NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview.
Agilent Technologies, Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
Basis of Presentation.
The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and is in conformity with U.S. generally accepted accounting principles ("GAAP"). Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of Consolidation.
The consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revision of Services and Other, Product Net Revenue and related Cost of Sales.
In 2018, we identified a stream of service revenue that had been presented as product revenue in the prior years. We have revised prior year's presentation to show the revenue within services and other to conform with the current presentation in fiscal 2018. The cost of sales associated with these newly identified service revenue has also been revised to align with the new presentation. For the years ended
October 31, 2017
and
2016
service and other revenue increased
$13 million
and
$14 million
, respectively, and service and other cost of sales increased
$7 million
in both periods, with corresponding reductions in product revenue and cost of sales. These corrections to the classifications are not considered to be material to current or prior periods and had no impact to our results of operations previously reported in our consolidated statement of operations.
Use of Estimates.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, valuation of goodwill and purchased intangible assets, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions and accounting for income taxes.
Retirement of Treasury Shares.
Upon the formal retirement of treasury shares, we deduct the par value of the retired treasury shares from common stock and allocate the excess of cost over par as a deduction to additional paid-in capital, based on the pro-rata portion of additional paid-in-capital, and the remaining excess as a deduction to retained earnings. All retired treasury shares revert to the status of authorized but unissued shares.
Revenue Recognition.
We enter into agreements to sell products (hardware and/or software), services and other arrangements (multiple element arrangements) that include combinations of products and services.
We recognize revenue, net of trade discounts and allowances, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer for products, or when the service has been provided. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. At the time of the transaction, we evaluate the creditworthiness of our customers to determine the appropriate timing of revenue recognition. Provisions for discounts, warranties, returns, extended payment terms, and other adjustments are provided for in the period the related sales are recorded.
Product Revenue.
Product revenue includes revenue generated from the sales of our analytical instrumentation, software and consumables. Our product revenue is generated predominantly from the sales of various types of analytical instrumentation. Product revenue, including sales to resellers and distributors, is reduced for estimated returns when appropriate. For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete.
Where software is licensed separately, revenue is recognized when the software is delivered and has been transferred to the customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs.
We also evaluate whether collection of the receivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist on which a portion of the total fee would be allocated based on vendor-specific objective evidence.
Service Revenue.
Revenue from services includes extended warranty, customer and software support including, Software as a Service (SaaS), consulting including companion diagnostics and training and education. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. For example, customer support contracts are recognized ratably over the contractual period, while training revenue is recognized as the training is provided to the customer. In addition, the four revenue recognition criteria described above must be met before service revenue is recognized.
Revenue Recognition for Arrangements with Multiple Deliverables.
Our multiple-element arrangements are generally comprised of a combination of measurement instruments, installation or other start-up services, and/or software and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized upon delivery once title and risk of loss pass to the customer. Delivery of installation, start-up services and other services varies based on the complexity of the equipment, staffing levels in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Revenue from the sale of software products that are not required to deliver the tangible product's essential functionality are accounted for under software revenue recognition rules which require vendor specific objective evidence (VSOE) of fair value to allocate revenue in a multiple element arrangement. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on VSOE if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.
We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve changes may occur in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.
For sales arrangements that include equipment lease along with other products or services, revenue is allocated to the different elements based on the Revenue Recognition for Multiple Element Arrangements. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a capital (sales-type) lease using lease classification guidance.
Deferred Revenue.
Deferred revenue represents the amount that is allocated to undelivered elements in multiple element arrangements. We limit the revenue recognized to the amount that is not contingent on the future delivery of products or services or meeting other specified performance conditions.
Accounts Receivable, net.
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable have been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging of such receivables, among other factors. The allowance for doubtful accounts as of
October 31, 2018
and
2017
was not material. We do not have any off-balance-sheet credit exposure related to our customers. Accounts receivable are also recorded net of product returns.
Shipping and Handling Costs.
Our shipping and handling costs charged to customers are included in net revenue, and the associated expense is recorded in cost of products for all periods presented.
Inventory.
Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based on estimates about future demand. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory.
Goodwill and Purchased Intangible Assets.
Under the authoritative guidance we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregate components of an operating segment that have similar economic characteristics into our reporting units.
In May 2018, we re-organized our operating segments and moved our microfluidics business from our life sciences and applied markets operating segment to our diagnostics and genomics operating segment. As a result, we reassigned approximately
$45 million
of goodwill from our life sciences and applied markets segment to our diagnostics and genomics segment using the relative fair value allocation approach. Goodwill balances as of October 31, 2017 and 2016, have been recast to conform to this new presentation.
In fiscal year
2018
, we assessed goodwill impairment for our three reporting units which consisted of three segments: life sciences and applied markets, diagnostics and genomics and Agilent CrossLab. We performed a qualitative test for goodwill impairment of the three reporting units, as of September 30,
2018
. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these reporting units are greater than their respective carrying values. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated. There was
no
impairment of goodwill during the years ended
October 31, 2018
,
2017
and
2016
.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the economic benefits are consumed or used up or a straight-line method ranging from
6 months
to
15
years. In-process research and development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e. greater
than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed a qualitative test for impairment of indefinite-lived intangible assets as of September 30,
2018
. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible asset is indicated. During the year ended
October 31, 2018
and
2017
, there were
no
impairments of indefinite-lived intangible assets. Based on triggering events in the year ended
October 31, 2016
, we recorded an impairment of
$4 million
due to the cancellation of certain IPR&D projects.
Share-Based Compensation.
For the years ended
2018
,
2017
and
2016
, we accounted for share-based awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our Employee Stock Purchase Plan ("ESPP") and performance share awards under Agilent Technologies, Inc. Long-Term Performance Program ("LTPP") using the estimated grant date fair value method of accounting. Under the fair value method, we recorded compensation expense for all share-based awards of
$71 million
in
2018
,
$61 million
in
2017
and
$60 million
in
2016
. See Note 3, "Share-based Compensation" for additional information.
Retirement and Post-Retirement Plans.
Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees. Assumptions used to determine the benefit obligations and the expense for these plans are derived annually. See Note 12, “Retirement plans and post-retirement pension plans” for additional information.
Taxes on Income.
Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. See Note 4, "Income Taxes" for more information.
Warranty.
Our standard warranty terms typically extend for one year from the date of delivery. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product revenue. 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. See Note 13, "Guarantees".
Advertising.
Advertising costs are generally expensed as incurred and amounted to
$41 million
in
2018
,
$38 million
in
2017
and
$30 million
in
2016
.
Research and Development.
Costs related to research, design and development of our products are charged to research and development expense as they are incurred.
Sales Taxes.
Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue.
Net Income Per Share.
Basic net income per share is computed by dividing net income - the numerator - by the weighted average number of common shares outstanding - the denominator - during the period excluding the dilutive effect of stock options and other employee stock plans. Diluted net income per share gives effect to all potential common shares outstanding during the period unless the effect is anti-dilutive. 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 and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be used to repurchase hypothetical shares. See Note 5, "Net Income Per Share".
Cash, Cash Equivalents and Short Term Investments.
We classify investments as cash equivalents if their original or remaining maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.
As of
October 31, 2018
, approximately
$1,361 million
of our cash and cash equivalents is held outside of the U.S. by our foreign subsidiaries. In 2018, we repatriated
$1,921 million
of the cash held outside the U.S. The cash remaining outside the U.S. can be repatriated to the U.S. as local working capital and other regulatory conditions permit. As a result of the U.S. Tax Cuts and Jobs Act (the "Tax Act"), our cash and cash equivalents are no longer subjected to U.S. federal tax on repatriation into the U.S. Our cash and cash equivalents mainly consist of short term deposits held at major global financial institutions, institutional money market funds, and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and institutional money market funds in which we invest our funds.
We classify investments as short-term investments if their original maturities are greater than three months and their remaining maturities are one year or less. Currently, we have no short-term investments.
Variable Interest Entities.
We make a determination upon entering into an arrangement whether an entity in which we have made an investment is considered a Variable Interest Entity (“VIE”). The company evaluates its investments in privately held companies on an ongoing basis. We account for these investments under either the equity or cost method, depending on the circumstances. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, based on changes in facts and circumstances including changes in contractual arrangements and capital structure. During 2016, we wrote down an equity method investment to its fair value of
zero
, resulting in an impairment charge of
$18 million
. In addition, we recorded an impairment of
$7 million
of uncollectible loans related to this equity method investment.
During the year ended October 31, 2016, Agilent made a preferred stock investment in Lasergen for
$80 million
. This investment in Lasergen was accounted for under the cost method. Agilent’s initial ownership stake was
48 percent
and included an option to acquire the remaining shares until March 2018. During the year ended
October 31, 2018
, we exercised our option and acquired all of the remaining shares of Lasergen, Inc. that we did not already own for an additional cash consideration of approximately
$107 million
. The fair value remeasurement of our previous investment immediately before the acquisition resulted in a net gain of
$20 million
and was recorded in other income. Lasergen was previously considered a VIE. As of
October 31, 2018
, we have no VIE's.
Investments.
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. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. The company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable.
Fair Value of Financial Instruments.
The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the cost or equity method, their carrying value approximates their estimated fair value. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. There are no equity method investments as of
October 31, 2018
or
2017
. The fair value of our senior notes, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy is lower than the carrying value by approximately
$15 million
as of
October 31, 2018
and exceeds the carrying value by approximately
$58 million
as of
October 31, 2017
. The change in the fair value over carrying value in the year ended
October 31, 2018
is primarily due to increased market interest rates. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 10, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Concentration of Credit Risk.
Financial instruments that potentially subject Agilent to significant concentration of credit risk include money market fund investments, time deposits and demand deposit balances. These investments are categorized as cash and cash equivalents. In addition, Agilent has credit risk from derivative financial instruments used in hedging activities and accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis.
Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount and we sell the majority of our products through our direct sales force. Credit risk is mitigated through collateral such as letter of credit, bank guarantees or payment terms like cash in advance. No single customer accounted for more than 10 percent of combined accounts receivable as of
October 31, 2018
, or
2017
.
Derivative Instruments.
Agilent is exposed to global foreign currency exchange rate and interest rate risks in the normal course of business. We enter into foreign exchange hedging contracts, primarily forward contracts and purchased options and, in the past, interest rate swaps to manage financial exposures resulting from changes in foreign currency exchange rates and interest
rates. In the vast majority of cases, these contracts are designated at inception as hedges of the related foreign currency or interest exposures. Foreign currency exposures include committed and anticipated revenue and expense transactions and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary. Interest rate exposures are associated with the company's fixed-rate debt. For option contracts, we exclude time value from the measurement of effectiveness. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies; foreign exchange hedging contracts generally mature within
twelve
months and interest rate swaps, if any, mature at the same time as the maturity of the debt. In order to manage foreign currency exposures in a few limited jurisdictions we may enter into foreign exchange contracts that do not qualify for hedge accounting. In such circumstances, the local foreign currency exposure is offset by contracts owned by the parent company. We do not use derivative financial instruments for speculative trading purposes.
All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and qualify as a fair value hedge, changes in value of the derivative are recognized in the consolidated statement of operations in the current period, along with the offsetting gain or loss on the hedged item attributable to the hedged risk. For derivative instruments that are designated and qualify as a cash flow hedges, changes in the value of the effective portion of the derivative instrument is recognized in comprehensive income (loss), a component of stockholders' equity. Amounts associated with cash flow hedges are reclassified and recognized in income when either the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at their fair value and changes in the fair values are recorded in the income statement in the current period. Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet. Changes in the fair value of the ineffective portion of derivative instruments are recognized in earnings in the current period. Ineffectiveness in
2018
,
2017
and
2016
was not material. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities.
Property, Plant and Equipment.
Property, plant and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger, and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated over the lesser of their useful lives or the remaining term of the lease and machinery and equipment over
three
to
ten
years. We use the straight-line method to depreciate assets.
Leases.
We lease buildings, machinery and equipment under operating leases for original terms ranging generally from
one
year to
twenty
years. Certain leases contain renewal options for periods up to
six
years. In addition, we lease equipment to customers in connection with our diagnostics business using both capital and operating leases. As of
October 31, 2018
and
2017
our diagnostics and genomics segment has approximately
$32 million
and
$27 million
, respectively, of lease receivables related to capital leases and approximately
$20 million
and
$22 million
, respectively, of net assets for operating leases. We depreciate the assets related to the operating leases over their estimated useful lives, typically five years.
Capitalized Software.
We capitalize certain internal and external costs incurred to acquire or create internal use software. Capitalized software is included in property, plant and equipment and is depreciated over
three
to
five
years once development is complete.
Impairment of Long-Lived Assets.
We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. During 2018, we recorded an impairment charge of
$21 million
related to purchased intangible assets within the diagnostics and genomics segment that were deemed unrecoverable.
Employee Compensation and Benefits.
Amounts owed to employees, such as accrued salary, bonuses and vacation benefits are accounted for within employee compensation and benefits. The total amount of accrued vacation benefit was
$107 million
and
$101 million
as of
October 31, 2018
, and
2017
, respectively.
Foreign Currency Translation.
We translate and remeasure balance sheet and income statement items into U.S. dollars. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates
which approximate to average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity.
For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates which approximate average exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in consolidated net income. Net gains or losses resulting from foreign currency transactions, including hedging gains and losses, are reported in other income (expense), net and was
$3 million
loss for
2018
,
$2 million
loss for
2017
and
$5 million
loss for
2016
, respectively.
2. NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued new revenue recognition guidance, Accounting Standard Codification Topic 606, Revenue from contract with customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The objective of the new revenue standard is to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. The guidance is effective for us at the beginning of our fiscal year 2019. We will adopt this standard on November 1, 2018 through application of the modified retrospective method reflecting the cumulative effect of initially applying the new guidance to revenue recognition in the first quarter of fiscal 2019. Under the new guidance, there are specific criteria to determine if a performance obligation should be recognized over time or at a point in time. We expect that in some cases the revenue recognition timing under the new guidance will change from current practice. We have substantially completed our analysis of the impact of the new guidance in 2018. While the timing of revenue recognition for some of the company’s sales transactions will be affected by the new guidance, the impact is not expected to be material. The cumulative impact to beginning retained earnings from adopting the new revenue standard is expected to be a credit of less than
$30 million
.
In January 2016, the FASB issued amendments to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The provisions under this amendment are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is not permitted. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. The new guidance is effective for us beginning November 1, 2019 using a modified retrospective approach. We are in the process of assessing the impact of the new guidance on our financial statements and consider that the most notable impact upon the adoption of the new standard will be the recognition of a material right-of-use asset and lease liability for our real estate and automobile leases.
In August 2016, the FASB issued amendments to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. We do not expect the impact of the amendments to have a material impact on our consolidated statement of cash flows and disclosures.
In October 2016, the FASB issued amendments to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. There is no material impact expected to our cumulative retained earnings on adoption of these amendments.
In November 2016, the FASB issued amendments to require amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. We do not expect the impact of the amendments to have a material impact on our consolidated statement of cash flows and disclosures.
In January 2017, the FASB issued guidance intended to clarify the definition of a business in connection with business combinations with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted
for as acquisitions (or disposals) of assets or businesses. This guidance is effective for us beginning November 1, 2018, and for interim periods within that year. Adjustments will be recorded in the period that they are determined rather than applied retrospectively via revision to the period of acquisition and each period thereafter. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In January 2017, the FASB issued an amendment to modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The amendment also simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments are effective for us beginning November 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect to early adopt nor do we expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In March 2017, the FASB issued guidance on the presentation of the net periodic pension and postretirement benefit cost. This guidance also specifies that only the service cost component of net benefit cost is eligible for capitalization. The standard requires employers to report the service cost component in the same line item as other compensation costs and to report the other components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) separately and below operating income in the statement of operations. The amendments are effective for us beginning November 1, 2018, including interim periods within those annual periods. We expect the adoption of this guidance to result in an impact of approximately
$20 million
of income reclassified from our income from operations to other income (expense) on our consolidated statement of operations in fiscal year 2019. In future filings, we will revise our prior periods to conform to the new presentation required under this guidance.
In May 2017, the FASB issued an update to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendments are effective for us beginning November 1, 2018. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In August 2017, the FASB issued amendments to hedge accounting intended to better align a company's risk management strategies and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The amendments expand and refine accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements. The amendments are effective for us beginning November 1, 2019, including the interim periods within those annual periods. We expect to early adopt this guidance beginning November 1, 2018. We do not expect the the adoption of this guidance to have a material impact on our consolidated financial statements and disclosures.
In February 2018, the FASB issued amendments to reporting comprehensive income to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act that was enacted in December 2017 that reduced the U.S. federal corporate income tax rate and made other changes to U.S. federal tax laws. The amendments in this update also require certain disclosures about stranded tax effects. The amendments are effective for us beginning November 1, 2019, and for interim periods within that fiscal year and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We expect to adopt this guidance on November 1, 2018. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements and disclosures upon adoption.
In February 2018, the FASB issued technical corrections and improvements to amendments published in January 2016 to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The provisions under these corrections and improvements are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is not permitted. We currently do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In August 2018, the FASB issued updates to improve the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement which eliminates certain disclosure requirements and modifies others. These amendments are effective for us beginning November 1, 2020, and for interim periods within that year with early adoption permitted. We currently do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In August 2018, the FASB issued updates to improve the effectiveness of disclosures for defined benefit plans under Accounting Standard Codification Topic 715-20. The amendments in this guidance remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. These amendments are effective for us beginning November 1, 2021, with early adoption permitted. We currently do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
3. SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our ESPP and performance share awards granted to selected members of our senior management under the LTPP based on estimated fair values.
Description of Share-Based Plans
Employee Stock Purchase Plan.
Effective November 1, 2000, we adopted the ESPP. The ESPP allows eligible employees to contribute up to
ten percent
of their base compensation to purchase shares of our common stock at
85
percent of the closing market price at purchase date. Currently, there are
75 million
shares authorized for issuance in connection with the ESPP.
Under our ESPP, employees purchased
558,116
shares for
$32 million
in
2018
,
618,270
shares for
$26 million
in
2017
and
696,178
shares for
$23 million
in
2016
. As of
October 31, 2018
, the number of shares of common stock authorized and available for issuance under our ESPP was
26,937,115
. This excludes the number of shares of common stock to be issued to participants in consideration of the aggregate participants contributions totaling
$17 million
as of
October 31, 2018
.
Incentive Compensation Plans.
On November 15, 2017 and March 21, 2018, the Board of Directors and the stockholders, respectively, approved the Agilent Technologies, Inc. 2018 Stock Plan (the "2018 Plan") which amends, including renaming and extending the term of, the Agilent Technologies, Inc. 2009 Stock Plan (the "2009 Plan"). The 2009 plan replaced the Agilent Technologies, Inc. Amended and Restated 1999 Stock Plan and 1999 Non-Employee Director Stock Plan. The 2018 Plan provides for the grant of awards in the form of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2018 Plan has a term of
ten years
. As of
October 31, 2018
,
6,158,260
shares were available for future awards under the 2018 Stock Plan.
Stock options under the 2018 Stock Plan may be either "incentive stock options", as defined in Section 422 of the Internal Revenue Code, or non-statutory. Options were granted prior to November 1, 2015 and generally vest at a rate of
25 percent
per year over a period of
four years
from the date of grant with a maximum contractual term of
ten years
. The exercise price for stock options is generally not less than
100 percent
of the fair market value of our common stock on the date the stock award is granted. Agilent issues new shares of common stock when employee stock options are exercised.
Effective November 1, 2003, the Compensation Committee of the Board of Directors approved the LTPP, which is a performance stock award program administered under the 2018 Stock Plan, for the company's executive officers and other key employees. Participants in this program are entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets are met. Certain LTPP awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the Total Stockholders’ Return (“TSR”) set at the beginning of the performance period. Effective November 1, 2015, the Compensation Committee of the Board of Directors approved another type of performance stock award, for the company's executive officers and other key employees. Participants in this program are also entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets over the three-year period are met. The performance target for grants made in 2016 were based on Operating
Margin (“OM”) and the performance grants made in 2017 and 2018 were based on Earnings Per Share ("EPS"). In the case of LTPP-OM, the performance targets for all the three years of performance period are set at the time of grant. The performance targets for LTPP-EPS grants for year 2 and year 3 of the performance period are set in the first quarter of year 2 and year 3, respectively. All LTPP awards granted after November 1, 2015, are subject to a one-year post-vest holding period.
Based on the performance metrics the final LTPP award may vary from
zero
to
200 percent
of the target award. The maximum contractual term for awards under the LTPP program is
three years
and the maximum award value for awards granted in 2017 and 2016 cannot exceed 300 percent of the grant date target value. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met.
We also issue restricted stock units under our share-based plans. The estimated fair value of the restricted stock unit awards granted under the Stock Plans is determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield. Restricted stock units generally vest, with some exceptions, at a rate of
25 percent
per year over a period of
four years
from the date of grant. All restricted stock units granted to our executives after November 1, 2015, are subject to a one-year post-vest holding period.
Impact of Share-based Compensation Awards
We have recognized compensation expense based on the estimated grant date fair value method under the authoritative guidance. For all share-based awards we have recognized compensation expense using a straight-line amortization method. As the guidance requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation has been reduced for estimated forfeitures.
The impact on our results for share-based compensation was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Cost of products and services
|
$
|
16
|
|
|
$
|
15
|
|
|
$
|
14
|
|
Research and development
|
7
|
|
|
6
|
|
|
6
|
|
Selling, general and administrative
|
48
|
|
|
40
|
|
|
40
|
|
Total share-based compensation expense
|
$
|
71
|
|
|
$
|
61
|
|
|
$
|
60
|
|
At
October 31, 2018
and
2017
there was
no
share-based compensation capitalized within inventory.
Valuation Assumptions
For all periods presented, shares granted under the LTPP (TSR) were valued using a Monte Carlo simulation. The ESPP allows eligible employees to purchase shares of our common stock at
85
percent of the fair market value at the purchase date.
The estimated fair value of restricted stock unit awards, LTPP (OM) and LTPP (EPS) was determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield and as appropriate, a discount related to the one-year post vesting. The compensation cost for LTPP (OM) and LTPP (EPS) awards reflect the cost of awards that are probable to vest at the end of the performance period.
The following assumptions were used to estimate the fair value of awards granted.
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
LTPP:
|
|
|
|
|
|
Volatility of Agilent shares
|
21%
|
|
23%
|
|
24%
|
Volatility of selected peer-company shares
|
14%-66%
|
|
15%-63%
|
|
14%-50%
|
Pair-wise correlation with selected peers
|
32%
|
|
36%
|
|
35%
|
|
|
|
|
|
|
Post-vest restriction discount for all executive awards
|
4.8%
|
|
5.3%
|
|
5.5%
|
Shares granted under the LTPP (TSR) were valued using a Monte Carlo simulations model. The Monte Carlo simulation fair value model requires the use of highly subjective and complex assumptions, including the price volatility of the underlying stock. For the LTPP (TSR) grants in 2016, we used the 3-year average historical stock price volatility of a group of our peer companies and an expected dividend yield to compute the discount. We believed our historical volatility prior to the separation of Keysight in 2015 was no longer relevant to use. For LTPP (TSR) grants in 2017 and thereafter, we used our own historical stock price volatility.
All LTPP awards granted to our executives have a one-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model. The model calculates the potential lost value if the employee were able to sell the shares during the lack of marketability period, instead of being required to hold the shares.
Share-Based Payment Award Activity
Employee Stock Options
The following table summarizes employee stock option award activity of our employees and directors for
2018
.
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
(in thousands)
|
|
|
Outstanding at October 31, 2017
|
2,761
|
|
|
$
|
34
|
|
Exercised
|
(753
|
)
|
|
$
|
32
|
|
Forfeited
|
(11
|
)
|
|
$
|
41
|
|
Outstanding at October 31, 2018
|
1,997
|
|
|
$
|
35
|
|
The options outstanding and exercisable for equity share-based payment awards at
October 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Number
Exercisable
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
(in thousands)
|
|
(in years)
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
(in years)
|
|
|
|
(in thousands)
|
$0 - 25
|
87
|
|
|
1.0
|
|
$
|
22
|
|
|
$
|
3,744
|
|
|
87
|
|
|
1.0
|
|
$
|
22
|
|
|
$
|
3,744
|
|
$25.01 - 30
|
674
|
|
|
3.5
|
|
$
|
26
|
|
|
25,862
|
|
|
674
|
|
|
3.5
|
|
$
|
26
|
|
|
25,862
|
|
$30.01 - 40
|
375
|
|
|
5.1
|
|
$
|
39
|
|
|
9,635
|
|
|
375
|
|
|
5.1
|
|
$
|
39
|
|
|
9,635
|
|
$40.01 - over
|
861
|
|
|
6.0
|
|
$
|
41
|
|
|
20,579
|
|
|
577
|
|
|
6.0
|
|
$
|
41
|
|
|
13,793
|
|
|
1,997
|
|
|
4.8
|
|
$
|
35
|
|
|
$
|
59,820
|
|
|
1,713
|
|
|
4.6
|
|
$
|
34
|
|
|
$
|
53,034
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the company's closing stock price of
$64.79
at
October 31, 2018
, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable at
October 31, 2018
was approximately
1.7 million
.
The following table summarizes the aggregate intrinsic value of options exercised in
2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Aggregate
Intrinsic Value
|
|
Weighted
Average
Exercise
Price
|
|
(in thousands)
|
|
|
Options exercised in fiscal 2016
|
$
|
26,913
|
|
|
$
|
25
|
|
Options exercised in fiscal 2017
|
$
|
36,175
|
|
|
$
|
30
|
|
Options exercised in fiscal 2018
|
$
|
28,417
|
|
|
$
|
32
|
|
As of
October 31, 2018
, the unrecognized share-based compensation costs for outstanding stock option awards, net of expected forfeitures, was not material. The amount of cash received from the exercise of share-based awards granted was
$56 million
in
2018
,
$66 million
in
2017
and
$62 million
in
2016
.
Non-Vested Awards
The following table summarizes non-vested award activity in
2018
primarily for our LTPP and restricted stock unit awards.
