<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f73158e10-q.txt
<DESCRIPTION>FORM 10-Q
<TEXT>
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _______________ TO_________________
COMMISSION FILE NUMBER: 001-15405
AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0518772
STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
395 PAGE MILL ROAD, PALO ALTO, CALIFORNIA 94306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (650) 752-5000
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 30, 2001
<S> <C>
COMMON STOCK, $0.01 PAR VALUE 457,072,749 SHARES
</TABLE>
<PAGE> 2
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
Part I. Financial Information 1
Item 1. Condensed Financial Statements 1
Condensed Consolidated Balance Sheet (Unaudited)
as of April 30, 2001 and October 31, 2000 1
Condensed Consolidated Statement of Earnings (Unaudited)
for the three months and six months ended
April 30, 2001 and April 30, 2000 2
Condensed Consolidated Statement of Cash Flows (Unaudited)
for the six months ended April 30, 2001
and April 30, 2000 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Unaudited) 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Part II. Other Information 29
Item 1. Legal Proceedings 29
Item 6. Exhibits and Reports on Form 8-K 29
Signature 30
Exhibit Index 31
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN MILLIONS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
2001 2000
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 809 $ 996
Accounts receivable, net ........................................... 1,573 1,938
Inventory .......................................................... 1,791 1,610
Other current assets ............................................... 825 595
------- -------
Total current assets ............................................. 4,998 5,139
Property, plant and equipment, net .................................... 1,848 1,685
Goodwill and other intangible assets, net ............................. 1,238 467
Other assets .......................................................... 383 442
Net investment in discontinued operations ............................. 613 597
------- -------
Total assets .......................................................... $ 9,080 $ 8,330
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 653 $ 857
Notes payable and short-term borrowings ............................ 773 110
Employee compensation and benefits ................................. 657 679
Deferred revenue ................................................... 377 322
Accrued taxes and other accrued liabilities ........................ 638 695
------- -------
Total current liabilities ........................................ 3,098 2,663
Other liabilities ..................................................... 366 402
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 125,000,000 shares authorized; none
issued and outstanding ........................................... -- --
Common stock; $.01 par value; 2,000,000,000 shares authorized;
457,073,000 shares at April 30, 2001 and 453,976,000 shares at
October 31, 2000 issued and outstanding .......................... 5 5
Additional paid-in capital ......................................... 4,589 4,508
Retained earnings .................................................. 1,007 757
Other comprehensive income (loss) .................................. 15 (5)
------- -------
Total stockholders' equity ....................................... 5,616 5,265
------- -------
Total liabilities and stockholders' equity ............................ $ 9,080 $ 8,330
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
Products ............................................. $ 2,150 $ 1,886 $ 4,454 $ 3,503
Services and other ................................... 232 256 476 490
------- ------- ------- -------
Total net revenue .................................. 2,382 2,142 4,930 3,993
------- ------- ------- -------
Costs and expenses:
Cost of products ..................................... 1,277 914 2,416 1,734
Cost of services and other ........................... 129 155 267 290
Research and development ............................. 349 263 691 522
Selling, general and administrative .................. 689 626 1,334 1,159
------- ------- ------- -------
Total costs and expenses ........................... 2,444 1,958 4,708 3,705
------- ------- ------- -------
(Loss) earnings from continuing operations .............. (62) 184 222 288
Other income (expense), net ............................. 260 28 277 58
------- ------- ------- -------
Earnings from continuing operations before taxes and
cumulative effect of a change in accounting
principle ............................................ 198 212 499 346
Provision for taxes ..................................... 115 72 235 118
------- ------- ------- -------
Earnings from continuing operations before cumulative
effect of a change in accounting principle ........... 83 140 264 228
Cumulative effect of adopting SFAS No. 133 (net of tax
benefit of $16 million) .............................. -- -- (25) --
Earnings from discontinued operations (net of taxes of
$12 million and $18 million for the three months ended
April 30, 2001 and 2000; $11 million and $43 million
for the six months ended April 30, 2001 and 2000) .... 13 26 11 69
------- ------- ------- -------
Net earnings ............................................ $ 96 $ 166 $ 250 $ 297
======= ======= ======= =======
Net earnings per share -- Basic:
Earnings from continuing operations before cumulative
effect of a change in accounting principle ......... $ 0.18 $ 0.31 $ 0.58 $ 0.51
Cumulative effect of adopting SFAS No. 133 ........... $ -- $ -- $ (0.05) $ --
Net earnings from discontinued operations ............ $ 0.03 $ 0.06 $ 0.02 $ 0.16
Net earnings ....................................... $ 0.21 $ 0.37 $ 0.55 $ 0.67
Net earnings per share -- Diluted:
Earnings from continuing operations before cumulative
effect of a change in accounting principle ......... $ 0.18 $ 0.31 $ 0.57 $ 0.51
Cumulative effect of adopting SFAS No. 133 ........... $ -- $ -- $ (0.05) $ --
Net earnings from discontinued operations ............ $ 0.03 $ 0.06 $ 0.02 $ 0.15
Net earnings ......................................... $ 0.21 $ 0.36 $ 0.54 $ 0.66
Average shares used in computing net earnings per share:
Basic ................................................ 456 452 455 445
Diluted .............................................. 461 457 464 448
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 5
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
2001 2000
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations ............................ $ 239 $ 228
Adjustments to reconcile net earnings to net cash (used in) provided
by operating activities:
Depreciation and amortization .................................... 305 185
Inventory reserve ................................................ 173 21
Net gain on sale of assets ................................... (268) (25)
Deferred taxes ................................................... 56 (59)
Cumulative effect of adopting SFAS No.133 ........................ 41 --
Changes in assets and liabilities:
Accounts receivable ............................................ 384 (298)
Inventory ...................................................... (346) (130)
Accounts payable ............................................... (190) 11
Taxes on earnings .............................................. (149) 192
Other current assets and liabilities ........................... (339) 113
Other, net ..................................................... 37 (80)
------- -------
Net cash (used in) provided by operating activities ................... (57) 158
------- -------
Cash flows from investing activities:
Investments in property, plant and equipment ....................... (455) (226)
Dispositions of property, plant and equipment
Land sale and other ....................................... 346 97
Lease portfolio ........................................... 231 --
(Purchase) sale of equity investments ............................. (26) 53
Acquisitions, net of cash acquired ................................. (902) (465)
Other, net ......................................................... (43) 9
------- -------
Net cash used in investing activities ................................. (849) (532)
------- -------
Cash flows from financing activities:
Initial public offering proceeds ................................... -- 2,068
Initial public offering proceeds distributed to Hewlett-Packard .... -- (2,068)
Issuance of common stock under employee stock plans ................ 61 2
Proceeds from notes payable and short-term borrowings, net of
payments ......................................................... 663 98
Financing from Hewlett-Packard ..................................... -- 1,081
------- -------
Net cash provided by financing activities ............................. 724 1,181
------- -------
Net cash (used in) provided by discontinued operations ................ (5) 171
------- -------
Change in cash and cash equivalents ................................... (187) 978
Cash and cash equivalents at beginning of period ...................... 996 --
------- -------
Cash and cash equivalents at end of period ............................ $ 809 $ 978
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS
Agilent Technologies, Inc. ("Agilent") is a global technology leader in
communications, electronics, life sciences and healthcare. Agilent was
incorporated in Delaware in May 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications.
Amounts in the condensed consolidated financial statements as of October
31, 2000 and for the three and six months ended April 30, 2000 have been
reclassified to conform to the current period's presentation of
discontinued operations (see note 3 below).
Basis of Presentation.
The accompanying financial data as of April 30, 2001 and 2000 has been
prepared by Agilent pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such
rules and regulations.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all normal and recurring adjustments
necessary to present fairly Agilent's consolidated financial position as
of April 30, 2001, consolidated results of operations for the three and
six months ended April 30, 2001 and 2000, and cash flow activities for
the six months ended April 30, 2001 and 2000.
