ended July 31, 2008, net interest income decreased $27 million and $69 million, respectively. The decrease in interest income is due to the decrease in interest rates and the increase in interest expense is due to the increase in debt compared to last year. For the three months ended July 31, 2007, the provision for income taxes includes a $30 million discrete tax benefit related to valuation allowance adjustments based on changes in other comprehensive income items. For the nine months ended July 31, 2007, the provision for income taxes also includes a benefit of $50 million related to the reversal of a tax reserve for potential non-U.S. exposures where the statute of limitations expired. The effect of currency movement had no net impact in the year-over-year comparison of net income in the three and nine months ended July 31, 2008.

 

In the nine months ended July 31, 2008, we generated $498 million of cash from operations compared with $571 million generated in the nine months of the prior year. The decrease in year-over-year operating cash was mainly driven by higher tax cash payments related to the transfer of intellectual property between affiliated entities and by lower interest income receipts and higher interest payments.

 

 Looking forward, our continued focus will be to grow revenue at a faster rate than the electronic measurement and bio-analytical markets, primarily through increasing market share, expanding our served market size with new products and

 

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channels and by complementary acquisitions. Our primary strategy is to pursue profitable growth by expanding our leadership in core/adjacent markets and seeking revenue growth opportunities.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

Share-based compensation. The expected stock price volatility assumption was determined using the implied volatility for our stock awards. We estimate the stock price volatility using the implied volatility of Agilent’s publicly traded, similarly priced, stock options. We have determined that implied volatility is more reflective of market conditions and a better indicator of expected volatility than using historical volatility or a combined method of determining volatility. In reaching this conclusion, we have considered many factors including the extent to which our options are traded and our ability to find traded options with similar terms and prices to the options we are valuing. A 10 percent point increase in our estimated volatility from 31 percent to 41 percent would generally increase the value of an award and the associated compensation cost by approximately 23 percent if no other factors were changed.

 

Goodwill and purchased intangible assets. No events occurred or circumstances changed during the nine months ended July 31, 2008 that required us to test goodwill or purchased intangibles for impairment.

 

Accounting for income taxes. Effective at the beginning of the first quarter of 2008, we adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN No. 48”). As a result of the implementation, we recognize liabilities for uncertain tax positions based on the two-step approach prescribed in the interpretation. The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes.  We reevaluate these uncertain tax positions on a quarterly basis.  This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.  Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period. See Note 5, “Provision for Taxes”, for additional information, including the effects of adoption on our condensed consolidated financial statements.

 

Other critical accounting policies were unchanged in the three and nine months ended July 31, 2008.

 

Adoption of New Pronouncements

 

See Note 3, “New Accounting Pronouncements,” to the condensed consolidated financial statements for a description of new accounting pronouncements.

 

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Table of Contents

 

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 condensed 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 (rolling twelve month period). Therefore, we are exposed to currency fluctuations over the longer term.

 

Results from Operations

 

Orders and Net Revenue

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

 

 

(in millions)

 

 

 

 

 

Orders

 

$

1,387

 

$

1,308

 

$

4,312

 

$

3,958

 

6

%

9

%

Net revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

1,195

 

$

1,140

 

$

3,570

 

$

3,300

 

5

%

8

%

Services and other

 

249

 

234

 

723

 

674

 

6

%

7

%

Total net revenue

 

$

1,444

 

$

1,374

 

$

4,293

 

$

3,974

 

5

%

8

%

 

Agilent orders increased 6 percent and 9 percent for the three and nine months ended July 31, 2008, respectively, compared to the same periods in 2007. The bio-analytical measurement business continued to deliver consistent order growth of 19 percent and 20 percent for the three and nine month periods ended July 31, 2008, respectively. Excluding Stratagene and Velocity11, orders grew 15 percent and 14 percent in the three and nine months ended July 31, 2008, respectively, when compared to the prior year. Electronic measurement orders decreased 2 percent and increased 2 percent, respectively, for the three and nine months ended July 31, 2008.