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Price
|
|
(in thousands)
|
|
|
Non-vested at October 31, 2017
|
3,302
|
|
|
$
|
43
|
|
Granted
|
1,136
|
|
|
$
|
68
|
|
Vested
|
(1,377
|
)
|
|
$
|
42
|
|
Forfeited
|
(172
|
)
|
|
$
|
51
|
|
Change in LTPP shares in the year due to exceeding performance targets
|
292
|
|
|
$
|
—
|
|
Non-vested at October 31, 2018
|
3,181
|
|
|
$
|
49
|
|
As of
October 31, 2018
, the unrecognized share-based compensation costs for non-vested restricted stock awards, net of expected forfeitures, was approximately
$74 million
which is expected to be amortized over a weighted average period of
2.2
years. The total fair value of restricted stock awards vested was
$58 million
for
2018
,
$42 million
for
2017
and
$21 million
for
2016
.
4. INCOME TAXES
The domestic and foreign components of income before taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
U.S. operations
|
$
|
169
|
|
|
$
|
116
|
|
|
$
|
27
|
|
Non-U.S. operations
|
777
|
|
|
687
|
|
|
517
|
|
Total income before taxes
|
$
|
946
|
|
|
$
|
803
|
|
|
$
|
544
|
|
The provision for income taxes is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
U.S. federal taxes:
|
|
|
|
|
|
Current
|
$
|
520
|
|
|
$
|
15
|
|
|
$
|
(1
|
)
|
Deferred
|
51
|
|
|
110
|
|
|
19
|
|
Non-U.S. taxes:
|
|
|
|
|
|
Current
|
95
|
|
|
1
|
|
|
77
|
|
Deferred
|
(22
|
)
|
|
(7
|
)
|
|
(14
|
)
|
State taxes, net of federal benefit:
|
|
|
|
|
|
Current
|
1
|
|
|
1
|
|
|
3
|
|
Deferred
|
(15
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Total provision
|
$
|
630
|
|
|
$
|
119
|
|
|
$
|
82
|
|
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Profit before tax times statutory rate
|
$
|
221
|
|
|
$
|
281
|
|
|
$
|
190
|
|
State income taxes, net of federal benefit
|
—
|
|
|
2
|
|
|
2
|
|
Non-U.S. income taxed at different rates
|
(93
|
)
|
|
(43
|
)
|
|
(68
|
)
|
Change in unrecognized tax benefits
|
(17
|
)
|
|
(110
|
)
|
|
(27
|
)
|
U.S Tax Reform
|
552
|
|
|
—
|
|
|
—
|
|
Valuation allowances
|
—
|
|
|
1
|
|
|
18
|
|
Adjustments to earnings of foreign subsidiaries
|
—
|
|
|
—
|
|
|
(11
|
)
|
Other, net
|
(33
|
)
|
|
(12
|
)
|
|
(22
|
)
|
Provision for income taxes
|
$
|
630
|
|
|
$
|
119
|
|
|
$
|
82
|
|
Effective tax rate
|
66.6
|
%
|
|
14.8
|
%
|
|
15.1
|
%
|
For 2018, the company's income tax expense was
$630 million
with an effective tax rate of
66.6 percent
. For the year ended October 31, 2018, our effective tax rate and the resulting provision for income taxes were significantly impacted by the discrete charge of
$552 million
related to the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) as discussed below.
For 2017, the company's income tax expense was
$119 million
with an effective tax rate of
14.8 percent
. Our effective tax rate is impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. During the year, the company determined a portion of current year foreign earnings from its low tax jurisdictions would not be considered as indefinitely reinvested. As such, a deferred tax liability for that portion of unremitted foreign earnings was accrued causing an increase in the annual tax expense. Our annual effective tax rate also included tax benefits due to the settlement of an audit in Germany for the years 2005 through 2008 and the lapse of U.S. statute of limitation for the fiscal years 2012 and
2013. This benefit was offset by a deferred tax liability required for the tax expected upon repatriation of related unremitted foreign earnings that were not asserted as indefinitely invested outside the U.S.
For 2016, the company’s income tax expense was
$82 million
with an effective tax rate of
15.1 percent
. The income tax provision for the year ended October 31, 2016 included net discrete tax expense of
$17 million
primarily due to tax expense related to the establishment of a valuation allowance on an equity method impairment that would generate a capital loss when realized.
The company has negotiated tax holidays in several different jurisdictions, most significantly in Singapore. The tax holidays provide lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific types of income in those jurisdictions. In December 2018, the tax holiday in Singapore was renegotiated and extended through 2027, see Note 19, "Subsequent Events" for more information. Other tax holidays are due for renewal 2019 and 2020. As a result of the incentives, the impact of the tax holidays decreased income taxes by
$87 million
,
$93 million
, and
$86 million
in
2018
,
2017
, and
2016
, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately
$0.27
,
$0.29
, and
$0.26
in
2018
,
2017
and
2016
, respectively.
2017 U.S. Tax Reform - Tax Cuts and Jobs Act
On December 22, 2017, the Tax Act was enacted into law. The Tax Act enacted significant changes affecting our fiscal year 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that had not been previously taxed in the U.S.
The Tax Act also establishes new tax provisions affecting our fiscal year 2019, including, but not limited to, (1) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax (“AMT”); (4) creating the base erosion anti-abuse tax (“BEAT”); (5) establishing a deduction for foreign derived intangible income ("FDII"); (6) repealing domestic production activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation.
The Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Due to our fiscal year end, the lower corporate tax rate will be phased in, resulting in a U.S. statutory federal rate of 23 percent for our fiscal year ending October 31, 2018 and 21 percent for subsequent fiscal years.
ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118") which allowed companies to record provisional amounts during a measurement period not extending beyond one year from the Tax Act enactment date. For the year ended October 31, 2018, the company recognized income tax expense related to the Tax Act of
$552 million
which includes (1) an expense of
$499 million
of U.S. transition tax and correlative items on deemed repatriated earnings of non-U.S. subsidiaries and (2) an expense of
$53 million
associated with the impact on deferred taxes resulting from the decreased U.S. corporate tax rate as described below. As of October 31, 2018, the company has completed the accounting for all the impacts of the Tax Act except for the policy election for the treatment of the tax on GILTI inclusions.
Deemed Repatriation Transition Tax ("Transition Tax")
: The Transition Tax is based on the company’s total unrepatriated post-1986 earnings and profits ("E&P") of its foreign subsidiaries and the amount of non-U.S. taxes paid (Tax Pools) on such earnings. Historically, the company permanently reinvested a significant portion of these post-1986 E&P outside the U.S. For the remaining portion, the company previously accrued deferred taxes. Since the Tax Act required all foreign earnings to be taxed currently, the company recorded an income tax expense of
$651 million
for its one-time transition U.S. federal tax and a benefit of
$152 million
for the reversal of related deferred tax liabilities. The resulting
$499 million
net transition tax, reduced by existing tax credits, will be paid over 8 years in accordance with the election available under the Tax Act. We have completed our accounting for charges related to the Transition Tax.
Reduction of U.S. Federal Corporate Tax Rate
: The reduction of the corporate income tax rate requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment. The amount recorded for the year ended October31, 2018 for the remeasurement due to tax rate change is
$53 million
. We have completed our accounting for the measurement of deferred taxes.
GILTI:
The Tax Act subjects a U.S. corporation to tax on its GILTI. U.S. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in the U.S. taxable income as a current-period expense
when incurred (“period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (“deferred method”). Our analysis of the new GILTI rules and how they may impact us is incomplete. Accordingly, we have not made a policy election regarding the treatment of GILTI tax.
Indefinite Reinvestment Assertion:
Prior to the enactment of the Tax Act, the company had indefinite investment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. As a result of the enactment of the Tax Act, we have reevaluated our historic assertion and no longer consider these earnings to be indefinitely reinvested in our foreign subsidiaries. The company repatriated
$1,921 million
of foreign earnings in fiscal year 2018. The company has recorded a deferred tax liability of
$11 million
for foreign withholding taxes on repatriation of remaining undistributed earnings.
The significant components of deferred tax assets and deferred tax liabilities included on the consolidated balance sheet are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
Deferred
Tax Assets
|
|
Deferred Tax
Liabilities
|
|
Deferred
Tax Assets
|
|
Deferred Tax
Liabilities
|
|
(in millions)
|
Inventory
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
—
|
|
Intangibles
|
—
|
|
|
112
|
|
|
—
|
|
|
93
|
|
Property, plant and equipment
|
8
|
|
|
—
|
|
|
12
|
|
|
—
|
|
Warranty reserves
|
8
|
|
|
—
|
|
|
12
|
|
|
—
|
|
Pension benefits and retiree medical benefits
|
49
|
|
|
—
|
|
|
70
|
|
|
—
|
|
Employee benefits, other than retirement
|
34
|
|
|
—
|
|
|
28
|
|
|
—
|
|
Net operating loss, capital loss, and credit carryforwards
|
185
|
|
|
—
|
|
|
328
|
|
|
—
|
|
Unremitted earnings of foreign subsidiaries
|
—
|
|
|
18
|
|
|
—
|
|
|
163
|
|
Share-based compensation
|
31
|
|
|
—
|
|
|
45
|
|
|
—
|
|
Deferred revenue
|
38
|
|
|
—
|
|
|
45
|
|
|
—
|
|
Other
|
4
|
|
|
3
|
|
|
1
|
|
|
—
|
|
Subtotal
|
364
|
|
|
133
|
|
|
557
|
|
|
256
|
|
Tax valuation allowance
|
(135
|
)
|
|
—
|
|
|
(138
|
)
|
|
—
|
|
Total deferred tax assets or deferred tax liabilities
|
$
|
229
|
|
|
$
|
133
|
|
|
$
|
419
|
|
|
$
|
256
|
|
The decrease in 2018 as compared to 2017 for the deferred tax asset and liabilities was primarily due to the Tax Act.
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. As of
October 31, 2018
, we continued to maintain a valuation allowance of
$135 million
until sufficient positive evidence exists to support reversal. The valuation allowance is mainly related to deferred tax assets for California R&D credits, net operating losses in the state of Colorado and the Netherlands and capital losses in the U.S. and foreign jurisdictions.
At
October 31, 2018
, we had federal, state and foreign net operating loss carryforwards of approximately
$21 million
,
$671 million
and
$330 million
, respectively. The federal and state net operating loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state tax laws. If not utilized, the federal and state net operating loss carryforwards will begin to expire in 2019. If not utilized,
$140 million
of the foreign net operating loss carryforwards will begin to expire in 2019. The remaining
$190 million
of the foreign net operating losses carry forward indefinitely. At
October 31, 2018
, we had federal and foreign capital loss carryforwards of
$48 million
and
$119 million
, respectively. If not utilized, the federal capital loss carryforwards will expire in 2022. The foreign capital losses carry forward indefinitely. At
October 31, 2018
, we had state tax credit carryforwards, net of reserves of approximately
$41 million
. The state tax credits carry forward indefinitely.
The breakdown between long-term deferred tax assets and deferred tax liabilities was as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Long-term deferred tax assets (included within other assets)
|
$
|
165
|
|
|
$
|
240
|
|
Long-term deferred tax liabilities (included within other long-term liabilities)
|
(69
|
)
|
|
(77
|
)
|
Total
|
$
|
96
|
|
|
$
|
163
|
|
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Current income tax assets (included within other current assets)
|
$
|
59
|
|
|
$
|
77
|
|
Long-term income tax assets (included within other assets)
|
19
|
|
|
18
|
|
Current income tax liabilities (included within other accrued liabilities)
|
(71
|
)
|
|
(55
|
)
|
Long-term income tax liabilities (included within other long-term liabilities)
|
(607
|
)
|
|
(131
|
)
|
Total
|
$
|
(600
|
)
|
|
$
|
(91
|
)
|
The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Balance, beginning of year
|
$
|
224
|
|
|
$
|
293
|
|
|
$
|
289
|
|
Additions for tax positions related to the current year
|
27
|
|
|
32
|
|
|
31
|
|
Additions for tax positions from prior years
|
2
|
|
|
1
|
|
|
1
|
|
Reductions for tax positions from prior years
|
(13
|
)
|
|
(3
|
)
|
|
(27
|
)
|
Settlements with taxing authorities
|
—
|
|
|
(52
|
)
|
|
—
|
|
Statute of limitations expirations
|
(26
|
)
|
|
(47
|
)
|
|
(1
|
)
|
Balance, end of year
|
$
|
214
|
|
|
$
|
224
|
|
|
$
|
293
|
|
As of
October 31, 2018
, we had
$214 million
of unrecognized tax benefits of which
$190 million
, if recognized, would affect our effective tax rate.
We recognized a tax expense of
$11 million
, a tax benefit of
$9 million
and a tax expense of
$2 million
of interest and penalties related to unrecognized tax benefits in
2018
,
2017
and
2016
, respectively. Interest and penalties accrued as of
October 31, 2018
and
2017
were
$27 million
and
$16 million
, respectively.
In the U.S., tax years remain open back to the year 2015 for federal income tax purposes and the year 2000 for significant states. There were no substantial changes to the status of these open tax years during 2018. The U.S. statute of limitation for audit of tax returns for fiscal year 2014 expired in July 2018. The statute expiration resulted in the recognition of previously unrecognized tax benefits of
$23 million
.
In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2001.
With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
5. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
316
|
|
|
$
|
684
|
|
|
$
|
462
|
|
Denominators:
|
|
|
|
|
|
Basic weighted average shares
|
321
|
|
|
322
|
|
|
$
|
326
|
|
Potential common shares — stock options and other employee stock plans
|
4
|
|
|
4
|
|
|
3
|
|
Diluted weighted average shares
|
325
|
|
|
326
|
|
|
329
|
|
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 and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. In addition, we exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined exercise price and unamortized fair value collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive.