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The results of operations for the three and six months ended April 30,
2001 are not necessarily indicative of the results to be expected for
the full year. The information included in this Form 10-Q should be read
in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations as well as the consolidated
financial statements and notes thereto included in Agilent's 2000 Annual
Report on Form 10-K.
Recent Accounting Pronouncements.
In December 1999, the U.S. Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." This Staff Accounting Bulletin, as amended, will
be adopted by Agilent in the fourth quarter of 2001. Agilent currently
does not believe the adoption will have a material effect on its annual
consolidated financial statements.
3. SUBSEQUENT EVENT -- MEASUREMENT DATE FOR THE SALE OF OUR HEALTHCARE
SOLUTIONS BUSINESS
On November 17, 2000, Agilent agreed to sell its healthcare solutions
business to Koninklijke Philips Electronics, N.V. ("Philips") for
approximately $1.7 billion pursuant to an asset purchase agreement.
Agilent and Philips received antitrust clearance for the transaction
from the European Commission in March 2001. As of May 31, 2001, the U.S.
Department of Justice decided to allow the transaction to proceed
without challenge. Consequently, Agilent's condensed consolidated
financial statements reflect its healthcare solutions business as
discontinued operations in accordance with Accounting
4
<PAGE> 7
Principles Board Opinion No. 30 "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). The financial position, results of operations
and cash flows of Agilent's healthcare solutions business have been
classified as discontinued, and prior periods have been restated,
including the reallocation of general overhead charges to Agilent's
remaining business segments. Agilent and Philips expect to complete the
transaction before the end of the fiscal year at which time Agilent
anticipates recording an after-tax gain in the range of $600 million to
$700 million. The amount of the gain is subject to change due to a
number of factors, including the valuation of certain assets and
liabilities and the length of time to the closing date of the sale.
The following table shows the component assets and liabilities of
Agilent's net investment in its healthcare solutions business.
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
2001 2000
---- ----
(IN MILLIONS)
<S> <C> <C>
Current assets .............................. $593 $516
Property, plant and equipment, net .......... 51 56
Goodwill and other intangible assets, net ... 98 90
Other assets ................................ 12 30
Current liabilities ......................... 136 95
Other liabilities ........................... 5 --
---- ----
Net investment in discontinued operations ... $613 $597
==== ====
</TABLE>
The following table shows the detailed results of operations of
Agilent's discontinued healthcare solutions business.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
--------- ---------
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenue ............................................ $362 $343 $655 $738
Costs and expenses ..................................... 338 313 636 641
---- ---- ---- ----
Earnings from discontinued operations .................. 24 30 19 97
Other income, net ...................................... 1 14 3 15
---- ---- ---- ----
Earnings from discontinued operations before taxes ..... 25 44 22 112
Provision for taxes .................................... 12 18 11 43
---- ---- ---- ----
Net earnings from discontinued operations .............. $ 13 $ 26 $ 11 $ 69
==== ==== ==== ====
</TABLE>
5
<PAGE> 8
4. ADOPTION OF SFAS NO. 133
Effective November 1, 2000, Agilent adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133").
The adoption of SFAS No. 133 in the first quarter of 2001 resulted in a
cumulative pre-tax reduction in earnings of $41 million ($25 million
after-tax) and a pre-tax increase in accumulated comprehensive income of
$10 million. During the three and six months ended April 30, 2001,
pre-tax losses of $7 million and pre-tax gains of $4 million were
recorded in other income from continuing operations related to the value
of derivative transactions. Pre-tax losses of $8 million and pre-tax
gains of $17 million were recorded in accumulated other comprehensive
income during the same periods related to derivative instruments.
Discontinued operations results for the three and six months ended April
30, 2001, include a pre-tax loss of $1 million related to the value of
derivative transactions.
5. ACQUISITIONS AND DISPOSITIONS
Acquisitions. On January 5, 2001, Agilent acquired Objective Systems
Integrators, Inc. ("OSI") for a total purchase price of $716 million. Of
this total, $690 million was cash and the remainder represents the fair
value of options issued. The purchase method of accounting has been used
for this transaction and accordingly goodwill and intangibles of $593
million were created and will be amortized over 3 years.
In January 2001, Agilent completed its acquisition of Yokogawa Electric
Corporation's 25% equity interest in Agilent Technologies Japan, Ltd. by
purchasing the remaining 4.2% interest for approximately $98 million. Of
this amount, approximately $66 million was attributable to goodwill. Of
the total acquisition price of $391 million, approximately $278 million
has been recorded as goodwill and will be amortized over a 10-year
period. In addition to the acquisition of the remaining 4.2% of Agilent
Technologies, Japan, Ltd. and OSI, Agilent acquired several companies
that were not significant to its consolidated financial position,
results of operations or cash flows in the three and six months ended
April 30, 2001.
Dispositions. In the three and six months ended April 30, 2001, Agilent
sold additional portions of its portfolio of lease assets to the CIT
Group, Inc. ("CIT"). Net proceeds from these sales transactions, product
revenue, and cost of products for these sales in the three and six
months ended April 30, 2001 are summarized in the following table.
Agilent has agreed in principle to sell the remainder of its portfolio
of lease assets to CIT during the remainder of 2001.
<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
2001 2001
---- ----
(IN MILLIONS)
<S> <C> <C>
Net proceeds.......................................... 148 231
Net revenue - products............................... 140 201
Cost of products...................................... 71 101
</TABLE>
6
<PAGE> 9
6. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted net earnings per share computations for the
periods presented below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NUMERATORS:
Net earnings from continuing operations before
cumulative effect of a change in accounting principle ..... $ 83 $ 140 $ 264 $ 228
Cumulative effect of adopting SFAS No. 133, net of tax ...... -- -- (25) --
Net earnings from discontinued operations ................... 13 26 11 69
----- ----- ----- -----
Net earnings ................................................ $ 96 $ 166 $ 250 $ 297
===== ===== ===== =====
DENOMINATORS:
Basic weighted average shares ............................... 456 452 455 445
Potentially dilutive common shares -- stock options ......... 5 5 9 3
----- ----- ----- -----
Diluted weighted average shares ............................. 461 457 464 448
===== ===== ===== =====
</TABLE>
7. INVENTORY
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
2001 2000
---- ----
(IN MILLIONS)
<S> <C> <C>
Finished goods .......$ 433 $ 356
Work in progress ..... 316 340
Raw materials ........ 1,042 914
------ ------
$1,791 $1,610
====== ======
</TABLE>
7
<PAGE> 10
8. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
APRIL 30, APRIL 30,
2001 2000
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Net earnings .................................................... $ 96 $ 166
Other comprehensive income:
Reclassification adjustment for realized gain relating to
derivative instruments included in net income ........ (12) --
Change in unrealized gain (loss) on investments, net .... (12 (57)
Unrealized loss on derivative instruments ............... (4) --
----- -----
Total comprehensive income ............................. $ 68 $ 109
===== =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
APRIL 30, APRIL 30,
2001 2000
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Net earnings ........................................................... $ 250 $ 297
Other comprehensive income:
Change in unrealized gain (loss) on investments, net ............... (18) (4)
Reclassification adjustment for realized loss relating to warrants
included in net income ........................................... 22 --
Reclassification adjustment for realized gain relating to derivative
instruments included in net income ............................... (13) --
SFAS No. 133 cumulative transition adjustment ...................... 6 --
Unrealized gain on derivative instruments .......................... 12 --
----- -----
Total comprehensive income ....................................... $ 259 $ 293
===== =====
</TABLE>
9. TAXES ON EARNINGS
In prior periods, Agilent's effective tax rate was calculated using an
estimate of its annual pre-tax income. Due to the impacts of the recent
economic downturn, Agilent's management has determined that a reliable
estimate of its annual pre-tax income and related annual effective tax
rate cannot be made. Therefore, Agilent used the actual year-to-date
effective tax rate as its best estimate of the annual effective tax rate
for fiscal 2001. Agilent's effective tax rate for the six months ended
April 30, 2001 was 48%. Agilent's future effective tax rate will be
calculated using an estimate of its annual pre-tax income and will be
subject to the impact of future profitability, the effects of business
acquisitions and dispositions, as well as changes in the mix of its
pre-tax earnings amongst jurisdictions with varying statutory rates.