 

Agilent net revenue increased 5 percent and 8 percent for the three and nine months ended July 31, 2008, respectively, compared to the same periods last year. The bio-analytical measurement business achieved revenue growth of 13 percent and 16 percent for the three and nine months ended July 31, 2008, respectively, showing strong performance in both our chemical analysis and life sciences businesses.  Excluding Stratagene and Velocity11, revenues increased 10 percent and 11 percent for the three and nine months ended July 31, 2008, respectively, when compared to the prior year. The impact of currency movement accounted for an increase of 5 percentage points of revenue growth in both the three and nine months ended July 31, 2008, when compared to the prior year. Electronic measurement business revenues were flat and increased by 3 percent for the three and nine months ended July 31, 2008, respectively, compared with the same periods in the prior year. Currency movement contributed 3 percentage points of revenue growth for both the three and nine months ended July 31, 2008 when compared to the prior year. Our communications test business grew 9 percent in the three months ended July 31, 2008 with strength in R&D markets and the continuing recovery of handset manufacturing test. General purpose test revenues decreased 5 percent in the three months ended July 31, 2008, with weakness in the computer and semi-conductor test market and aerospace and defense was flat.

 

Services and other revenue include revenue generated from servicing our installed base of products, warranty extensions and consulting. Services and other revenue for the three and nine months ended July 31, 2008 increased 6 percent and 7 percent, respectively, as compared to the same periods last year.

 

Operating Results

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

Total gross margin

 

55.6

%

55.2

%

55.1

%

54.8

%

 

 

Operating margin

 

15.1

%

12.2

%

12.6

%

9.9

%

3

ppts

3

ppts

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

170

 

$

170

 

$

534

 

$

511

 

 

5

%

Selling, general and administrative

 

$

415

 

$

420

 

$

1,289

 

$

1,274

 

(1

)%

1

%

 

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Total gross margins for the three and nine months ended July 31, 2008 were flat when compared to the same periods last year. Excluding the impact of currency, gross margins increased by approximately 1 percentage point for both the three and nine months ended July 31, 2008 when compared to the same periods in 2007. Operating margins increased by 3 percentage points for both the three and nine months ended July 31, 2008 when compared with the same periods last year.

 

Research and development expenses were flat and increased 5 percent for the three and nine months ended July 31, 2008, respectively, compared to the same periods last year. The increase in expense due to currency movement was offset by cost savings in the three months ended July 31, 2008. We remain committed to bringing new products to the market, and have focused our development efforts on key strategic opportunities in order to align our business with available markets and position ourselves to capture market share.

 

Selling, general and administrative expenses decreased 1 percent and increased 1 percent for the three and nine months ended July 31, 2008, respectively, compared to the same period last year. Excluding the impact of currency, selling, general and administrative expenses decreased 5 percent and 3 percent for the three and nine months ended July 31, 2008, respectively, when compared to the same period last year.

 

At July 31, 2008, our headcount was approximately 19,560 as compared to approximately 19,390 at July 31, 2007. The increase in workforce is largely due to acquisitions.

 

General Infrastructure and Shared Services

 

Our global infrastructure organization (“GIO”) remains a key component of our operating model and has proactively taken action to fully prepare for potential economic disruptions. GIO, which includes finance, IT and workplace services has aggressively focused on ways to reduce expenses and leverage our infrastructure while continuing to develop the infrastructure to support our Asian business presence and integrate our recent acquisitions.

 

Provision for Income Taxes

 

For the three and nine months ended July 31, 2008, we recorded an income tax provision of $46 million and $96 million, respectively, compared to an income tax provision of $5 million and $11 million for the same periods last year. The tax provision for the three and nine months ended July 31, 2008, includes a benefit of zero and $12 million, respectively, for effectively settled issues related to foreign audits. The tax provision for the three and nine months ended July 31, 2008, includes an expense of $7 million and $10 million, respectively, for interest and penalties. The tax provision for the three months ended July 31, 2007, includes a benefit of $30 million related to valuation allowance adjustments based on changes in other comprehensive income (“OCI”) items during the nine months ended July 31, 2007. The tax provision for the nine months ended July 31, 2007, includes the same valuation allowance adjustments for OCI items and a benefit of $50 million related to the reversal of a tax reserve for potential non-U.S. exposures where the statute of limitations expired. These benefits were treated as discrete events during the first and third quarters of fiscal 2007. The provision for taxes was recorded for income generated in jurisdictions other than the U.S., U.K., Puerto Rico and the Netherlands in which we have partial or full valuation allowances. We intend to maintain partial or full valuation allowances in the U.S., U.K., Puerto Rico and the Netherlands until sufficient positive evidence exists to support the reversal of the valuation allowances.