In
2018
,
2017
and
2016
, we issued approximately
2 million
,
3 million
and
3 million
, of share-based awards, respectively. For the years ended
2018
,
2017
and
2016
, options to purchase
36,200
shares,
200
shares and
1.1 million
shares, respectively, were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.
6. INVENTORY
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Finished goods
|
$
|
386
|
|
|
$
|
363
|
|
Purchased parts and fabricated assemblies
|
252
|
|
|
212
|
|
Inventory
|
$
|
638
|
|
|
$
|
575
|
|
Inventory-related excess and obsolescence charges, included in continuing operations, of
$26 million
were recorded in total cost of products in
2018
,
$24 million
in
2017
and
$20 million
in
2016
, respectively. We record excess and obsolete inventory charges for both inventory on our site as well as inventory at our contract manufacturers and suppliers where we have non-cancellable purchase commitments.
7. PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Land
|
$
|
55
|
|
|
$
|
56
|
|
Buildings and leasehold improvements
|
952
|
|
|
886
|
|
Machinery and equipment
|
512
|
|
|
470
|
|
Software
|
141
|
|
|
188
|
|
Total property, plant and equipment
|
1,660
|
|
|
1,600
|
|
Accumulated depreciation and amortization
|
(838
|
)
|
|
(843
|
)
|
Property, plant and equipment, net
|
$
|
822
|
|
|
$
|
757
|
|
In 2018, we retired approximately
$68 million
of fully depreciated assets, primarily related to software, that were no longer in use. There were less than
$1 million
asset impairments in
2018
and no asset impairments in
2017
and
2016
. Depreciation expenses were
$102 million
in
2018
,
$94 million
in
2017
and
$95 million
in
2016
.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balances at
October 31, 2018
,
2017
and
2016
and the movements in
2018
and
2017
for each of our reportable segments are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences and Applied Markets
|
|
Diagnostics and Genomics
|
|
Agilent CrossLab
|
|
Total
|
|
(in millions)
|
Goodwill as of October 31, 2016
|
$
|
745
|
|
|
$
|
1,268
|
|
|
$
|
504
|
|
|
$
|
2,517
|
|
Foreign currency translation impact
|
2
|
|
|
10
|
|
|
—
|
|
|
12
|
|
Goodwill arising from acquisitions
|
26
|
|
|
52
|
|
|
—
|
|
|
78
|
|
Goodwill as of October 31, 2017
|
$
|
773
|
|
|
$
|
1,330
|
|
|
$
|
504
|
|
|
$
|
2,607
|
|
Foreign currency translation impact
|
(7
|
)
|
|
(4
|
)
|
|
(4
|
)
|
|
(15
|
)
|
Goodwill arising from acquisitions
|
37
|
|
|
281
|
|
|
63
|
|
|
381
|
|
Goodwill as of October 31, 2018
|
$
|
803
|
|
|
$
|
1,607
|
|
|
$
|
563
|
|
|
$
|
2,973
|
|
|
|
|
|
|
|
|
|
In May 2018, we re-organized our operating segments and moved our microfluidics business from our life sciences and applied markets operating segment to our diagnostics and genomics operating segment. As a result, we reassigned approximately
$45 million
of goodwill from our life sciences and applied markets segment to our diagnostics and genomics segment using the relative fair value allocation approach. Goodwill balances as of October 31, 2017 and 2016, have been recast to conform to this new presentation.
As of September 30,
2018
, we assessed goodwill impairment for our reporting units and
no
impairment was indicated.
The component parts of other intangible assets at
October 31, 2018
and
2017
are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
and Impairments
|
|
Net Book
Value
|
|
(in millions)
|
As of October 31, 2017:
|
|
|
|
|
|
Purchased technology
|
$
|
855
|
|
|
$
|
646
|
|
|
$
|
209
|
|
Trademark/Tradename
|
149
|
|
|
73
|
|
|
76
|
|
Customer relationships
|
151
|
|
|
112
|
|
|
39
|
|
Third-party technology and licenses
|
$
|
27
|
|
|
$
|
14
|
|
|
$
|
13
|
|
Total amortizable intangible assets
|
$
|
1,182
|
|
|
$
|
845
|
|
|
$
|
337
|
|
In-Process R&D
|
24
|
|
|
—
|
|
|
24
|
|
Total
|
$
|
1,206
|
|
|
$
|
845
|
|
|
$
|
361
|
|
As of October 31, 2018:
|
|
|
|
|
|
Purchased technology
|
$
|
947
|
|
|
$
|
683
|
|
|
$
|
264
|
|
Trademark/Tradename
|
151
|
|
|
88
|
|
|
63
|
|
Customer relationships
|
107
|
|
|
63
|
|
|
44
|
|
Third-party technology and licenses
|
$
|
28
|
|
|
$
|
19
|
|
|
$
|
9
|
|
Total amortizable intangible assets
|
$
|
1,233
|
|
|
$
|
853
|
|
|
$
|
380
|
|
In-Process R&D
|
111
|
|
|
—
|
|
|
111
|
|
Total
|
$
|
1,344
|
|
|
$
|
853
|
|
|
$
|
491
|
|
|
|
|
|
|
|
In 2018, we acquired
seven
businesses, for a combined purchase price of approximately
$536 million
. The largest of which was Advanced Analytical Technologies, Inc. ("AATI") for approximately
$268 million
in cash. The financial results of all these businesses have been included in our financial results from the date of the business’ respective close.
We have not included the pro forma impact of these acquisitions since they are not material individually or in aggregate to our current or prior period results.
During
2018
,
w
e recorded additions to goodwill of
$381 million
and to other intangible assets of
$262 million
related to the acquisition of these businesses. During
2018
, other intangible assets, net decreased
$1 million
, due to the impact of foreign exchange translation.
During
2017
, we recorded additions to goodwill of
$78 million
and to intangible assets of
$52 million
related to the acquisition of
two
businesses. During the year other intangible assets decreased
$5 million
, due to the impact of foreign exchange translation.
During 2018, we also wrote-off the gross carrying amount of
$89 million
and the related accumulated amortization of fully amortized intangible assets which were no longer being used.
In general, for United States federal tax purposes, goodwill from asset purchases is deductible, however any goodwill created as part of a stock acquisition is not deductible.
During 2018, we recorded an impairment charge of
$21 million
related to purchased intangible assets within the diagnostics and genomics segment that were deemed unrecoverable. In
2017
, there were
no
impairments of other intangible assets recorded. In
2016
, we recorded impairments of other intangibles related to the cancellation of in-process research and development projects of
$4 million
.
Amortization expense of intangible assets was
$110 million
in
2018
,
$120 million
in
2017
, and
$154 million
in
2016
.
Future amortization expense related to existing finite-lived purchased intangible assets associated with business combinations for the next five fiscal years and thereafter is estimated below:
|
|
|
|
|
Estimated future amortization expense:
|
|
|
(in millions)
|
2019
|
$
|
94
|
|
2020
|
$
|
79
|
|
2021
|
$
|
65
|
|
2022
|
$
|
51
|
|
2023
|
$
|
41
|
|
Thereafter
|
$
|
50
|
|
9. INVESTMENTS
The following table summarizes the company's equity investments as of
October 31, 2018
and
2017
(net book value):
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Long-Term
|
|
|
|
Cost method investments
|
$
|
38
|
|
|
$
|
106
|
|
Trading securities
|
30
|
|
|
32
|
|
Total
|
$
|
68
|
|
|
$
|
138
|
|
During 2018, we acquired all of the remaining shares of Lasergen, Inc. (Lasergen), for an additional cash consideration of approximately
$107 million
, an investment that was accounted for under the cost method in 2017 for approximately
$80 million
. The fair value remeasurement of our previous investment immediately before the acquisition resulted in a net gain of
$20 million
and was recorded in other income. Cost method investments consist of non-marketable equity securities and a fund 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.
All of our investments, excluding trading securities, are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have significant adverse effect on the future value of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. During the year ended October 31, 2016, we identified certain events and circumstances that indicated the decline in value of an equity method investment was other-than-temporary. As a result, we wrote down the investment to its fair value of
zero
, resulting in an impairment charge of approximately
$18 million
.
Amounts included in other income (expense), net for the appropriate share of loss on equity method investments and other than temporary impairments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Equity method investments - share of losses
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10
|
)
|
Equity method investments - other than temporary impairments
|
—
|
|
|
—
|
|
|
(18
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(28
|
)
|
Net unrealized gains on our trading securities portfolio were
$1 million
in
2018
,
$4 million
in
2017
and
$1 million
in
2016
.
10. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1
— applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
— applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3
— applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of
October 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2018 Using
|
|
October 31,
2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
|
|
Cash equivalents (money market funds)
|
$
|
1,355
|
|
|
$
|
1,355
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative instruments (foreign exchange contracts)
|
16
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
Trading securities
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
1,401
|
|
|
$
|
1,385
|
|
|
$
|
16
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
|
|
Derivative instruments (foreign exchange contracts)
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
Deferred compensation liability
|
30
|
|
|
—
|
|
|
30
|
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
35
|
|
|
$
|
—
|
|
Financial assets and liabilities measured at fair value on a recurring basis as of
October 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2017 Using
|
|
October 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(in millions)
|
Assets:
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
|
|
Cash equivalents (money market funds)
|
$
|
1,659
|
|
|
$
|
1,659
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative instruments (foreign exchange contracts)
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
Trading securities
|
32
|
|
|
32
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
1,695
|
|
|
$
|
1,691
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
|
|
Derivative instruments (foreign exchange contracts)
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
Long-term
|
|
|
|
|
|
|
|
Deferred compensation liability
|
32
|
|
|
—
|
|
|
32
|
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Trading securities, which is comprised of mutual funds, bonds and other similar instruments, and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated other comprehensive loss within stockholders' equity. Realized gains and losses from the sale of these instruments are recorded in net income.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net income for the years ended
October 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Long-lived assets held and used
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Long-lived assets held for sale
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For
2018
, long-lived assets held and used with a carrying amount of
$21 million
were written down to their fair value of
zero
, resulting in an impairment charge of
$21 million
, which was included in net income. The impairment charge in 2018 of
$21 million
relates to purchased intangible assets within the diagnostics and genomics segment that were deemed unrecoverable. For
2017
, there were no impairments of long-lived assets held and used. For
2016
, long-lived assets held and used with a carrying amount of
$4 million
were written down to their fair value of
zero
, resulting in an impairment charge of
$4 million
, which was
included in net income. The impairment charge in
2016
of
$4 million
relates to IPR&D projects that were abandoned and written down to their fair value of zero.
There were
no
impairments of long-lived assets held for sale in
2018
,
2017
and
2016
.
Fair values for the impaired long-lived assets during 2018 and 2016 were measured using level 3 and 2 inputs respectively. To determine the fair value of long-lived assets in 2018, we used the income approach based on projected discounted cash flows expected to be generated by the long-lived assets over the remaining useful life.
11. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts, purchased options, and interest rate swaps, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates and interest rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. The fair value of our fixed rate debt changes when the underlying market rates of interest change, and, in the past, we have used interest rate swaps to change our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from our cash, cash equivalents and other short term investments. As of
October 31, 2018
, all interest rate swap contracts had either been terminated or had expired.
On August 9, 2011, we terminated
five
interest rate swap contracts related to our 2020 senior notes that represented the notional amount of
$500 million
. The remaining gain to be amortized at
October 31, 2018
was
$7 million
. All deferred gains from terminated interest rate swaps are being amortized over the remaining life of the respective senior notes.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance and are assessed for effectiveness against the underlying exposure every reporting period. Changes in the time value of the foreign exchange contract are excluded from the assessment of hedge effectiveness and are recognized in other income (expense) each period. The changes in fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income (loss). Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified to other income (expense) in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized in other income (expense) in the consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in other income (expense) over the life of the option contract. For the years ended
October 31, 2018
,
2017
and
2016
, ineffectiveness and gains and losses recognized in other income (expense) due to de-designation of cash flow hedge contracts were not significant.
In July 2012, Agilent executed treasury lock agreements for
$400 million
in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2022 senior notes. The remaining gain to be amortized related to the treasury lock agreements at
October 31, 2018
was
$1 million
.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional amount of
$300 million
in connection with future interest payments to be made on our 2026 senior notes issued on September 15, 2016. These derivative instruments were designated and qualified as cash flow hedges under the criteria prescribed in the
authoritative guidance. The swap arrangements were terminated on September 15, 2016 with a payment of $
10 million
and we recognized this as a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2026 senior notes. The remaining loss to be amortized related to the interest rate swap agreements at
October 31, 2018
was
$7 million
.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative instruments are recognized in other income (expense) in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of
October 31, 2018
, was not material. The credit-risk-related contingent features underlying these agreements had not been triggered as of
October 31, 2018
.