10. RESTRUCTURING
As of April 30, 2001, $9 million of the $21 million liability recorded
in the last quarter of 2000 relating to the restructuring of Agilent's
healthcare solutions business remains and is expected to be utilized in
the second half of 2001. This liability is included in Agilent's net
investment in discontinued operations.
11. NOTES PAYABLE AND SHORT-TERM BORROWINGS
On January 2, 2001, Agilent entered into an additional one-year
revolving credit facility for $150 million, which has the same terms and
conditions as its existing five-year $250 million and one-year $250
million revolving credit facilities. As of April 30, 2001, Agilent had
borrowed $110 million under the new facility and approximately $500
million in commercial paper supported by its $250 million five-year and
$250 million one-year revolving credit facilities. In addition to these
committed credit
8
<PAGE> 11
facilities, for which Agilent pays a fee, Agilent has access to
uncommitted credit lines through its banking partners, under which the
banks are not contractually obligated to lend to the Company. Agilent
had borrowed approximately $160 million as of April 30, 2001 under these
uncommitted bank credit lines.
9
<PAGE> 12
12. CONTINUING OPERATIONS - SEGMENT INFORMATION
The following tables reflect the results of Agilent's reportable
segments under the Agilent management system. These results are not
necessarily in conformity with accounting principles generally accepted
in the United States of America. The performance of each segment is
measured based on several metrics, including earnings from operations.
These results are used, in part, by management, in evaluating the
performance of, and in allocating resources to, each of the segments.
The results of our Healthcare Solutions business, previously reported as
a segment, are disclosed in Note 3 "Discontinued operations" above.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR CHEMICAL TOTAL
MEASUREMENT PRODUCTS ANALYSIS SEGMENTS
----------- ------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Three months ended April 30, 2001:
Total net revenue .................. $ 1,648 $ 443 $ 291 $ 2,382
======= ======= ======= =======
Earnings (loss) from operations .... $ 10 $ (97) $ 25 $ (62)
======= ======= ======= =======
Three months ended April 30, 2000:
External revenue ................... $ 1,385 $ 497 $ 260 $ 2,142
Internal revenue ................... -- 11 -- 11
======= ======= ======= =======
Total net revenue .................. $ 1,385 $ 508 $ 260 $ 2,153
======= ======= ======= =======
Earnings from operations ........... $ 130 $ 54 $ -- $ 184
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR CHEMICAL TOTAL
MEASUREMENT PRODUCTS ANALYSIS SEGMENTS
----------- ------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Six months ended April 30, 2001:
Total net revenue ................. $ 3,333 $ 1,038 $ 559 $ 4,930
======= ======= ======= =======
Earnings (loss) from operations ... $ 227 $ (44) $ 39 $ 222
======= ======= ======= =======
Six months ended April 30, 2000:
External revenue .................. $ 2,546 $ 944 $ 503 $ 3,993
Internal revenue .................. -- 20 -- 20
======= ======= ======= =======
Total net revenue ................. $ 2,546 $ 964 $ 503 $ 4,013
======= ======= ======= =======
Earnings from operations .......... $ 202 $ 77 $ 9 $ 288
======= ======= ======= =======
</TABLE>
The following table reconciles the segment results reported above to the
total reported results for Agilent's continuing operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
2001 2000 2001 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
Total reportable segments ............................. $ 2,382 $ 2,153 $ 4,930 $ 4,013
Elimination of internal revenue ....................... -- (11) -- (20)
------- ------- ------- -------
Total net revenue, as reported ...................... $ 2,382 $ 2,142 $ 4,930 $ 3,993
======= ======= ======= =======
Earnings before taxes:
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30 APRIL 30
2001 2000 2001 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total reportable segments' (loss) earnings from operations $ (62) $ 184 $ 222 $ 288
Other income (expense), net .............................. 260 28 277 58
------- ------- ------- -------
Total earnings from continuing operations before taxes,
as reported .......................................... $ 198 $ 212 $ 499 $ 346
======= ======= ======= =======
</TABLE>
13. SUBSEQUENT EVENT
In June, 2001, Agilent and Hewlett-Packard agreed in principle to extend
Agilent's use of Hewlett-Packard legacy systems for its customer support
businesses. Agilent expects to extend and amend the related
Hewlett-Packard IT Service Level Agreements, due to expire in November
2001, for two to three years. Concurrently, Agilent announced the
cancellation of the development of replacement systems and is currently
assessing the degree to which assets associated with such system
development are impaired.
11
<PAGE> 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS INCLUDING, WITHOUT LIMITATION, STATEMENTS
REGARDING THE ANTICIPATED COMPLETION OF TRANSACTIONS, OUR LIQUIDITY
POSITION AND OUR EXPECTED OVERALL GROWTH THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN
FACTORS, INCLUDING THOSE DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT
FUTURE RESULTS" IN THIS FORM 10-Q.
BASIS OF PRESENTATION
The financial information presented in this Form 10-Q is not necessarily
indicative of our consolidated financial position, results of operations
or cash flows in the future.
RECLASSIFICATIONS
Amounts in the condensed consolidated financial statements as of October
31, 2000 and for the three and six months ended April 30, 2000 have been
reclassified to conform to the current period's presentation of
discontinued operations (see paragraph below).
DISCONTINUED OPERATIONS
On November 17, 2000, we agreed to sell our healthcare solutions
business to Koninklijke Philips Electronics, N.V. ("Philips") for
approximately $1.7 billion pursuant to an asset purchase agreement.
Agilent and Philips received antitrust clearance for the transaction
from the European Union Commission in March 2001. As of May 31, 2001,
the U.S. Department of Justice decided to allow the transaction to
proceed without challenge. Consequently, our consolidated financial
statements reflect our healthcare solutions business as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" ("APB 30"). The financial position,
results of operations and cash flows of our healthcare solutions
business have been classified as discontinued, and prior periods have
been restated, including the reallocation of general overhead charges to
our remaining business segments. Agilent and Philips expect to complete
the transaction before the end of the fiscal year at which time we
anticipate recording an after-tax gain in the range of $600 million to
$700 million. The amount of the gain is subject to change due to a
number of factors, primarily any proceeds related to contingent
performance, the valuation of certain assets and liabilities and the
length of time to the closing date of the sale.
IMPACT OF FOREIGN CURRENCIES
In the three and six months ended April 30, 2001, the U.S. dollar
strengthened against the Japanese yen. This movement had no material
effect on our net revenue or operating expense growth.
ADOPTION OF SFAS NO. 133
Effective November 1, 2000, Agilent adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133").
The adoption of SFAS No. 133 resulted in a cumulative pre-tax reduction
in earnings of $41 million ($25 million after-tax) and a pre-tax
increase in accumulated comprehensive income of $10 million.
12
<PAGE> 15
The current impacts of this accounting change are discussed under "Other
income (expense), net" below.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." We will adopt this Staff Accounting Bulletin, as amended,
in the fourth quarter of fiscal 2001. We currently do not believe the
adoption will have a material effect on our annual consolidated
financial statements.
RECENT ECONOMIC DOWNTURN
The recent economic downturn has had an impact on consumer and capital
spending in many of the worldwide markets that we serve. It also has
created an imbalance of supply and demand in the wireless and
semiconductor manufacturing industries. Management is uncertain as to
how long and how deep the current downturn may be in these markets.