 

For 2008, our current expectation of the annual effective tax rate is 17.5 percent. The income tax rate was 17 percent for the nine months ended July 31, 2008. Excluding the impact of quarterly discrete tax adjustments, we anticipate the full-year 2008 effective tax rate to be approximately 16.5 percent.  The overall tax rate reflects taxes in all jurisdictions except the U.S. and foreign jurisdictions in which income tax expense or benefit continues to be offset by adjustments to the valuation allowances. This tax rate may change over time as the amount or mix of income and taxes changes. Our effective tax rate is calculated using our projected annual pre-tax income or loss from continuing operations and is affected by research tax credits, the expected level of other tax benefits, the effects of business acquisitions and dispositions, the impact of changes to valuation allowances, changes in other comprehensive income, as well as changes in the mix of income and losses in the jurisdictions in which we operate that have varying statutory rates.

 

Effective at the beginning of the first quarter of 2008, we adopted FIN No. 48. FIN No. 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” The first step is to evaluate each uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon ultimate settlement.

 

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As a result of the implementation of FIN No. 48, we increased the liability for net unrecognized tax benefits by $74 million, and accounted for the increase as a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $74 million. The total amount of gross unrecognized tax benefits as of the date of adoption was $909 million. We historically classified unrecognized tax benefits in current taxes payable, or as reductions to tax receivables or net deferred tax assets. As a result of adopting FIN No. 48, approximately $355 million of unrecognized tax benefits and related interest and penalties were reclassified to long-term income taxes payable from current taxes payable. Most of these gross unrecognized tax benefits would affect the effective tax rate, if realized.

 

We continue to include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the condensed consolidated statement of operations. As of the date of adoption of FIN No. 48, we had accrued $35 million for the payment of interest and penalties relating to unrecognized tax benefits.

 

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

 

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

 

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 accrual of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.

 

Segment Overview

 

Agilent is the world’s premier measurement company providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. Agilent has two primary businesses focused on the electronic measurement market and the bio-analytical measurement market.

 

Electronic Measurement

 

Our electronic measurement business provides standard and customized solutions that are used in the design, development, manufacture, installation, deployment and operation of electronic equipment and systems and communications networks and services. Our key product categories include: communications one-box testers, electronic design and simulation tools, digital and photonic test instruments, electronic manufacturing test solutions, internet protocol performance test solutions, logic and protocol analyzers, low-cost general purpose instruments, network analyzers, network assurance solutions, network protocol test solutions, oscilloscopes, semiconductor test solutions, signal sources, spectrum/signal analyzers, surveillance and aerospace defense solutions, and system components products.

 

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Table of Contents

 

Orders and Net Revenue

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

 

 

(in millions)

 

 

 

 

 

Orders

 

$

793

 

$

810

 

$

2,564

 

$

2,503

 

(2

)%

2

%

Net revenue

 

$

878

 

$

874

 

$

2,614

 

$

2,527

 

 

3

%

 

Orders for the three and nine months ended July 31, 2008, declined 2 percent and increased 2 percent, respectively, when compared to the same periods last year.  Our communications test business was driven by strength in wireless manufacturing and broadband R&D and manufacturing markets, while our general purpose test business declined due to weakness in semiconductor-related parametric test markets and the cancellation of an aerospace and defense order of $24 million.

 

Revenue for the three and nine months ended July 31, 2008, was flat and increased 3 percent, respectively, when compared to the same periods last year, as strength in the communications test market was offset by a decline in general purpose test.  Regionally, for the three months ended July 31, 2008, revenue from the Americas was flat, Europe grew 15 percent and Asia declined 5 percent from one year ago due to weakness in Japan.

 

General purpose test revenue of $495 million and $1,528 million for the three and nine months ended July 31, 2008, declined 5 percent and was flat, respectively, compared to the same periods last year.  Within general purpose test, aerospace and defense and other general purpose test markets were flat from one year ago, offset by a decline in the computer and semiconductor test market. Intelligence, surveillance and reconnaissance markets remained strong. The computer and semiconductor test markets were down compared to last year due to a sharp decline in the parametric test market, while digital test improved. Other general test markets were flat with particular caution in electronic manufacturing test markets.

 

Communications test revenues of $383 million and $1,086 million for the three and nine months ended July 31, 2008, increased 9 percent and 8 percent, respectively, compared to the same periods last year. Growth for the three months ended July 31, 2008, was driven by the wireless manufacturing test market, as well as broadband R&D and manufacturing test. Weakness in the communications test market was isolated to the network monitoring and installation and maintenance markets. Investment in the wireless R&D test market continues to focus on high-speed applications, as well as pre-conformance and interoperability test solutions.  A pause in demand for WiMax test solutions was offset by on-going demand for next generation cellular technologies test, such as long-term evolution (“LTE”). Strength in the broadband R&D and manufacturing test market continues to be driven by the convergence of an all internet protocol-based network for service delivery including video, voice, data, and mobile services.