There were
158
foreign exchange forward contracts open as of
October 31, 2018
and designated as cash flow hedges. There were
171
foreign exchange forward contracts open as of
October 31, 2018
not designated as hedging instruments. The aggregated notional amounts by currency and designation as of
October 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as
Cash Flow Hedges
|
|
Derivatives
Not
Designated
as Hedging
Instruments
|
|
|
Forward
Contracts USD
|
|
Forward
Contracts USD
|
Currency
|
|
Buy/(Sell)
|
|
Buy/(Sell)
|
|
|
(in millions)
|
Euro
|
|
$
|
(44
|
)
|
|
$
|
37
|
|
British Pound
|
|
(54
|
)
|
|
16
|
|
Canadian Dollar
|
|
(39
|
)
|
|
13
|
|
Australian Dollars
|
|
4
|
|
|
1
|
|
Malaysian Ringgit
|
|
—
|
|
|
(2
|
)
|
Japanese Yen
|
|
(91
|
)
|
|
14
|
|
Danish Krone
|
|
—
|
|
|
25
|
|
Korean Won
|
|
(34
|
)
|
|
(31
|
)
|
Singapore Dollar
|
|
14
|
|
|
6
|
|
Swiss Franc
|
|
—
|
|
|
(9
|
)
|
Chinese Yuan Renminbi
|
|
(38
|
)
|
|
(25
|
)
|
Polish Zloty
|
|
—
|
|
|
(5
|
)
|
Swedish Krona
|
|
—
|
|
|
(9
|
)
|
Other
|
|
—
|
|
|
(14
|
)
|
|
|
$
|
(282
|
)
|
|
$
|
17
|
|
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance with the authoritative guidance. The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of
October 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Fair Value
|
|
|
|
Fair Value
|
Balance Sheet Location
|
|
October 31,
2018
|
|
October 31,
2017
|
|
Balance Sheet Location
|
|
October 31,
2018
|
|
October 31,
2017
|
(in millions)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
11
|
|
|
$
|
2
|
|
|
Other accrued liabilities
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
5
|
|
|
$
|
2
|
|
|
Other accrued liabilities
|
|
$
|
4
|
|
|
$
|
4
|
|
Total derivatives
|
|
$
|
16
|
|
|
$
|
4
|
|
|
|
|
$
|
5
|
|
|
$
|
6
|
|
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Loss on interest rate swaps recognized in other comprehensive income (loss)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
Loss reclassified from accumulated other comprehensive income into interest expense
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) recognized in accumulated other comprehensive income (loss)
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Gain (loss) reclassified from accumulated other comprehensive income (loss) into cost of sales
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
$
|
(3
|
)
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Gain (loss) recognized in other income (expense), net within continuing operations
|
$
|
(2
|
)
|
|
$
|
5
|
|
|
$
|
1
|
|
At
October 31, 2018
the estimated amount of existing net gain expected to be reclassified from accumulated other comprehensive income to cost of sales within the next twelve months is
$12 million
.
12. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
General.
Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees.
Agilent provides U.S. employees, who meet eligibility criteria under the Agilent Technologies, Inc. Retirement Plan (the "RP"), defined benefits which are based on an employee's base or target pay during the years of employment and on length of service. For eligible service through October 31, 1993, the benefit payable under the Agilent Retirement Plans is reduced by any amounts due to the eligible employee under the Agilent defined contribution Deferred Profit-Sharing Plan (the "DPSP"), which was closed to new participants as of November 1993. Effective November 1, 2014, Agilent’s U.S. defined benefit retirement plan is closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. As of April 30, 2016, benefits under the RP were frozen. See Plan Amendments below.
As of
October 31, 2018
and
2017
, the fair value of plan assets of the DPSP was
$141 million
and
$156 million
, respectively. Note that the projected benefit obligation for the DPSP equals the fair value of plan assets.
In addition to the DPSP, in the U.S., Agilent maintains a Supplemental Benefits Retirement Plan ("SBRP"), supplemental unfunded non-qualified defined benefit plan to provide benefits that would be provided under the RP but for limitations imposed by the Internal Revenue Code. The RP and the SBRP comprise the "U.S. Plans" in the tables below.
Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans based upon factors such as years of service and/or employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements.
401(k) Defined Contribution Plan
. Eligible Agilent U.S. employees may participate in the Agilent Technologies, Inc. 401(k) Plan. Effective April 30, 2016, we began matching contributions to employees up to a maximum of
6 percent
of an employee's annual eligible compensation. Effective May 1, 2016 until April 30, 2022, we will provide an additional transitional company contribution for certain eligible employees equal to
3 percent
,
4 percent
or
5 percent
of an employee's annual eligible compensation due to the RP benefits being frozen. The maximum contribution to the 401(k) Plan is
50 percent
of an employee's annual eligible compensation, subject to regulatory limitations. The 401(k) Plan employer expense included in income from operations was
$37 million
in 2018,
$33 million
in 2017 and
$24 million
in 2016.
Post-Retirement Medical Benefit Plans.
In addition to receiving retirement benefits, Agilent U.S. employees who meet eligibility requirements as of their termination date may participate in the Agilent Technologies, Inc. Health Plan for Retirees. Eligible retirees who were less than age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of service are eligible for a fixed amount which can be utilized to pay for either sponsored plans and/or individual medicare plans. Effective January 1, 2012, employees who were at least age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of service are eligible for fixed dollar subsidies and stipends. Grandfathered retirees receive a fixed monthly subsidy toward pre-65 premium costs (subsidy capped at 2011 levels) and a fixed monthly stipend post-65. The subsidy amounts will not increase. In addition, any new employee hired on or after November 1, 2014, will not be eligible to participate in the retiree medical plans upon retiring. As of April 30, 2016, benefits under this plan were changed - see Plan Amendments below.
Plan Amendments.
In 2016, we made changes to our U.S. Retirement Plan and Supplemental Benefits Retirement Plan ("U.S. Plans"). Effective April 30, 2016, benefit accruals under the U.S. Plans were frozen. Any pension benefit earned in the U.S. Plans through April 30, 2016 remained fully vested, and there were no additional benefit accruals after April 30, 2016. In addition, active employees who have not met the eligibility requirement for the Retiree Medical Account (RMA) under the U.S. Post Retirement Benefit Plan - 55 years old with at least 15 years of Agilent service - as of April 30, 2016 - will only be eligible for 50 percent of the current RMA reimbursement amount upon retirement.
Due to these plan amendments, we recorded a curtailment gain of
$15 million
in the U.S. Plans during the year ended October 31, 2016. In addition, we recognized a settlement gain of
$1 million
related to the U.S. Supplemental Benefits Retirement Plan during the year ended October 31, 2016.
Japanese Welfare Pension Insurance Law
. In Japan, Agilent has employees' pension fund plans, which are defined benefit pension plans established under the Japanese Welfare Pension Insurance Law (JWPIL). The plans are composed of (a) a substitutional portion based on the pay-related part of the old-age pension benefits prescribed by JWPIL (similar to social security benefits in the United States) and (b) a corporate portion based on a contributory defined benefit pension arrangement established at the discretion of the company.
During the year ended October
31, 2017
,
Agilent received government approval and returned the substitutional portion of Japan's pension plan to the Japanese government, as allowed by the JWPIL. The initial transfer resulted in a net gain of
$32 million
recorded within cost of sales and operating expenses in the consolidated statement of operations. The net gain consisted of two parts - a gain of
$41 million
, representing the difference between the fair values of the Accumulated Benefit Obligation (ABO) settled of
$65 million
and the assets transferred from the pension trust to the government of Japan of
$24 million
, offset by a settlement loss of
$9 million
related to the recognition of previously unrecognized actuarial losses included in accumulated other comprehensive income. In the first quarter of fiscal year 2018, after the Japanese government’s final review of our initial payment, we received a refund of
$5 million
which was recorded as a settlement gain.
Components of Net periodic cost.
The company uses alternate methods of amortization as allowed by the authoritative guidance which amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. Plans, gains and losses are amortized over the average future lifetime of participants using the corridor method. For most Non-U.S. Plans and U.S. Post-Retirement Benefit Plans, gains and losses are amortized using a separate layer for each year's gains and losses. For the years ended
October 31, 2018
,
2017
and
2016
, components of net periodic benefit cost and other amounts recognized in other comprehensive income were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
|
|
U.S. Post-Retirement Benefit Plans
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Net periodic benefit cost (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost — benefits earned during the period
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
20
|
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost on benefit obligation
|
16
|
|
|
15
|
|
|
16
|
|
|
13
|
|
|
12
|
|
|
16
|
|
|
3
|
|
|
3
|
|
|
4
|
|
Expected return on plan assets
|
(28
|
)
|
|
(25
|
)
|
|
(25
|
)
|
|
(46
|
)
|
|
(41
|
)
|
|
(44
|
)
|
|
(7
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Amortization of net actuarial loss
|
1
|
|
|
3
|
|
|
3
|
|
|
29
|
|
|
36
|
|
|
27
|
|
|
8
|
|
|
11
|
|
|
10
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Total periodic benefit cost (benefit)
|
$
|
(11
|
)
|
|
$
|
(7
|
)
|
|
$
|
3
|
|
|
$
|
16
|
|
|
$
|
26
|
|
|
$
|
18
|
|
|
$
|
(3
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
Curtailments and settlements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(16
|
)
|
|
$
|
(5
|
)
|
|
$
|
(32
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
2
|
|
|
$
|
(19
|
)
|
|
$
|
22
|
|
|
$
|
49
|
|
|
$
|
(128
|
)
|
|
$
|
149
|
|
|
$
|
(2
|
)
|
|
$
|
(9
|
)
|
|
$
|
3
|
|
Amortization of net actuarial loss
|
(1
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
(29
|
)
|
|
(36
|
)
|
|
(27
|
)
|
|
(8
|
)
|
|
(11
|
)
|
|
(10
|
)
|
Prior service cost (benefit)
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
9
|
|
|
10
|
|
Gain due to settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive (income) loss
|
$
|
1
|
|
|
$
|
(22
|
)
|
|
$
|
37
|
|
|
$
|
21
|
|
|
$
|
(130
|
)
|
|
$
|
119
|
|
|
$
|
(2
|
)
|
|
$
|
(11
|
)
|
|
$
|
(4
|
)
|
Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss
|
$
|
(10
|
)
|
|
$
|
(29
|
)
|
|
$
|
24
|
|
|
$
|
32
|
|
|
$
|
(136
|
)
|
|
$
|
137
|
|
|
$
|
(5
|
)
|
|
$
|
(12
|
)
|
|
$
|
(6
|
)
|
Funded Status.
As of
October 31, 2018
and
2017
, the funded status of the defined benefit and post-retirement benefit plans was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined
Benefit Plans
|
|
Non-U.S. Defined
Benefit Plans
|
|
U.S.
Post-Retirement
Benefit Plans
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Change in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value — beginning of year
|
$
|
414
|
|
|
$
|
341
|
|
|
$
|
855
|
|
|
$
|
774
|
|
|
$
|
95
|
|
|
$
|
88
|
|
Actual return on plan assets
|
8
|
|
|
66
|
|
|
(9
|
)
|
|
81
|
|
|
1
|
|
|
14
|
|
Employer contributions
|
—
|
|
|
25
|
|
|
21
|
|
|
21
|
|
|
—
|
|
|
—
|
|
Participants' contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(21
|
)
|
|
(18
|
)
|
|
(26
|
)
|
|
(23
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Settlements
|
—
|
|
|
—
|
|
|
5
|
|
|
(26
|
)
|
|
—
|
|
|
—
|
|
Currency impact
|
—
|
|
|
—
|
|
|
(21
|
)
|
|
28
|
|
|
—
|
|
|
—
|
|
Fair value — end of year
|
$
|
401
|
|
|
$
|
414
|
|
|
$
|
825
|
|
|
$
|
855
|
|
|
$
|
90
|
|
|
$
|
95
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation — beginning of year
|
$
|
445
|
|
|
$
|
434
|
|
|
$
|
935
|
|
|
$
|
1,002
|
|
|
$
|
97
|
|
|
$
|
103
|
|
Service cost
|
—
|
|
|
—
|
|
|
20
|
|
|
19
|
|
|
1
|
|
|
1
|
|
Interest cost
|
16
|
|
|
15
|
|
|
13
|
|
|
12
|
|
|
3
|
|
|
3
|
|
Participants' contributions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Plan amendment
|
—
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
(19
|
)
|
|
15
|
|
|
(6
|
)
|
|
(43
|
)
|
|
(7
|
)
|
|
(3
|
)
|
Benefits paid
|
(22
|
)
|
|
(19
|
)
|
|
(27
|
)
|
|
(22
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Curtailments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
(70
|
)
|
|
—
|
|
|
—
|
|
Currency impact
|
—
|
|
|
—
|
|
|
(23
|
)
|
|
38
|
|
|
—
|
|
|
—
|
|
Benefit obligation — end of year
|
$
|
420
|
|
|
$
|
445
|
|
|
$
|
913
|
|
|
$
|
935
|
|
|
$
|
87
|
|
|
$
|
97
|
|
Overfunded (underfunded) status of PBO
|
$
|
(19
|
)
|
|
$
|
(31
|
)
|
|
$
|
(88
|
)
|
|
$
|
(80
|
)
|
|
$
|
3
|
|
|
$
|
(2
|
)
|
Amounts recognized in the consolidated balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
86
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Employee compensation and benefits
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Retirement and post-retirement benefits
|
(18
|
)
|
|
(30
|
)
|
|
(183
|
)
|
|
(166
|
)
|
|
—
|
|
|
(2
|
)
|
Total net asset (liability)
|
$
|
(19
|
)
|
|
$
|
(31
|
)
|
|
$
|
(88
|
)
|
|
$
|
(80
|
)
|
|
$
|
3
|
|
|
$
|
(2
|
)
|
Amounts Recognized in Accumulated Other Comprehensive Income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gains) losses
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
263
|
|
|
$
|
243
|
|
|
$
|
10
|
|
|
$
|
20
|
|
Prior service costs (benefits)
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(20
|
)
|
|
(28
|
)
|
Total
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
263
|
|
|
$
|
242
|
|
|
$
|
(10
|
)
|
|
$
|
(8
|
)
|
The amounts in accumulated other comprehensive income expected to be recognized by Agilent as components of net expense during
2019
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined
Benefit Plans
|
|
Non-U.S. Defined
Benefit Plans
|
|
U.S. Post-Retirement
Benefit Plans
|
|
(in millions)
|
Amortization of net prior service cost (benefit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
Amortization of actuarial net loss (gain)
|
$
|
1
|
|
|
$
|
35
|
|
|
$
|
4
|
|
Investment Policies and Strategies as of
October 31, 2018
and
2017
.