These forces resulted in second quarter orders declining 41% from the
previous year's levels, with the most significant impacts on our test
and measurement and semiconductor products businesses. Since incoming
order rate is a good indicator of future revenue, we expect third
quarter revenue and net earnings to be down substantially compared with
the same period last year. It is also very likely that revenue in the
third quarter will also be lower than in the second quarter of this
year.
RESULTS OF OPERATIONS
Our results of operations for the three and six months ended April 30,
2001 and 2000 as a percentage of total net revenue follow.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
---------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
Products ..................................... 90.3 88.0 90.3 87.7
Services and other ........................... 9.7 12.0 9.7 12.3
----- ----- ----- -----
Total net revenue .......................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs and expenses:
Cost of products ............................. 53.6 42.7 49.0 43.4
Cost of services and other ................... 5.4 7.2 5.4 7.3
Research and development ..................... 14.7 12.3 14.0 13.1
Selling, general and administrative .......... 28.9 29.2 27.1 29.0
----- ----- ----- -----
Total costs and expenses ................... 102.6 91.4 95.5 92.8
----- ----- ----- -----
(Loss) earnings from continuing operations ...... (2.6) 8.6 4.5 7.2
Other income (expense), net ..................... 10.9 1.3 5.6 1.5
----- ----- ----- -----
Earnings from continuing operations before
taxes and cumulative effect of a change
in accounting principle .................... 8.3 9.9 10.1 8.7
Provision for taxes ............................. 4.8 3.4 4.7 3.0
----- ----- ----- -----
Net earnings from continuing operations before
cumulative effect of a change in accounting
principle ................................... 3.5 6.5 5.4 5.7
Cumulative effect of adopting SFAS No. 133, net
of tax benefit ............................... -- -- (0.5) --
Earnings from discontinued operations, net of tax 0.5 1.2 0.2 1.7
----- ----- ----- -----
Net earnings .................................... 4.0 7.7 5.1 7.4
===== ===== ===== =====
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
---------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of products as a percentage of products
revenue ..................................... 59.4 48.5 54.2 49.5
Cost of services and other as a percentage of
services and other revenue .................. 55.6 60.5 56.1 59.2
</TABLE>
NET REVENUE
Net revenue increased 11.2 percent to $2.4 billion and 23.5 percent to
$4.9 billion in the three and six months ended April 30, 2001,
respectively, as compared to $2.1 billion and $4.0 billion in the same
periods in 2000. During the first half of fiscal 2001 we have continued
to sell certain portions of our lease portfolio to the CIT Group, Inc.
("CIT"), which was recently acquired by Tyco International, Ltd. (the
portfolio sale will be referred to in this document as the "CIT sale").
We have contracted with CIT to initiate new lease business with our
customers on our behalf. Consequently, our service revenue is generally
smaller in 2001 than in the previous year as this arrangement has
eliminated our rental revenue streams. Excluding the CIT sale, net
revenue increased 4.9 and 18.7 percent in the three and six months ended
April 30, 2001, respectively, as compared to the same periods in 2000.
The increases reflect increased sales of our products serving the
communications and life sciences markets. The increases were partially
offset by a decline in revenue from our semiconductor products group in
the three months ended April 30, 2001.
Revenue in the United States increased 2.8 percent to $892 million and
25.1 percent to $2.0 billion in the three and six months ended April 30,
2001, respectively, as compared to the same periods in 2000.
International revenue increased 17.0 percent to $1.5 billion and 22.3
percent to $2.9 billion in the three and first six months ended April
30, 2001, respectively, as compared to the same periods in 2000. The
higher net revenue growth internationally in the three months ended
April 30, 2001 was primarily attributable to the CIT sale. Excluding the
CIT sale, international revenue increased 6.4 percent in the three
months ended April 30, 2001. There was minimal currency impact on net
revenue growth in the three and six months ended April 30, 2001 as
compared to the same periods in 2000.
In the three months ended April 30, 2001, revenue from products
increased 14.0 percent while revenue from services and other decreased
9.4 percent, as compared to the same periods in 2000. In the first six
months of 2001, revenue from products increased 27.1 percent while
revenue from services and other decreased 2.9 percent, as compared to
the same period in 2000. The increase in product revenue growth was
primarily due to increased sales of our products in the communications,
electronics and life sciences markets. In addition, the CIT sale had a
favorable impact on our product revenue growth and an unfavorable impact
on our services and other revenue growth. Excluding the CIT sale, net
revenue from products increased 6.9 percent and 21.7 percent in the
three and six months ended April 30, 2001 as compared to the same
periods in 2000. Excluding lease revenue from all periods, revenue from
services increased 8.4 percent and 10.7 percent in the three and six
months ended April 30, 2001 as compared to the same periods in 2000.
Generally, there is a lag between service revenue growth and product
revenue growth. This lag occurs because service revenue increases as our
installed base of products increases and warranty periods expire.
(LOSS) EARNINGS FROM OPERATIONS
We reported a loss from continuing operations of $62 million in the
three months ended April 30, 2001, as compared to earnings from
continuing operations of $184 million in the same period in 2000.
Earnings from continuing operations decreased 22.9 percent to $222
million in the six months ended April 30, 2001 as compared to the same
period in 2000. Excluding the CIT sale, we had a loss from continuing
operations of $125 million and earnings from continuing operations of
$130 million in the three and six months ended April 30, 2001,
respectively, as compared to $184 million and $288 million in the same
periods in 2000. The decreases were primarily due to weak results in the
test and measurement and semiconductor
14
<PAGE> 17
businesses and increased goodwill amortization related to recent
acquisitions. These decreases were partially offset by the performance
of our chemical analysis business. Our results from continuing
operations were also affected by the reallocation of general overhead
costs from our discontinued healthcare solutions business to continuing
operations. The overhead absorbed by continuing operations decreased $20
million and $44 million in the three and six month period ended April
30, 2001, as compared to the prior year.
Costs of products and services, as a percentage of net revenue,
increased 9.1 percentage points to 59.0 percent in the three months
ended April 30, 2001, as compared to the same period in 2000. Costs of
products and services, as a percentage of net revenue, increased 3.7
percentage points to 54.4 percent in the first six months of 2001, as
compared to the same period in 2000. The CIT sale had minimal impact on
the costs of products and services, as a percentage of net revenue. The
increases were primarily attributable to increased reserves for excess
and obsolete inventory in the amount of approximately $100 million and
lower than anticipated manufacturing volumes which resulted in
unabsorbed manufacturing overhead of approximately $100 million. These
increases were partially offset by higher volumes in our chemical
analysis business.
Operating expenses as a percentage of net revenue increased 2.1
percentage points to 43.6 percent and decreased 1.0 percentage point to
41.1 percent in the three and six months ended April 30, 2001,
respectively, as compared to 41.5 percent and 42.1 percent in the same
periods in 2000. Excluding the CIT sale, operating expenses as a
percentage of net revenue increased 4.7 percentage points to 46.2
percent and 0.6 percentage points to 42.7 percent in the three and six
months ended April 30, 2001, respectively, as compared to the same
periods in 2000. The increases were primarily due to higher research and
development costs as well as higher goodwill amortization related to
recent acquisitions partially offset by higher net revenue. During the
three months ended April 30, 2001, we have initiated measures to reduce
discretionary spending, on items such as travel and temporary labor, and
the full benefits of these efforts will be felt beginning in the third
quarter of this year.
Research and development expenses as a percentage of net revenue
increased 2.4 percentage points and 0.9 percentage points in the three
and six months ended April 30, 2001, respectively, as compared to the
same periods in 2000. The increases reflect our continuing commitment to
invest in developing new products and technologies in the areas of
wireless communications, networking equipment and life sciences. Total
selling, general and administrative expenses for the three and six month
periods ended April 30, 2001 included an increase of $72 million and
$106 million, respectively, related to additional goodwill amortization
as compared to the prior year. Revenues increased more quickly than
selling, general and administrative expenses, leading to a decrease in
those expenses as a percentage of revenues of 0.3 percentage points and
1.9 percentage points in the three and six months ended April 30, 2001,
respectively, as compared to the same periods in 2000.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, increased $232 million to $260 million and
$219 million to $277 million in the three and six months ended April 30,
2001, respectively, as compared to $28 million and $58 million for the
same periods in 2000. The increases were primarily attributable to a
$269 million gain on sale of land in the three months ended April 30,
2001. These increases were partially offset by higher interest expense
and lower interest income as a result of increased borrowings and
reduced cash levels. There were no material changes related to changes
in the fair value of derivative instruments and in the six months ended
April 30, 2001.