 

Looking forward, we project modest growth in our electronic measurement business. This growth is expected to be driven by our customers’ expansion of wireless 3G coverage and services (high data rate, multi-media services supported by multi-functional handsets), emerging cellular technologies, and continued opportunities in broadband access, voice-over-internet-protocol and fiber-to-the-home, all fueled by consumer demand for video, voice, data converged services. We believe the aerospace and defense market’s overall long-term trend of spending growth in areas of signal intelligence, communications, surveillance and information warfare bodes well for long-term growth in test and measurement sales into this market. This growth potential could be mitigated by potential slowdowns in spending on new communications technologies, governmental budgetary shifts, continued contraction in the semiconductor test market and the current overall macro economic uncertainty in the U.S.

 

Operating Results

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

Gross margin

 

57.3

%

57.5

%

57.3

%

57.1

%

 

 

Operating margin

 

15.3

%

13.3

%

13.0

%

11.0

%

2

ppts

2

ppts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

118

 

$

124

 

$

375

 

$

377

 

(5

)%

(1

)%

Selling, general and administrative

 

$

251

 

$

262

 

$

784

 

$

787

 

(4

)%

 

 

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Gross margins were flat for the three and nine months ended July 31, 2008, compared to the same periods last year, as improvements in product mix and overhead costs were largely offset by the impact of foreign currency movements and competitive pressures.

 

Research and development expenses for the three and nine months ended July 31, 2008 declined 5 percent and 1 percent, respectively, compared to the same periods last year. This decline was driven largely by operational and discretionary spending reductions that exceeded the unfavorable year-over-year impact of currency movements.

 

Selling, general and administrative expenses for the three and nine months ended July 31, 2008, declined 4 percent and were flat, respectively, compared to the same periods last year.  Expenses in this period declined due to significant reductions in operational and discretionary spending, reflecting the structural savings delivered through cost reduction programs and expense controls.

 

Income from operations for the three and nine months ended July 31, 2008 increased $19 million and $61 million, respectively, while our operating margins for both periods improved 2 percentage points.  Structural savings and spending reductions compared to the same periods last year exceeded the unfavorable impact of currency movements.

 

Bio-analytical Measurement

 

Our bio-analytical measurement 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. Our key product categories include: microarrays, microfluidics, gas chromatography, liquid chromatography, mass spectrometry, laser interferometry and microscopy, software and informatics, and related consumables, reagents and services.

 

Orders and Net Revenue

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

 

 

(in millions)

 

 

 

 

 

Orders

 

$

594

 

$

498

 

$

1,748

 

$

1,455

 

19

%

20

%

Net revenue

 

$

566

 

$

500

 

$

1,679

 

$

1,447

 

13

%

16

%

 

Our bio-analytical measurement business continues to see sustained momentum with double-digit growth in orders and revenues on a quarter- and year-to-date basis.  Results were consistent with our normal seasonal patterns and reflected the strong demand across virtually all of our markets.

 

Orders for the three and nine months ended July 31, 2008 grew 19 percent and 20 percent, respectively, when compared to the same periods last year.  The Stratagene and Velocity11 acquisitions contributed 4 percentage points and 6 percentage points of the order growth for the three and nine months ended July 31, 2008, respectively, when compared to the same periods last year.  Foreign currency movements for the three and nine months ended July 31, 2008 accounted for 5 percentage points and 6 percentage points, respectively, of the growth in orders when compared to the same periods last year.  In our chemical analysis business, we continue to see strength from petrochemical and food safety markets.  In life sciences, we saw sustained demand from academic and government markets, offsetting a slowdown in pharmaceutical and biotechnology markets.

 

Revenues for the three and nine months ended July 31, 2008 grew 13 percent and 16 percent, respectively, compared to the same periods last year with solid results seen across both life sciences and chemical analysis end markets.  The Stratagene and Velocity11 acquisitions contributed 3 percentage points and 5 percentage points of the revenue growth for the three and nine months ended July 31, 2008, respectively, when compared to the same periods last year.  Foreign currency movements for the three and nine months ended July 31, 2008 accounted for 5 percentage points of the revenue growth in both periods when compared to last year.  Geographically, revenues were up 15 percent in the Americas, 5 percent in Europe, and 23 percent in Asia for the three months ended July 31, 2008 compared to the same periods last year.