In the U.S., target asset allocations for our retirement and post-retirement benefit plans are approximately
80 percent
to equities and approximately
20 percent
to fixed income investments. Our DPSP target asset allocation is approximately
60 percent
to equities and approximately
40 percent
to fixed income investments. Approximately
3 percent
of our U.S. equity portfolio consists of limited partnerships. The general investment objective for all our plan assets is to obtain the optimum rate of investment return on the total investment portfolio consistent with the assumption of a reasonable level of risk. Specific investment objectives for the plans' portfolios are to: maintain and enhance the purchasing power of the plans' assets; achieve investment returns consistent with the level of risk being taken; and earn performance rates of return in accordance with the benchmarks adopted for each asset class. Outside the U.S., our target asset allocation is from
31
to
60 percent
to equities, from
38
to
61 percent
to fixed income investments, and from
zero
to
25 percent
to real estate investments and from
zero
to
12 percent
to cash, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity markets, our actual allocations of plan assets at
October 31, 2018
and
2017
differ from the target allocation. Our policy is to bring the actual allocation in line with the target allocation.
Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified industries. Fixed income securities include a global portfolio of corporate bonds of companies from diversified industries, government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Other investments include a group trust consisting primarily of private equity partnerships. Portions of the cash and cash equivalent, equity, and fixed income investments are held in commingled funds that are valued using Net Asset Value (“NAV”) as the practical expedient. In addition, some of the investments valued using NAV as the practical expedient may have limits on their redemption to weekly or monthly and/or may require prior written notice specified by each fund.
Fair Value.
The measurement of the fair value of pension and post-retirement plan assets uses the valuation methodologies and the inputs as described in Note 10, "Fair Value Measurements".
Cash and Cash Equivalents - Cash and cash equivalents consist of short-term investment funds. The funds also invest in short-term domestic fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and quality. Some of our cash and cash equivalents are held in commingled funds. Other cash and cash equivalents are classified as Level 1 investments.
Equity - Some equity securities consisting of common and preferred stock that are not traded on an active market are valued at quoted prices reported by investment dealers based on the underlying terms of the security and comparison to similar securities traded on an active market; these are classified as Level 2 investments. Securities which have quoted prices in active markets are classified as Level 1 investments.
Fixed Income - Some of the fixed income securities are not actively traded and are valued at quoted prices based on the terms of the security and comparison to similar securities traded on an active market; these are classified as Level 2 investments. Securities which have quoted prices in active markets are classified as Level 1 investments.
Other Investments - Other investments also includes partnership investments where, due to their private nature, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on proprietary appraisals, application of public market multiples to private company cash flows, utilization of market transactions that provide valuation information for comparable companies and other methods. Holdings of limited partnerships are classified as Level 3.
Agilent has adopted the accounting guidance related to the presentation of certain investments using the NAV practical expedient. The accounting guidance exempts investments using this practical expedient from categorization within the fair value hierarchy.
The following tables present the fair value of U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of
October 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2018 Using
|
|
|
|
October 31,
2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
Cash and Cash Equivalents
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Equity
|
308
|
|
|
69
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Fixed Income
|
83
|
|
|
36
|
|
|
5
|
|
|
—
|
|
|
42
|
|
Other Investments
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
401
|
|
|
$
|
105
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
285
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2017 Using
|
|
|
|
October 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
Cash and Cash Equivalents
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Equity
|
327
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
239
|
|
Fixed Income
|
76
|
|
|
38
|
|
|
—
|
|
|
—
|
|
|
38
|
|
Other Investments
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
414
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
280
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
For U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Years Ended
October 31.
|
|
2018
|
|
2017
|
Balance, beginning of year
|
$
|
7
|
|
|
$
|
9
|
|
Realized gains/(losses)
|
—
|
|
|
(3
|
)
|
Unrealized gains/(losses)
|
1
|
|
|
3
|
|
Purchases, sales, issuances, and settlements
|
(2
|
)
|
|
(2
|
)
|
Transfers in (out)
|
—
|
|
|
—
|
|
Balance, end of year
|
$
|
6
|
|
|
$
|
7
|
|
The following tables present the fair value of U.S. Post-Retirement Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of
October 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2018 Using
|
|
|
|
October 31,
2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
Cash and Cash Equivalents
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Equity
|
65
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Fixed Income
|
18
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Other Investments
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
90
|
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
62
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2017 Using
|
|
|
|
October 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
Cash and Cash Equivalents
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Equity
|
68
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Fixed Income
|
17
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Other Investments
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
95
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
59
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
For U.S. Post-Retirement Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during
2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Years Ended
October 31,
|
|
2018
|
|
2017
|
Balance, beginning of year
|
$
|
4
|
|
|
$
|
5
|
|
Realized gains/(losses)
|
—
|
|
|
(2
|
)
|
Unrealized gains/(losses)
|
1
|
|
|
2
|
|
Purchases, sales, issuances, and settlements
|
(1
|
)
|
|
(1
|
)
|
Transfers in (out)
|
—
|
|
|
—
|
|
Balance, end of year
|
$
|
4
|
|
|
$
|
4
|
|
The following tables present the fair value of non-U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of
October 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2018 Using
|
|
|
|
October 31,
2018
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
Cash and Cash Equivalents
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
489
|
|
|
298
|
|
|
34
|
|
|
—
|
|
|
157
|
|
Fixed Income
|
334
|
|
|
76
|
|
|
228
|
|
|
—
|
|
|
30
|
|
Other Investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
825
|
|
|
$
|
374
|
|
|
$
|
264
|
|
|
$
|
—
|
|
|
$
|
187
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at October 31, 2017 Using
|
|
|
|
October 31,
2017
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Not Subject to Leveling
(1)
|
|
(in millions)
|
|
|
Cash and Cash Equivalents
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity
|
539
|
|
|
326
|
|
|
28
|
|
|
—
|
|
|
185
|
|
Fixed Income
|
307
|
|
|
60
|
|
|
229
|
|
|
—
|
|
|
18
|
|
Other Investments
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
855
|
|
|
$
|
386
|
|
|
$
|
266
|
|
|
$
|
—
|
|
|
$
|
203
|
|
(1) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy.
The table below presents the combined projected benefit obligation ("PBO"), accumulated benefit obligation ("ABO") and fair value of plan assets, grouping plans using comparisons of the PBO and ABO relative to the plan assets as of
October 31, 2018
or
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Benefit
Obligation
|
|
|
|
Benefit
Obligation
|
|
|
|
Fair Value of
Plan Assets
|
|
Fair Value of
Plan Assets
|
|
PBO
|
|
PBO
|
|
|
(in millions)
|
U.S. defined benefit plans where PBO exceeds the fair value of plan assets
|
$
|
420
|
|
|
$
|
401
|
|
|
$
|
445
|
|
|
$
|
414
|
|
U.S. defined benefit plans where fair value of plan assets exceeds PBO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
420
|
|
|
$
|
401
|
|
|
$
|
445
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
Non-U.S. defined benefit plans where PBO exceeds or is equal to the fair value of plan assets
|
$
|
563
|
|
|
$
|
380
|
|
|
$
|
563
|
|
|
$
|
397
|
|
Non-U.S. defined benefit plans where fair value of plan assets exceeds PBO
|
350
|
|
|
445
|
|
|
372
|
|
|
458
|
|
Total
|
$
|
913
|
|
|
$
|
825
|
|
|
$
|
935
|
|
|
$
|
855
|
|
|
|
|
|
|
|
|
|
|
ABO
|
|
|
|
ABO
|
|
|
U.S. defined benefit plans where ABO exceeds the fair value of plan assets
|
$
|
420
|
|
|
$
|
401
|
|
|
$
|
445
|
|
|
$
|
414
|
|
U.S. defined benefit plans where the fair value of plan assets exceeds ABO
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
420
|
|
|
$
|
401
|
|
|
$
|
445
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
Non-U.S. defined benefit plans where ABO exceeds or is equal to the fair value of plan assets
|
$
|
543
|
|
|
$
|
380
|
|
|
$
|
539
|
|
|
$
|
397
|
|
Non-U.S. defined benefit plans where fair value of plan assets exceeds ABO
|
343
|
|
|
445
|
|
|
365
|
|
|
458
|
|
Total
|
$
|
886
|
|
|
$
|
825
|
|
|
$
|
904
|
|
|
$
|
855
|
|
Contributions and Estimated Future Benefit Payments.
During fiscal year
2019
, we do not expect to contribute to the U.S. defined benefit plans and the Post-Retirement Medical Plans. We expect to contribute $23 million to plans outside the U.S. The following table presents expected future benefit payments for the next 10 years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Defined
Benefit Plans
|
|
Non-U.S. Defined
Benefit Plans
|
|
U.S. Post-Retirement
Benefit Plans
|
|
(in millions)
|
2019
|
$
|
29
|
|
|
$
|
23
|
|
|
$
|
8
|
|
2020
|
$
|
31
|
|
|
$
|
25
|
|
|
$
|
8
|
|
2021
|
$
|
30
|
|
|
$
|
28
|
|
|
$
|
8
|
|
2022
|
$
|
29
|
|
|
$
|
31
|
|
|
$
|
7
|
|
2023
|
$
|
30
|
|
|
$
|
33
|
|
|
$
|
7
|
|
2024 - 2028
|
$
|
142
|
|
|
$
|
175
|
|
|
$
|
33
|
|
Assumptions.
The assumptions used to determine the benefit obligations and expense for our defined benefit and post-retirement benefit plans are presented in the tables below. The expected long-term return on assets below represents an estimate of long-term returns on investment portfolios consisting of a mixture of equities, fixed income and alternative investments in proportion to the asset allocations of each of our plans. We consider long-term rates of return, which are weighted based on the asset classes (both historical and forecasted) in which we expect our pension and post-retirement funds to be invested. Discount rates reflect the current rate at which pension and post-retirement obligations could be settled based on the measurement dates of the plans - October 31. The U.S. discount rates at
October 31, 2018
and
2017
, were determined based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. rates were generally
based on published rates for high-quality corporate bonds. The range of assumptions that were used for the non-U.S. defined benefit plans reflects the different economic environments within various countries.
Assumptions used to calculate the net periodic cost in each year were as follows:
|
|
|
|
|
|
|
|
For years ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
U.S. defined benefit plans:
|
|
|
|
|
|
Discount rate
|
3.75%
|
|
3.75%
|
|
4.20%
|
Average increase in compensation levels
|
n/a
|
|
n/a
|
|
3.50%
|
Expected long-term return on assets
|
7.00%
|
|
7.25%
|
|
7.50%
|
Non-U.S. defined benefit plans:
|
|
|
|
|
|
Discount rate
|
0.67-2.52%
|
|
0.22-2.66%
|
|
0.77-3.76%
|
Average increase in compensation levels
|
2.00-3.25%
|
|
2.00-4.25%
|
|
2.25-4.00%
|
Expected long-term return on assets
|
4.00-6.00%
|
|
4.00-6.25%
|
|
4.25-6.50%
|
U.S. post-retirement benefits plans:
|
|
|
|
|
|
Discount rate
|
3.50%
|
|
3.50%
|
|
4.00%
|
Expected long-term return on assets
|
7.00%
|
|
7.25%
|
|
7.50%
|
Current medical cost trend rate
|
6.00%
|
|
6.00%
|
|
7.00%
|
Ultimate medical cost trend rate
|
3.50%
|
|
3.50%
|
|
3.50%
|
Medical cost trend rate decreases to ultimate rate in year
|
2029
|
|
2029
|
|
2029
|
Assumptions used to calculate the benefit obligation were as follows:
|
|
|
|
|
|
As of the Years Ending October 31,
|
|
2018
|
|
2017
|
U.S. defined benefit plans:
|
|
|
|
Discount rate
|
4.50%
|
|
3.75%
|
Non-U.S. defined benefit plans:
|
|
|
|
Discount rate
|
0.83-2.68%
|
|
0.67-2.52%
|
Average increase in compensation levels
|
2.25-3.25%
|
|
2.00-3.25%
|
U.S. post-retirement benefits plans:
|
|
|
|
Discount rate
|
4.25%
|
|
3.50%
|
Current medical cost trend rate
|
6.00%
|
|
6.00%
|
Ultimate medical cost trend rate
|
3.50%
|
|
3.50%
|
Medical cost trend rate decreases to ultimate rate in year
|
2029
|
|
2029
|
Health care trend rates do not have a significant effect on the total service and interest cost components or on the post-retirement benefit obligation amounts reported for the U.S. Post-Retirement Benefit Plan for the year ended
October 31, 2018
.
13. GUARANTEES
Standard Warranty
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our consolidated balance sheet. Our standard warranty terms typically extend to one years from the date of delivery, depending on the product.