PROVISION FOR TAXES
In prior periods, our effective tax rate was calculated using an
estimate of our annual pretax income. Due to the impacts of the recent
economic downturn, management has determined that a reliable estimate of
our annual pre-tax income and related annual effective tax rate cannot
be made. Therefore, we have used the actual year-to-date effective tax
rate as our best estimate of the annual effective tax rate for fiscal
2001. Our effective tax rate for the six months ended April 30, 2001 was
48%. Our future effective tax rate will be calculated using an estimate
of our annual pre-tax income and will be subject to the impact of future
profitability, the effects of business acquisitions and dispositions, as
well as changes in the mix of our pre-tax earnings amongst jurisdictions
with varying statutory rates.
15
<PAGE> 18
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED APRIL 30, APRIL 30,
--------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenue................................. $1,648 $1,385 $3,333 $2,546
Earnings from operations.................... 10 130 227 202
Operating margin...................... 0.6% 9.4% 6.8% 7.9%
</TABLE>
NET REVENUE
Net revenue from our test and measurement business increased 19.0
percent to $1.6 billion and 30.9 percent to $3.3 billion in the three
and six months ended April 30, 2001, respectively, as compared to the
same periods in 2000. Excluding the CIT sale, net revenue from our test
and measurement business increased 9.5 percent to $1.5 billion and 23.5
percent to $3.1 billion in the three and six months ended April 30,
2001, respectively, as compared to the same periods in 2000. The
increases were attributable to strong growth in our products serving the
communications test markets. Revenue growth was also strong in our
products and systems that enable our customers to design and develop
next-generation communications networks, deploy new technologies and
services as well as manage and optimize existing networks. The increase
in the three months ended April 30, 2001 was partially offset by a
decline in revenue from our electronics manufacturing test and
semiconductor test system businesses.
Net revenue from products increased 24.1 percent while our net revenue
from services and other decreased 12.4 percent, in the three months
ended April 30, 2001, as compared to the same period in 2000. Net
revenue from products increased 36.5 percent while our net revenue from
services and other decreased 2.7 percent, in the six months ended April
30, 2001, as compared to the same period in 2000. The increase in
product revenue was primarily due to increased sales of our products in
the communications and electronics markets. In addition, the CIT sale
had a favorable impact on the relative growth of our product revenue and
an unfavorable impact on our services and other revenue growth.
Excluding the CIT sale, net revenue from products increased 13.1 percent
and 27.9 percent in the three and six months ended April 30, 2001,
respectively, as compared to the same periods in 2000. Excluding lease
revenue, revenue from services increased 12.1 percent and 17.2 percent
in the three and six months ended April 30, 2001, respectively, as
compared to the same periods in 2000. Generally, there is a lag between
product revenue growth and service revenue growth. This lag occurs
because service revenue increases as our installed base of products
increases and warranty periods expire.
EARNINGS FROM OPERATIONS
Earnings from operations from our test and measurement business
decreased 92.3 percent to $10 million and 12.4 percent to $227 million
in the three and six months ended April 30, 2001, respectively, as
compared to the same periods in 2000. Excluding the CIT sale, our test
and measurement business had a loss from operations of $51 million and
earnings from operations of $137 million in the three and six months
ended April 30, 2001, respectively, as compared to earnings from
operations of $130 million and $202 million in the same periods in 2000.
The decreases resulted primarily from higher cost of products and
services as a percentage of revenue and higher goodwill amortization
related to recent acquisitions.
Cost of products and services as a percentage of net revenue increased
9.3 percentage points and 4.7 percentage points in the three and six
months ended April 30, 2001, respectively, as compared to the same
periods in 2000. The increases were primarily due to increased reserves
and write-offs for excess and obsolete inventory and manufacturing
inefficiencies as a result of lower than anticipated volumes. In
addition, premium prices paid for scarce components contributed to the
increase for the six months ended
16
<PAGE> 19
April 30, 2001.
Operating expenses as a percentage of net revenue decreased 0.5
percentage points and 3.5 percentage points in the three and six months
ended April 30, 2001, respectively, as compared to the same periods in
2000. The decreases were due to higher revenue partially offset by
higher expenses.
Research and development expenses as a percentage of net revenue
increased 1.5 percentage points and essentially flat in the three and
six months ended April 30, 2001, respectively, as compared to the same
periods in 2000. Selling, general and administrative expenses as a
percentage of net revenue decreased 1.9 percentages points and 3.3
percentage points in the three and six months ended April 30, 2001,
respectively, as compared to the same periods in 2000. The decreases
were primarily due to higher revenue partially offset by higher goodwill
amortization related to recent acquisitions.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED APRIL 30, APRIL 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenue .......................... $ 443 $ 497 $ 1,038 $ 944
(Loss) earnings from operations ...... (97) 54 (44) 77
Operating margin (deficiency) ..... (21.9%) 10.9% (4.2%) 8.2%
</TABLE>
NET REVENUE
Net revenue from our semiconductor products business decreased 10.9
percent to $443 million and increased 10.0 percent to $1.0 billion in
the three and six months ended April 30, 2001, respectively, as compared
to the same periods in 2000. The decrease in the three months ended
April 30, 2001 was primarily due to lower volumes in virtually all
product lines. The increase in the six months ended April 30, 2001 was
primarily due to strong growth in networking products in the first
quarter of 2001, particularly in fiber optics and storage-area-network
components. As a percentage of net revenue for the semiconductor
products business, revenue from sales to Hewlett-Packard, consisting
primarily of ASICs and motion control products, was 31.7 percent and
32.3 percent for the three and six months ended April 30, 2001,
respectively, as compared to 28.4 percent and 29.0 percent for the same
periods in 2000.
(LOSS) EARNINGS FROM OPERATIONS
Our semiconductor products business had a loss from operations of $97
million and $44 million in the three and six months ended April 30,
2001, respectively, as compared to earnings from operations of $54
million and $77 million in the same periods in 2000. The decreases
resulted primarily from lower net revenue and higher cost of products as
a percentage of net revenue. Our manufacturing costs generally do not
vary directly with production in the short-term. Consequently, in
periods of reduced demand our costs of sales decrease at a slower rate
than net revenue.
Cost of products as a percentage of net revenue increased 19.6
percentage points and 5.4 percentage points in the three and six months
ended April 30, 2001, respectively, as compared to the same periods in
2000. The increases were primarily driven by the sharp decline in
manufacturing volumes that led to an increase in unabsorbed overhead
costs. In addition, a decline in demand led to increased reserves for
excess and obsolete inventory.
Operating expenses as a percentage of net revenue increased 13.1
percentage points and 7.0 percentage points in the three and six months
ended April 30, 2001, respectively, as compared to the same periods in
17
<PAGE> 20
2000. The percentage increase was driven by a continued commitment to
research and development investment combined with a decreased revenue
base.
Research and development expenses as a percentage of net revenue
increased 7.9 percentage points and 5.2 percentage points in the three
and six months ended April 30, 2001, respectively, as compared to the
same periods in 2000. The increases reflect increased investments in the
fast-growing fiber optics, high-speed networking, and image and position
sensor businesses. Selling, general and administrative expenses as a
percentage of net revenue increased 5.3 percentage points and 1.8
percentage points in the three and six months ended April 30, 2001,
respectively, as compared to the same periods in 2000. The increases
were primarily driven by goodwill amortization related to recent
acquisitions.
CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED APRIL 30, APRIL 30,
---------------- -----------------
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenue .................. $291 $ 260 $559 $503
Earnings from operations ..... 25 -- 39 9
Operating margin ....... 8.6% 0.0% 7.0% 1.8%
</TABLE>
NET REVENUE
Net revenue from our chemical analysis business increased 11.9 percent
to $291 million and 11.1 percent to $559 million in the three and six
months ended April 30, 2001, respectively, as compared to the same
periods in 2000. The increases were driven by increased sales of our
products in the life sciences market moderated by slower growth in our
traditional chemical and petrochemical markets. Service revenue was also
flat in the three and six months ended April 30, 2001, as compared to
the same periods in 2000.
EARNINGS FROM OPERATIONS
Earnings from operations from our chemical analysis business increased
to $25 million and to $39 million in the three and six months ended
April 30, 2001, respectively, as compared to $0 and $9 million in the
same periods in 2000. The increases were primarily due to higher net
revenue. In addition, operational efficiencies contributed to the
increase.
Cost of products and services as a percentage of net revenue decreased
by 2.0 percentage points for the three months ended April 30, 2001 as
compared to the same period in 2000. The decrease was primarily due to
higher revenues resulting from increased volumes. Cost of products and
services as a percentage of net revenue was essentially flat for the six
months ended April 30, 2001 as compared to the same period in 2000.
Operating expenses as a percentage of net revenue decreased 6.6
percentage points and 5.4 percentage points in the three and six months
ended April 30, 2001, respectively, as compared to the same periods of
2000. The decreases resulted primarily from higher revenues and
increased operational efficiency.
Research and development expenses as a percentage of net revenue were
essentially flat in the three and six months ended April 30, 2001,
respectively, as compared to the same periods in 2000. Selling, general
and administrative expenses as a percentage of net revenue decreased 6.1
percentage points and 4.6 percentage points in the three and six months
April 30, 2001, respectively, as compared to the same periods in 2000.
The decreases were primarily driven by increased operational
efficiencies.
18
<PAGE> 21
HEALTHCARE SOUTIONS
Our healthcare solutions business is now classified as a discontinued
operation. The results for the three and six month periods ended April
30, 2000 and 2001 are shown in the table below.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenue .............................................. $362 $343 $655 $738
Costs and expenses ....................................... 338 313 636 641
---- ---- ---- ----
Earnings from discontinued operations .................... 24 30 19 97
Other income, net ........................................ 1 14 3 15
---- ---- ---- ----
Earnings from discontinued operations before taxes ....... 25 44 22 112
Provision for taxes ...................................... 12 18 11 43
---- ---- ---- ----
Net earnings from discontinued operations ................ $ 13 $ 26 $ 11 $ 69
==== ==== ==== ====
</TABLE>
Divestiture costs of $27 million and $40 million have been included in
the results from discontinued operations for the three and six month
periods ended April 30, 2001, in accordance with APB 30.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $809 million at April 30, 2001 as
compared to $996 million at October 31, 2000. Our cash balances have
declined as we continue to invest in our infrastructure and acquire
companies that will help us achieve our growth and strategic development
targets. These outflows were partially offset by the use of our
borrowing facilities, by the CIT sale and the sale of land located in
San Jose, California.
We used $57 million of cash in operating activities during the six
months ended April 30, 2001. We generated cash from operating activities
of $158 million for the corresponding period of 2000. The decrease in
operating cash flows was mainly attributable to an increase in other
current assets and inventory and a decrease in accounts payable, offset
by a decrease in accounts receivable.
Net cash used in investing activities in the first six months of 2001
was $849 million, as compared to $532 million for the corresponding
period of 2000. The increase in investment activity was primarily due to
the acquisition of Objective Systems Integrators, Inc. and other
companies, investment in property, plant and equipment, offset by
proceeds from the sale of land located in San Jose, California and from
the CIT sale.
On January 2, 2001, we entered into a new one-year revolving credit
facility for $150 million, that has the same terms and conditions as our
existing five-year $250 million and one-year $250 million revolving
credit facilities. As of April 30, 2001, we had borrowed $110 million
under the new facility and approximately $500 million in commercial
paper supported by our two existing revolving credit facilities. In
addition to these committed facilities, we have access to uncommitted
credit lines through our banking partners, under which we had borrowed
approximately $160 million as of April 30, 2001.
We expect to fund future operations and potential acquisitions from our
operating cash flows, the anticipated proceeds from the sale of our
healthcare solutions business to Philips and bank credit facilities.
19
<PAGE> 22
FACTORS THAT MAY AFFECT FUTURE RESULTS
IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR
PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL
SUFFER.
We sell our products in several industries that are characterized by rapid
technological changes, frequent new product and service introductions and
evolving industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will likely become
technologically obsolete over time, in which case our revenue and operating
results would suffer. The success of our new product and service offerings will
depend on several factors, including our ability to:
- properly identify customer needs;
- price our products competitively;
- innovate and develop new technologies and applications;
- successfully commercialize new technologies in a timely manner;
- manufacture and deliver our products in sufficient volumes on time;
- differentiate our offerings from our competitors' offerings; and
- anticipate our competitors' announcements of new products, services or
technological innovations.
OUR OPERATING RESULTS COULD BE HARMED IF THE GENERAL ECONOMY OR THE INDUSTRIES
INTO WHICH WE SELL OUR PRODUCTS ARE IN DOWNWARD CYCLES.
Several significant industries and markets into which we sell our products are
cyclical and are subject to general economic conditions. From time to time, both
the semiconductor and the electronics industries have experienced significant
downturns, often in connection with, or in anticipation of maturing product
cycles and declines in general economic conditions. The computer industry is
also subject to seasonal and cyclical fluctuations in demand for its products.
These industry and general economic downturns have been characterized by
diminished product demand, excess manufacturing capacity and the subsequent
accelerated erosion of average selling prices.
The recent economic downturn reduced consumer and capital spending in many of
the markets that we serve worldwide. It also has created an imbalance of supply
and demand in the wireless and semiconductor manufacturing industries. These
forces resulted in second quarter orders declining 41 percent from the previous
year's levels, with the most significant impacts on our test and measurement and
semiconductor product businesses. We are uncertain as to how long and how deep
the current downturn may be in these markets. Several factors make it very
likely that revenue in the third quarter will be lower than in the second
quarter: the extremely uncertain business climate, the steep order decline in
the second quarter and the fact that the company shipped a substantial portion
of its backlog during the second quarter. Any continued or further slowdowns in
our customers' markets or in general economic conditions would likely result in
a reduction in demand for our products and services and could harm our business
and our stock price.
WE HAVE TAKEN AND CONTINUE TO TAKE MEASURES TO ADDRESS THE RECENT SLOWDOWN IN
DEMAND, WHICH COULD HAVE LONG-TERM EFFECTS ON OUR BUSINESS
Our business has been experiencing lower revenues due to decreased or cancelled
customer orders. In an attempt to reduce our expenses, we have frozen hiring,
cut back significantly on our use of temporary workers and reduced all
discretionary spending. We also have initiated short-term manufacturing closures
to reduce production levels. In early April, Agilent announced a temporary
10-percent reduction in pay, effective May 1. This reduction in pay applies to
all employees globally, wherever possible. The reduction in pay takes effect via
a 10-percent reduction in hours for certain employees, in accordance with local
law. In addition, Agilent is continuing initiatives to streamline its operations
and improve its customer interfaces. Each of these measures could have long-term
effects on our business by reducing our pool of technical talent, decreasing or
slowing improvements in our products and making it more difficult for us to
respond to customers. These circumstances could cause a decline in our revenues.
20
<PAGE> 23
IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH OUR MANUFACTURING CAPACITY, OUR
EARNINGS MAY SUFFER.