 

Chemical analysis revenue of $319 million and $932 million for the three and nine months ended July 31, 2008, respectively, grew 10 percent in both periods compared to the same periods last year.  Chemical analysis continues to see strength from petrochemical and food safety market, and flat growth in environmental testing solutions.  High petrochemical profits continue to drive capital investments in both instrument replacements and upgrades.  Food testing also posted strong

 

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revenue growth in the three and nine months ended July 31, 2008.  Growth in this sector was driven by recent food safety issues in the U.S. causing updated regulations in China, Malaysia and India and by overall increases made to regulatory standards worldwide.  Environmental was relatively flat and forensics saw modest growth in the three months ended July 31, 2008. Material science is experiencing a decrease in sales into the semiconductor-related capital equipment market driven by weakness in the dynamic random access memory (“DRAM”) market.

 

Life sciences revenue of $247 million and $747 million for the three and nine months ended July 31, 2008, respectively, grew 18 percent and 25 percent compared to the same periods last year.  The Stratagene and Velocity11 acquisitions accounted for 8 percentage points and 13 percentage points of the growth for the three and nine months ended July 31, 2008, when compared to the same periods last year.   For the three and nine months ended July 31, 2008, we saw a slowdown in the pharmaceutical and biotech markets, while our academic and government markets grew at strong rates.  Our acquisition of Stratagene is bolstering our coverage in academia and government customer accounts.  Academic research is moving toward the use of high-end mass spectrometry instrumentation to answer complex biological questions and enhance research on proteins, peptides, and small molecules.  The market continues to see more partnerships and collaborations between not-for-profit organizations, big pharma and biotech.  In Asia Pacific, governments are investing in the modernization of their healthcare systems and improving the quality of pharmaceuticals they produce.

 

Looking forward, we expect our chemical analysis market growth to be driven by investments in food safety on a global basis and in environmental testing in China, India and selected Eastern European countries.  Our LC/MS and GC/MS systems are well positioned to address these market needs.  In life sciences we are uniquely positioned with our recent acquisitions to expand the range of our technology offering along the life sciences workflow. Workflow solutions can span from sample delivery and preparation through sample measurement to data analysis and management. In addition, our ongoing expansion of the liquid chromatography/mass spectroscopy (“LC/MS”) portfolio, augmented with focused R&D programs will enable Agilent to address the high-growth proteomics and metabolomics market needs.

 

Operating Results

 

 

 

Three Months Ended

 

Nine Months Ended

 

Year over Year Change

 

 

 

July 31,

 

July 31,

 

Three

 

Nine

 

 

 

2008

 

2007

 

2008

 

2007

 

Months

 

Months

 

Gross margin

 

54.6

%

53.8

%

53.8

%

53.1

%

1

ppt

1

ppt

Operating margin

 

17.8

%

16.5

%

16.4

%

15.4

%

1

ppt

1

ppt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

52

 

$

42

 

$

153

 

$

125

 

23

%

22

%

Selling, general and administrative

 

$

156

 

$

144

 

$

475

 

$

419

 

8

%

13

%

 

Gross margins improved by 1 percentage point for both the three and nine months ended July 31, 2008, compared to the same periods last year, as improvements in product mix and overhead costs were offset by the impact of foreign currency movements and competitive pressures.

 

Research and development expenses increased 23 percent and 22 percent, respectively, for the three and nine months ended July 31, 2008, compared to the same periods last year.  The Stratagene and Velocity11 acquisitions accounted for 10 percentage points and 12 percentage points of this increase in the three and nine months ended July 31, 2008, respectively, compared to the same periods last year.  Excluding Stratagene and Velocity11, the increase was driven by our investments in research and development facilities in life sciences and the impact of foreign currency movement.

 

Selling, general and administrative expenses increased 8 percent and 13 percent, respectively, for the three and nine months ended July 31, 2008 compared to the same periods last year.  The Stratagene and Velocity11 acquisitions accounted for 6 percentage points and 8 percentage points of this growth in the three and nine months ended July 31, 2008 compared with the same periods last year.  Modest growth in spending in the three and nine months ended July 31, 2008 was due to significant reductions in operational and discretionary spending, reflecting the structural savings delivered through cost reduction programs and expense controls.

 

Income from operations for the three and nine months ended July 31, 2008 increased $19 million and $53 million, respectively, while our operating margins for both periods improved 1 percentage point.  Structural savings and spending reductions compared to the same periods last year exceeded the unfavorable impact of currency movements.

 

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FINANCIAL CONDITION

 

Liquidity and Capital Resources

 

Our cash balances are held in numerous locations throughout the world, including substantial amounts held outside of the United States. Most of the amounts held outside of the United States could be repatriated to the United States but, under current law, would be subject to United States federal income taxes, less applicable foreign tax credits. Repatriation of some foreign balances