A summary of the standard warranty accrual activity is shown in the table below. The standard warranty accrual balances are held in other accrued and other long-term liabilities.
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance as of October 31, 2017 and 2016
|
$
|
34
|
|
|
$
|
35
|
|
Accruals for warranties including change in estimates
|
53
|
|
|
53
|
|
Settlements made during the period
|
(52
|
)
|
|
(54
|
)
|
Balance as of October 31, 2018 and 2017
|
$
|
35
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
Accruals for warranties due within one year
|
35
|
|
|
33
|
|
Accruals for warranties due after one year
|
—
|
|
|
1
|
|
Balance as of October 31, 2018 and 2017
|
$
|
35
|
|
|
$
|
34
|
|
Indemnifications in Connection with Transactions
In connection with various divestitures, acquisitions, spin-offs and other transactions, we have agreed to indemnify certain parties, their affiliates and/or other related parties against certain damages and expenses that might occur in the future. These indemnifications may cover a variety of liabilities, including, but not limited to, employee, tax, environmental, intellectual property, litigation and other liabilities related to the business conducted prior to the date of the transaction. In our opinion, the fair value of these indemnification obligations was not material as of
October 31, 2018
.
Indemnifications to Officers and Directors
Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Agilent and such other entities, including service with respect to employee benefit plans. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Agilent which provide for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and the fair value for these indemnification obligations was not material as of
October 31, 2018
.
Other Indemnifications
As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability was not material as of
October 31, 2018
.
In connection with the sale of several of our businesses, we have agreed to indemnify the buyers of such business, their respective affiliates and other related parties against certain damages that they might incur in the future. The continuing indemnifications primarily cover damages relating to liabilities of the businesses that Agilent retained and did not transfer to the buyers, as well as other specified items. In our opinion, the fair value of these indemnification obligations was not material as of
October 31, 2018
.
14. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments:
We lease certain real and personal property from unrelated third parties under non-cancelable operating leases. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. Total rent expense was
$64 million
in
2018
,
$57 million
in
2017
and
$61 million
in
2016
.
Future minimum lease payments and future minimum lease income under operating leases at
October 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum
Lease Payments
|
|
Future Minimum
Lease Income
|
|
|
(in millions)
|
2019
|
|
$
|
42
|
|
|
$
|
9
|
|
2020
|
|
$
|
35
|
|
|
$
|
8
|
|
2021
|
|
$
|
23
|
|
|
$
|
9
|
|
2022
|
|
$
|
13
|
|
|
$
|
4
|
|
2023
|
|
$
|
10
|
|
|
$
|
—
|
|
Thereafter
|
|
$
|
57
|
|
|
$
|
—
|
|
Other Purchase Commitments.
Typically, we can cancel contracts with professional services suppliers without penalties. For those contracts that are not cancelable without penalties, the termination fees and costs or commitments for continued spending that we are obligated to pay to a supplier under each contact's termination period before such contract can be cancelled were approximately
$80 million
. Approximately
$27 million
of the penalties for the new contracts will reduce over the next 15 years.
Contingencies:
We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, intellectual property, commercial, real estate, environmental and employment matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
15. SHORT-TERM DEBT
Credit Facilities
On
September 15, 2014
, Agilent entered into a credit agreement with a financial institution which provides for a
$400 million
five
-year unsecured credit facility that will expire on
September 15, 2019
. On June 9, 2015, the commitments under the existing credit facility were increased by
$300 million
and on July 14, 2017, the commitments under the existing credit facility were increased by an additional
$300 million
so that the aggregate commitments under the facility now total
$1 billion
. As of
October 31, 2018
, the company had
no
borrowings outstanding under the credit facility. We were in compliance with the covenants for the credit facility during the years ended
October 31, 2018
and
2017
.
2017 Senior Notes
In
October 2007
, the company issued an aggregate principal amount of
$600 million
in senior notes ("2017 senior notes"). On October 20, 2014, we settled the redemption of
$500 million
of the
$600 million
outstanding aggregate principal amount of our 2017 senior notes. The 2017 senior notes were repayable within one year as of October 31, 2017 and were reclassified to short-term debt. The remaining
$100 million
in senior notes matured and were paid in full on November 1, 2017.
16. LONG-TERM DEBT
Senior Notes
The following table summarizes the company's long-term senior notes and the related interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
October 31, 2017
|
|
Amortized
Principal
|
|
Swap
|
|
Total
|
|
Amortized
Principal
|
|
Swap
|
|
Total
|
|
(in millions)
|
2020 Senior Notes
|
$
|
499
|
|
|
$
|
7
|
|
|
$
|
506
|
|
|
$
|
499
|
|
|
$
|
11
|
|
|
$
|
510
|
|
2022 Senior Notes
|
399
|
|
|
—
|
|
|
399
|
|
|
398
|
|
|
—
|
|
|
398
|
|
2023 Senior Notes
|
597
|
|
|
—
|
|
|
597
|
|
|
596
|
|
|
—
|
|
|
596
|
|
2026 Senior Notes
|
297
|
|
|
—
|
|
|
297
|
|
|
297
|
|
|
—
|
|
|
297
|
|
Total
|
$
|
1,792
|
|
|
$
|
7
|
|
|
$
|
1,799
|
|
|
$
|
1,790
|
|
|
$
|
11
|
|
|
$
|
1,801
|
|
2020 Senior Notes
In
July 2010
, the company issued an aggregate principal amount of
$500 million
in senior notes ("2020 senior notes"). The 2020 senior notes were issued at
99.54%
of their principal amount. The notes will mature on
July 15, 2020
, and bear interest at a fixed rate of
5.00%
per annum. The interest is payable
semi-annually
on January 15th and July 15th of each year, payments commenced on
January 15, 2011
.
On
August 9, 2011
, we terminated our interest rate swap contracts related to our 2020 senior notes that represented the notional amount of
$500 million
. The asset value, including interest receivable, upon termination for these contracts was approximately
$34 million
and the amount to be amortized at
October 31, 2018
was
$7 million
. The gain is being deferred and amortized to interest expense over the remaining life of the 2020 senior notes.
2022 Senior Notes
In
September 2012
, the company issued an aggregate principal amount of
$400 million
in senior notes ("2022 senior notes"). The 2022 senior notes were issued at
99.80%
of their principal amount. The notes will mature on
October 1, 2022
, and bear interest at a fixed rate of
3.20%
per annum. The interest is payable
semi-annually
on April 1st and October 1st of each year, payments commenced on
April 1, 2013
.
In July 2012, Agilent executed treasury lock agreements for
$400 million
in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2022 senior notes. The remaining gain to be amortized related to the treasury lock agreements at
October 31, 2018
was
$1 million
.
2023 Senior Notes
In
June 2013
, the company issued aggregate principal amount of
$600 million
in senior notes ("2023 senior notes"). The 2023 senior notes were issued at
99.544%
of their principal amount. The notes will mature on
July 15, 2023
and bear interest at a fixed rate of
3.875%
per annum. The interest is payable
semi-annually
on January 15th and July 15th of each year and payments commenced
January 15, 2014
.
2026 Senior Notes
On
September 15, 2016
, the company issued aggregate principal amount of
$300 million
in senior notes ("2026 senior notes"). The 2026 senior notes were issued at
99.624%
% of their principal amount. The notes will mature on
September 22, 2026
and bear interest at a fixed rate of
3.050%
per annum. The interest is payable
semi-annually
on March 22nd and September 22nd of each year and payments commenced
March 22, 2017
.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional amount of
$300 million
in connection with future interest payments to be made on our 2026 senior notes issued on September 15, 2016. The swap arrangements were terminated on September 15, 2016 with a payment of
$10 million
and we recognized this as a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2026 senior notes.The remaining loss to be amortized related to the interest rate swap agreements at
October 31, 2018
was
$7 million
.
17. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The program was designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs to target maintaining a weighted average share count of approximately
335 million
diluted shares. For the year ended
October 31, 2016
we repurchased
2 million
shares for
$98 million
which completed the purchases under this authorization.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program (the "2015 repurchase program"). The 2015 share repurchase program authorizes the purchase of up to
$1.14 billion
of our common stock at the company's discretion through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a specific number of shares and may be suspended or discontinued at any time. During the year ended
October 31, 2016
, upon the completion of our previous repurchase program, we repurchased approximately
8.3 million
shares for
$336 million
under this authorization. During the year ended
October 31, 2017
, we repurchased approximately
4.1 million
shares for
$194 million
under this authorization. During the year ended
October 31, 2018
we repurchased and retired approximately
6.4 million
shares for
$422 million
under this authorization. As of
October 31, 2018
, we had remaining authorization to repurchase up to
$188 million
of our common stock under this program which expired on November 1, 2018.
On November 19, 2018 we announced that our board of directors had approved a new share repurchase program (the "2019 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2019 share repurchase program authorizes the purchase of up to
$1.75 billion
of our common stock at the company's discretion and has no fixed termination date. The 2019 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time.
Cash Dividends on Shares of Common Stock
During the year ended
October 31, 2018
, cash dividends of
$0.596
per share, or
$191 million
were declared and paid on the company's outstanding common stock. During the year ended
October 31, 2017
, cash dividends of
$0.528
per share, or
$170 million
were declared and paid on the company's outstanding common stock. During the year ended
October 31, 2016
, cash dividends of
$0.460
per share, or
$150 million
were declared and paid on the company's outstanding common stock.
On
November 14, 2018
we declared a quarterly dividend of
$0.164
per share of common stock, or approximately
$52 million
which will be paid on
January 23, 2019
to shareholders of record as of the close of business on
December 31, 2018
. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the components of our accumulated other comprehensive income (loss) as of
October 31, 2018
and
2017
, net of tax effect:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Foreign currency translation, net of tax expense of $(15) and $(8) for 2018 and 2017, respectively
|
$
|
(214
|
)
|
|
(156
|
)
|
Unrealized losses (including prior service benefit) on defined benefit plans, net of tax benefit of $132 and $127 for 2018 and 2017, respectively
|
(201
|
)
|
|
(188
|
)
|
Unrealized gains (losses) on derivative instruments, net of tax benefit of $0 and $2 for 2018 and 2017, respectively
|
7
|
|
|
(2
|
)
|
Total accumulated other comprehensive loss
|
$
|
(408
|
)
|
|
$
|
(346
|
)
|
Changes in accumulated other comprehensive income (loss) by component and related tax effects for the years ended
October 31, 2018
and
2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net defined benefit pension cost and post retirement plan costs
|
|
|
|
|
|
|
Foreign currency translation
|
|
Prior service credits
|
|
Actuarial Losses
|
|
Unrealized gains (losses) on derivatives
|
|
Total
|
|
|
(in millions)
|
As of October 31, 2016
|
|
$
|
(197
|
)
|
|
$
|
146
|
|
|
$
|
(451
|
)
|
|
$
|
(1
|
)
|
|
$
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
44
|
|
|
—
|
|
|
116
|
|
|
—
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified out of accumulated other comprehensive income
|
|
—
|
|
|
(9
|
)
|
|
59
|
|
|
(1
|
)
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (expense) benefit
|
|
(3
|
)
|
|
3
|
|
|
(52
|
)
|
|
—
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
41
|
|
|
(6
|
)
|
|
123
|
|
|
(1
|
)
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2017
|
|
$
|
(156
|
)
|
|
$
|
140
|
|
|
$
|
(328
|
)
|
|
$
|
(2
|
)
|
|
$
|
(346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
(51
|
)
|
|
—
|
|
|
(49
|
)
|
|
7
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified out of accumulated other comprehensive income
|
|
—
|
|
|
(8
|
)
|
|
39
|
|
|
4
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (expense) benefit
|
|
(7
|
)
|
|
2
|
|
|
3
|
|
|
(2
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
(58
|
)
|
|
(6
|
)
|
|
(7
|
)
|
|
9
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2018
|
|
$
|
(214
|
)
|
|
$
|
134
|
|
|
$
|
(335
|
)
|
|
$
|
7
|
|
|
$
|
(408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications out of accumulated other comprehensive income (loss) for the years ended
October 31, 2018
and
2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other
Comprehensive Income components
|
|
Amounts Reclassified
from Other Comprehensive Income
|
|
Affected line item in
statement of operations
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
Unrealized gains and (losses) on derivatives
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
|
Cost of products and interest expense
|
|
|
(4
|
)
|
|
1
|
|
|
Total before income tax
|
|
|
1
|
|
|
—
|
|
|
(Provision)/benefit for income tax
|
|
|
(3
|
)
|
|
1
|
|
|
Total net of income tax
|
Net defined benefit pension cost and post retirement plan costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial net loss
|
|
(39
|
)
|
|
(59
|
)
|
|
Cost of sales and operating expenses
|
Prior service benefit
|
|
8
|
|
|
9
|
|
|
Cost of sales and operating expenses
|
|
|
(31
|
)
|
|
(50
|
)
|
|
Total before income tax
|
|
|
10
|
|
|
14
|
|
|
(Provision)/benefit for income tax
|
|
|
(21
|
)
|
|
(36
|
)
|
|
Total net of income tax
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(24
|
)
|
|
$
|
(35
|
)
|
|
|
Amounts in parentheses indicate reductions to income and increases to other comprehensive income.
Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 12, "Retirement Plans and Post Retirement Pension Plans").
18. SEGMENT INFORMATION
Description of Segments.
We are a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow.