Because we cannot quickly adapt our production and related cost structures to
rapidly changing market conditions, if demand does not meet our expectations,
our manufacturing capacity will exceed our production requirements. The fixed
costs associated with excess manufacturing capacity will adversely affect our
earnings. Conversely, if our manufacturing capacity does not keep pace with
product demand, or if we experience difficulties in obtaining parts or
components needed for manufacturing, we will not be able to fulfill orders in a
timely manner which in turn may have a negative effect on our earnings and
overall business.
FAILURE TO ADJUST OUR ORDERS FOR PARTS DUE TO CHANGING MARKET CONDITIONS COULD
ADVERSELY AFFECT OUR EARNINGS.
Our earnings would be harmed if we are unable to adjust our orders for
parts to market fluctuations. In order to secure components for the production
of products, at times we make advance payments to suppliers, or we may enter
into non-cancelable purchase commitments with vendors, which could impact our
ability to adapt our orders to market demands. By contrast, our results will be
materially and adversely impacted if we do not receive sufficient parts to meet
our requirements in a timely manner. Certain parts may be available only from a
single supplier or a limited number of suppliers. In addition, suppliers may
cease manufacturing certain components that are difficult to replace without
significant reengineering of our products. Suppliers may also extend lead times,
limit supplies or increase prices due to capacity constraints or other factors.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS COULD ADVERSELY AFFECT OUR SALES.
Since we sell our products worldwide, our businesses are subject to
risks associated with doing business internationally. We anticipate that revenue
from international operations will continue to represent a substantial portion
of our total revenue. In addition, many of our manufacturing facilities and
suppliers are located outside the United States. Accordingly, our future results
could be harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- differing protection of intellectual property; and
- unexpected changes in regulatory requirements.
For example, our businesses declined in 1998 when Korea and Japan
experienced economic difficulties. The recurrence of weakness in these economies
or weakness in other international economies could have a significant negative
effect on our future operating results.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Given the nature of the markets in which we participate, we cannot
reliably predict future revenue and profitability, and unexpected changes may
cause us to adjust our operations. A high proportion of our costs are fixed, due
in part to our significant sales, research and development and manufacturing
costs. Thus, relatively small declines in revenue could disproportionately
affect
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<PAGE> 24
our operating results in a quarter. For example, when orders declined in the
second quarter of 2001, it caused significant negative fluctuations in our
operating results.
Other factors that could affect our quarterly operating results include:
- competitive pressures resulting in lower selling prices;
- changes in the relative portion of our revenue represented by our
various products and customers;
- changes in the timing of product orders; and
- our inability to forecast revenue in a given quarter from large system
sales.
THE TECHNOLOGY LABOR MARKET IS COMPETITIVE, AND OUR BUSINESSES WILL SUFFER IF WE
ARE NOT ABLE TO HIRE AND RETAIN SUFFICIENT PERSONNEL.
Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. Although there are currently qualified personnel
available, the labor market may change in the future. If we fail to retain and
hire a sufficient number of these personnel, we will not be able to maintain and
expand our businesses. Competition for qualified personnel in the technology
area is intense, and we operate in several geographic locations where labor
markets are particularly competitive, including the Silicon Valley region of
Northern California where our headquarters and central research and development
laboratories are located. Although we believe we offer competitive salaries and
benefits, certain of our businesses have had to increase spending in order to
retain personnel. In addition, due to current economic conditions, we have
frozen hiring and cut back significantly on our use of temporary workers. In
early April, Agilent announced a temporary 10-percent reduction in pay,
effective May 1, 2001. These temporary measures may make it more difficult for
us to retain sufficient personnel.
OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY
RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED.
In the normal course of business, we frequently engage in discussions
with third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. Although completion of any one transaction may not
have a material effect on our financial position, results of operations or cash
flows taken as a whole, our financial results may differ from the investment
community's expectations in a given quarter. Divestiture of a part of our
business may result in the cancellation of orders and charges to earnings.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE COMPANIES WE ACQUIRE OR REALIZE
THE EXPECTED VALUE FROM ACQUIRING SUCH COMPANIES, AND OUR EFFORTS MAY DIVERT
ATTENTION FROM OTHER BUSINESS OPERATIONS.
Acquisitions and strategic alliances may require us to integrate not
only products but also a different company culture, management team and business
infrastructure. We may also have to develop, manufacture and market the products
of newly-acquired companies in a way that enhances the performance of our
combined businesses or product line to realize the value from expected synergies
of combining the two companies. Depending on the size and complexity of an
acquisition, our successful integration of the entity into Agilent depends on a
variety of factors, including:
- the hiring and retention of key employees,
- management of facilities and employees in separate geographic areas,
- retention of key customers, and
- the integration or coordination of different research and development,
product manufacturing and sales programs and facilities.
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<PAGE> 25
All of these efforts require varying levels of management resources, which
may divert our attention from other business operations.
OUR SEMICONDUCTOR TECHNOLOGY LICENSING AND SUPPLY ARRANGEMENTS WITH
HEWLETT-PACKARD LIMIT OUR ABILITY TO SELL TO OTHER COMPANIES AND COULD RESTRICT
OUR ABILITY TO EXPAND OUR BUSINESSES.
We do not have a license under Hewlett-Packard's patents, patent
applications and invention disclosures for, with some exceptions, inkjet
products, printer products (including printer supplies, accessories and
components), document scanners and computing products. In addition, our ICBD
Technology Ownership and License Agreement, which generally covers integrated
circuit technology that is used in integrated circuits for Hewlett-Packard's
printers, scanners and computers, provides that for a period of three years in
some cases and 10 years in other cases we are prohibited, with some exceptions,
from using this integrated circuit technology for the development and sale of
integrated circuits for use in inkjet products, printer products (including
printer supplies, accessories and components), document scanners and computing
products to third parties other than Hewlett-Packard.
Although we have entered into a supply agreement for the sale to
Hewlett-Packard of these kinds of integrated circuits, the supply agreement does
not require Hewlett-Packard to purchase a minimum amount of product from us. In
the event that Hewlett-Packard reduces its purchase of our integrated circuits,
we would be unable to address this reduction through sales of these kinds of
integrated circuits for these types of products to other customers.
IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER PRODUCTS
DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER, OUR SEMICONDUCTOR
PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.
Historically, our semiconductor products business has sold products to
Hewlett-Packard and has engaged in product development efforts with divisions of
Hewlett-Packard. For the three and six months ended April 30, 2001,
Hewlett-Packard accounted for 5.9% and 6.4%, respectively, of our total net
revenue and 31.7% and 32.3%, respectively, of our semiconductor products
business' net revenue. In comparison, for the three and six months ended April
30, 2000, Hewlett-Packard accounted for 6.3% and 5.8%, respectively, of our
total net revenue and 28.4% and 29.0%, respectively, of our semiconductor
products business' net revenue.
WE MAY FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND REGULATIONS
REGARDING THE MANUFACTURE, PROCESSING,DISTRIBUTION OF CHEMICALS, OR REGARDING
NOTIFICATION ABOUT CHEMICALS, AND IF WE FAIL TO COMPLY, WE COULD BE SUBJECT TO
CIVIL OR CRIMINAL PENALTIES OR BE PROHIBITED FROM DISTRIBUTING OUR PRODUCTS.
Some of our chemical analysis business' products are used in conjunction
with chemicals whose manufacture, processing, distribution and notification
requirements are regulated by the United States Environmental Protection Agency
under the Toxic Substances Control Act, and by regulatory bodies in other
countries with laws similar to the Toxic Substances Control Act. We must conform
the manufacture, processing and distribution of these chemicals to these laws,
and adapt to regulatory requirements in all countries as these requirements
change. If we fail to comply with these requirements in the manufacture or
distribution of our products, then we could be made to pay civil penalties, face
criminal prosecution and, in some cases, be prohibited from distributing our
products in commerce until the products or component substances are brought into
compliance.