Agilent has three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business each of which comprises a reportable segment. The
three
operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
In 2018, we re-organized our operating segments and moved our microfluidics business from our life sciences and applied markets operating segment to our diagnostics and genomics operating segment. Following this re-organization, we continue to have three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business. All historical financial segment information for both the life sciences and applied markets segment and the diagnostics and genomics segment has been recast to reflect this reorganization in our financial statements.
A description of our
three
reportable segments is as follows:
Our life sciences and applied markets business provides application-focused solutions that include instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular and cellular level. Key product categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS") systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave plasma-atomic emission spectrometry (“MP-AES”) instruments; inductively coupled plasma optical emission spectrometry ("ICP-OES") instruments; raman spectroscopy, cell analysis plate based assays, flow cytometer; real-time cell analyzer, laboratory software for sample tracking, information management and analytics; laboratory automation and robotic systems; dissolution testing; vacuum pumps and measurement technologies.
Our diagnostics and genomics business is comprised of six areas of activity providing active pharmaceutical ingredients ("APIs") for oligo-based therapeutics as well as solutions that include reagents, instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling, as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software. This business also includes solutions that enable clinical labs to identify DNA variants associated with genetic disease and help direct cancer therapy. Second, our nucleic acid solutions business provides equipment and expertise focused on production of synthesized oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as API in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Third, our pathology solutions business is focused on product offerings for cancer diagnostics and anatomic pathology workflows. The broad portfolio of offerings includes immunohistochemistry (“IHC”), in situ hybridization (“ISH”), hematoxylin and eosin (“H&E”) staining and special staining. Fourth, we also collaborate with a number of major pharmaceutical companies to develop new potential pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy. Fifth, the reagent partnership business is a provider of reagents used for turbidimetry and flow cytometry. Finally, our biomolecular analysis business provides complete workflow solutions, including instruments, consumables and software, for quality control analysis of nucleic acid samples. Samples are analyzed using quantitative and qualitative techniques to ensure accuracy in further genomics analysis techniques utilized in clinical and life science research applications.
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed to improve customer outcomes. Most of the portfolio is vendor neutral, meaning Agilent can serve and supply customers regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and compliance support, software as a service, as well as asset management and consultative services that help increase customer productivity. Custom service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
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 legal, accounting, tax, real estate, insurance services, information technology services, treasury, order administration, other corporate infrastructure expenses and costs of centralized research and development. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, pension curtailment or settlement gains, restructuring and transformational initiatives expenses, acquisition and integration costs, business exit and divestiture costs, special compliance costs, some nucleic acid solutions division ("NASD) site costs and certain other charges to the operating margin for each segment because management does not include this information in its measurement of the performance of the operating segments.Transformational initiatives include expenses associated with targeted cost reduction activities such as manufacturing transfers, site consolidations, legal entity and other business reorganizations, in-sourcing or outsourcing of activities.
The following tables reflect the results of our reportable segments under our management reporting system. The performance of each segment is measured based on several metrics, including segment income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, transformational initiatives, investment gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as noted in the reconciliations below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences and Applied Markets
|
|
Diagnostics and Genomics
|
|
Agilent CrossLab
|
|
Total
Segments
|
|
(in millions)
|
Year ended October 31, 2018:
|
|
|
|
|
|
|
|
Total net revenue
|
$
|
2,270
|
|
|
$
|
943
|
|
|
$
|
1,701
|
|
|
$
|
4,914
|
|
Income from operations
|
$
|
547
|
|
|
$
|
178
|
|
|
$
|
397
|
|
|
$
|
1,122
|
|
Depreciation expense
|
$
|
38
|
|
|
$
|
33
|
|
|
$
|
31
|
|
|
$
|
102
|
|
Share-based compensation expense
|
$
|
33
|
|
|
$
|
14
|
|
|
$
|
24
|
|
|
$
|
71
|
|
Year ended October 31, 2017:
|
|
|
|
|
|
|
|
Total net revenue
|
$
|
2,081
|
|
|
$
|
860
|
|
|
$
|
1,531
|
|
|
$
|
4,472
|
|
Income from operations
|
$
|
468
|
|
|
$
|
168
|
|
|
$
|
338
|
|
|
$
|
974
|
|
Depreciation expense
|
$
|
35
|
|
|
$
|
30
|
|
|
$
|
29
|
|
|
$
|
94
|
|
Share-based compensation expense
|
$
|
30
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
61
|
|
Year ended October 31, 2016:
|
|
|
|
|
|
|
|
Total net revenue
|
$
|
1,992
|
|
|
$
|
790
|
|
|
$
|
1,420
|
|
|
$
|
4,202
|
|
Income from operations
|
$
|
412
|
|
|
$
|
131
|
|
|
$
|
316
|
|
|
$
|
859
|
|
Depreciation expense
|
$
|
36
|
|
|
$
|
31
|
|
|
$
|
28
|
|
|
$
|
95
|
|
Share-based compensation expense
|
$
|
29
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
60
|
|
The following table reconciles reportable segments' income from operations to Agilent's total enterprise income before taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Total reportable segments' income from operations
|
$
|
1,122
|
|
|
$
|
974
|
|
|
$
|
859
|
|
Amortization of intangible assets related to business combinations
|
(105
|
)
|
|
(117
|
)
|
|
(152
|
)
|
Acquisition and integration costs
|
(23
|
)
|
|
(30
|
)
|
|
(41
|
)
|
Transformational initiatives
|
(25
|
)
|
|
(12
|
)
|
|
(38
|
)
|
Asset Impairments
|
(21
|
)
|
|
—
|
|
|
(4
|
)
|
Business exit and divestiture costs ( primarily our NMR business)
|
(9
|
)
|
|
—
|
|
|
(11
|
)
|
Impairment of loans
|
—
|
|
|
—
|
|
|
(7
|
)
|
NASD site costs
|
(8
|
)
|
|
—
|
|
|
—
|
|
Pension curtailment gain
|
—
|
|
|
—
|
|
|
15
|
|
Pension settlement gain
|
5
|
|
|
32
|
|
|
1
|
|
Special compliance costs
|
(4
|
)
|
|
—
|
|
|
—
|
|
Other
|
(4
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Interest Income
|
38
|
|
|
22
|
|
|
11
|
|
Interest Expense
|
(75
|
)
|
|
(79
|
)
|
|
(72
|
)
|
Other income (expense), net
|
55
|
|
|
19
|
|
|
(10
|
)
|
Income before taxes, as reported
|
$
|
946
|
|
|
$
|
803
|
|
|
$
|
544
|
|
Major Customers.
No customer represented 10 percent or more of our total net revenue in
2018
,
2017
or
2016
.
The following table reflects segment assets and capital expenditures under our management reporting system. Segment assets include allocations of corporate assets, goodwill, net other intangibles and other assets. Unallocated assets primarily consist of cash, cash equivalents, the valuation allowance relating to deferred tax assets and other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Sciences and Applied Markets
|
|
Diagnostics and Genomics
|
|
Agilent CrossLab
|
|
Total
Segments
|
|
(in millions)
|
As of October 31, 2018:
|
|
|
|
|
|
|
|
Assets
|
$
|
1,744
|
|
|
$
|
2,679
|
|
|
$
|
1,267
|
|
|
$
|
5,690
|
|
Capital expenditures
|
$
|
47
|
|
|
$
|
92
|
|
|
$
|
38
|
|
|
$
|
177
|
|
As of October 31, 2017:
|
|
|
|
|
|
|
|
Assets
|
$
|
1,681
|
|
|
$
|
2,191
|
|
|
$
|
1,138
|
|
|
$
|
5,010
|
|
Capital expenditures
|
$
|
39
|
|
|
$
|
111
|
|
|
$
|
26
|
|
|
$
|
176
|
|
The following table reconciles segment assets to Agilent's total assets:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2018
|
|
2017
|
|
(in millions)
|
Total reportable segments' assets
|
$
|
5,690
|
|
|
$
|
5,010
|
|
Cash, cash equivalents
|
2,247
|
|
|
2,678
|
|
Prepaid expenses
|
80
|
|
|
92
|
|
Investments
|
68
|
|
|
138
|
|
Long-term and other receivables
|
102
|
|
|
105
|
|
Other
|
354
|
|
|
403
|
|
Total assets
|
$
|
8,541
|
|
|
$
|
8,426
|
|
The other category primarily includes deferred tax assets and overfunded pension assets which are not allocated to the segments.
The following table represents total revenue by product category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Instrumentation
|
$
|
2,032
|
|
|
$
|
1,858
|
|
|
$
|
1,790
|
|
Analytical lab services
|
1,083
|
|
|
991
|
|
|
910
|
|
Analytical lab consumables
|
618
|
|
|
540
|
|
|
510
|
|
Diagnostics and genomics solutions
|
943
|
|
|
860
|
|
|
790
|
|
Informatics and other
|
238
|
|
|
223
|
|
|
202
|
|
Total
|
$
|
4,914
|
|
|
$
|
4,472
|
|
|
$
|
4,202
|
|
The following table presents summarized information for net revenue by geographic region. Revenues from external customers are generally attributed to countries based upon the customer's location.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
China
(1)
|
|
Rest of the
World
|
|
Total
|
|
(in millions)
|
Net revenue:
|
|
|
|
|
|
|
|
Year ended October 31, 2018
|
$
|
1,414
|
|
|
$
|
1,015
|
|
|
$
|
2,485
|
|
|
$
|
4,914
|
|
Year ended October 31, 2017
|
$
|
1,314
|
|
|
$
|
900
|
|
|
$
|
2,258
|
|
|
$
|
4,472
|
|
Year ended October 31, 2016
|
$
|
1,251
|
|
|
$
|
839
|
|
|
$
|
2,112
|
|
|
$
|
4,202
|
|
|
|
1.
|
China also includes Hong Kong net revenue.
|
The following table presents summarized information for long-lived assets by geographic region. Long lived assets consist of property, plant, and equipment, long-term receivables and other long-term assets excluding intangible assets. The rest of the world primarily consists of Asia and the rest of Europe.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Germany
|
|
Rest of the
World
|
|
Total
|
|
(in millions)
|
Long-lived assets:
|
|
|
|
|
|
|
|
October 31, 2018
|
$
|
565
|
|
|
$
|
117
|
|
|
$
|
362
|
|
|
$
|
1,044
|
|
October 31, 2017
|
$
|
556
|
|
|
$
|
118
|
|
|
$
|
358
|
|
|
$
|
1,032
|
|
19. SUBSEQUENT EVENTS
On November 14, 2018, we acquired 100 percent of the stock of ACEA Biosciences Inc. (ACEA), a developer of cell analysis tools, for approximately
$250 million
in cash. The financial results of ACEA will be included within our financial results from the date of the close. Due to the timing of the completion of the acquisition, our valuation for the tangible and intangible assets are not yet complete.
On December 20, 2018, we received the Letters of Award from Singapore Authorities extending the company’s tax incentives in Singapore through December 30, 2027. These incentives, coupled with application of the new accounting rules for income tax consequences of intra-entity transfer of assets as adopted on November 1, 2018, are expected to result in approximately
$265 million
benefit to our tax expense in the first quarter of fiscal 2019.
QUARTERLY SUMMARY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
January 31,
|
|
April 30,
|
|
July 31,
|
|
October 31,
|
|
(in millions, except per share data)
|
2018
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,211
|
|
|
$
|
1,206
|
|
|
$
|
1,203
|
|
|
$
|
1,294
|
|
Gross profit
|
673
|
|
|
644
|
|
|
661
|
|
|
709
|
|
Income from operations
|
239
|
|
|
215
|
|
|
225
|
|
|
249
|
|
Net income (loss)
|
(320
|
)
|
|
205
|
|
|
236
|
|
|
195
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share — Basic
|
$
|
(0.99
|
)
|
|
$
|
0.64
|
|
|
$
|
0.74
|
|
|
$
|
0.61
|
|
Net income (loss) per share — Diluted
|
$
|
(0.99
|
)
|
|
$
|
0.63
|
|
|
$
|
0.73
|
|
|
$
|
0.61
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share:
|
|
|
|
|
|
|
|
Basic
|
323
|
|
|
322
|
|
|
320
|
|
|
319
|
|
Diluted
|
323
|
|
|
326
|
|
|
324
|
|
|
322
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
$
|
0.149
|
|
|
$
|
0.149
|
|
|
$
|
0.149
|
|
|
$
|
0.149
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
Net revenue
|
$
|
1,067
|
|
|
$
|
1,102
|
|
|
$
|
1,114
|
|
|
$
|
1,189
|
|
Gross profit
|
574
|
|
|
592
|
|
|
596
|
|
|
647
|
|
Income from operations
|
206
|
|
|
201
|
|
|
201
|
|
|
233
|
|
Net income
|
168
|
|
|
164
|
|
|
175
|
|
|
177
|
|
|
|
|
|
|
|
|
|
Net income per share — Basic
|
$
|
0.52
|
|
|
$
|
0.51
|
|
|
$
|
0.55
|
|
|
$
|
0.55
|
|
Net income per share — Diluted
|
$
|
0.52
|
|
|
$
|
0.50
|
|
|
$
|
0.54
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share:
|
|
|
|
|
|
|
|
Basic
|
322
|
|
|
321
|
|
|
321
|
|
|
322
|
|
Diluted
|
326
|
|
|
325
|
|
|
326
|
|
|
326
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share
|
$
|
0.132
|
|
|
$
|
0.132
|
|
|
$
|
0.132
|
|
|
$
|
0.132
|
|