ENVIRONMENTAL CONTAMINATION FROM PAST OPERATIONS COULD SUBJECT US TO
UNREIMBURSED COSTS AND COULD HARM ON-SITE OPERATIONS AND THE FUTURE USE AND
VALUE OF THE PROPERTIES INVOLVED.
Some of our properties are undergoing remediation by Hewlett-Packard for
known subsurface contamination. Hewlett-Packard has agreed to retain the
liability for all known subsurface contamination, perform the required
remediation and indemnify us with respect to claims arising out of that
contamination. The determination of the existence and cost of any additional
contamination caused by us could involve costly and time-consuming negotiations
and litigation. In addition, Hewlett-Packard will have access to our properties
to perform remediation. While Hewlett-Packard has agreed to minimize
interference with on-site operations at those properties, remediation activities
and subsurface contamination may require us to incur unreimbursed costs and
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<PAGE> 26
could harm on-site operations and the future use and value of the properties. We
cannot be sure that Hewlett-Packard will fulfill its indemnification or
remediation obligations.
We are indemnifying Hewlett-Packard for any liability associated with
contamination from past operations at all other properties transferred from
Hewlett-Packard to us other than those properties currently undergoing
remediation by Hewlett-Packard. While we are not aware of any material
liabilities associated with existing subsurface contamination at any of those
properties, subsurface contamination may exist, and we may be exposed to
material liability as a result of the existence of that contamination.
ENVIRONMENTAL CONTAMINATION CAUSED BY ONGOING OPERATIONS COULD SUBJECT US TO
SUBSTANTIAL LIABILITIES IN THE FUTURE.
Our semiconductor and other manufacturing processes involve the use of
substances regulated under various international, federal, state and local laws
governing the environment. We may be subject to liabilities for environmental
contamination, and these liabilities may be substantial. Although our policy is
to apply strict standards for environmental protection at our sites inside and
outside the United States, even if not subject to regulations imposed by foreign
governments, we may not be aware of all conditions that could subject us to
liability.
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS GOVERNMENTAL REGULATIONS, COMPLIANCE
WITH WHICH MAY CAUSE US TO INCUR SIGNIFICANT EXPENSES, AND IF WE FAIL TO
MAINTAIN SATISFACTORY COMPLIANCE WITH CERTAIN REGULATIONS, WE MAY BE FORCED TO
RECALL PRODUCTS AND CEASE THEIR MANUFACTURE AND DISTRIBUTION, AND WE COULD BE
SUBJECT TO CIVIL OR CRIMINAL PENALTIES.
Our businesses are subject to various other significant international,
federal, state and local, health and safety, packaging, product content and
labor regulations. These regulations are complex, change frequently and have
tended to become more stringent over time. We may be required to incur
significant expenses to comply with these regulations or to remedy past
violations of these regulations. Any failure by us to comply with applicable
government regulations could also result in cessation of our operations or
portions of our operations, product recalls or impositions of fines and
restrictions on our ability to carry on or expand our operations. In addition,
because many of our products are regulated or sold into regulated industries, we
must comply with additional regulations in marketing our products.
Our products and operations are also often subject to the rules of
industrial standards bodies, like the International Standards Organization, as
well as regulation of other agencies such as the United States Federal
Communications Commission. We also must comply with work safety rules. If we
fail to adequately address any of these regulations, our businesses will be
harmed.
Our chemical analysis products are used in the drug design and production
processes to test compliance with the Toxic Substances Control Act, the Federal
Food, Drug and Cosmetic Act and similar regulations. Therefore, we must
continually adapt our chemical analysis products to changing regulations.
In addition, the medical device products produced by our healthcare
solutions business are subject to regulation by the United States Food and Drug
Administration (FDA) and similar international agencies. Their regulations
govern a wide variety of product activities from design and development to
labeling, manufacturing, promotion, sales and distribution. In the first quarter
of 2001, we announced a definitive agreement to sell our healthcare solutions
business to Philips. Although we have received U.S. and European antitrust
clearance, the sale is contingent upon other customary closing conditions.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND OUR
FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT
CONTRACTS COULD HARM OUR BUSINESSES.
We have agreements relating to the sale of our products to government
entities and as a result we are subject to various statutes and regulations that
apply to companies doing business with the government. The laws governing
government contracts differ from the laws governing private contracts. For
example, many government contracts contain pricing terms and conditions that are
not applicable to private contracts. We are also subject to investigation for
compliance with the regulations governing
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<PAGE> 27
government contracts. We have received and are responding to formal requests for
information by the government regarding our compliance with these terms and
regulations, which relate to our contracts for sales of products to certain
government agencies. These requests may result in legal proceedings against us
or liability which may be significant.
PROVIDING SERVICES TO PHILIPS AFTER THE SALE OF OUR HEALTHCARE SOLUTIONS
BUSINESS COULD DISRUPT OUR OPERATIONS.
We signed a definitive agreement to sell our healthcare solutions
business to Koninklijke Philips Electronics ("Philips"), and have received U.S.
and European antitrust clearance. The sale is still contingent upon other
customary closing conditions. In the event that the transaction is completed, we
will be providing transition services to Philips. The provision of such services
will require us to redirect resources and could disrupt our operations. However,
if the closing of the transaction is delayed or does not occur, we would need to
find alternate sources of funding for our future operations and our liquidity
could be negatively affected.
THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND WE
COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM
SELLING PRODUCTS.
Third parties may claim that we are infringing their intellectual
property rights, and we may be found to infringe those intellectual property
rights. While we do not believe that any of our products infringe the valid
intellectual property rights of third parties, we may be unaware of intellectual
property rights of others that may cover some of our technology, products and
services. Moreover, in connection with future intellectual property infringement
claims, we will only have the benefit of asserting counterclaims based on
Hewlett-Packard's intellectual property portfolio in limited circumstances, and
we will only be able to offer licenses to Hewlett-Packard's intellectual
property in order to resolve claims in limited circumstances. In addition,
although we believe we have all necessary rights to use the new brand name, our
rights to use it may be challenged by others.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increases these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. However, we may not be able to obtain royalty or
license agreements on terms acceptable to us, or at all. We also may be subject
to significant damages or injunctions against development and sale of certain of
our products.
We often rely on licenses of intellectual property useful for our
businesses. We cannot assure you that these licenses will be available in the
future on favorable terms or at all. In addition, our position with respect to
the negotiation of licenses may change as a result of our separation from
Hewlett-Packard. Our patent cross-license agreement with Hewlett-Packard gives
us a conditional right to sublicense only a portion of Hewlett-Packard's
intellectual property portfolio. As a result, in negotiating patent
cross-license agreements with third parties, we may be unable to obtain
agreements on terms as favorable as we may have been able to obtain if we could
sublicense Hewlett-Packard's entire intellectual property portfolio.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in large part on our proprietary technology. We rely
on a combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which could harm our
operating results.
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patents or
trademark registrations. In addition, our patents may not provide us a
significant competitive advantage.
We may be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect infringement and
may lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture market share.
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IF OUR FACTORIES OR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE TO
EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.
Several of our facilities could be subject to a catastrophic loss caused
by earthquake due to their location. We have significant facilities in areas
with above average seismic activity, such as our production facilities,
headquarters and Agilent Laboratories in California and our production
facilities in Washington and Japan. If any of these facilities were to
experience a catastrophic loss, it could disrupt our operations, delay
production, shipments and revenue, and result in large expenses to repair or
replace the facility. Agilent self-insures against such losses and does not
carry catastrophic insurance policies to cover potential losses resulting from
earthquakes.
ONGOING POWER SUPPLY PROBLEMS IN CALIFORNIA COULD HARM OUR BUSINESS.
Our corporate headquarters, a portion of our research and development
activities, other critical business operations and a certain number of our
suppliers are located in California. California has recently experienced ongoing
power shortages, which have resulted in "rolling blackouts." These blackouts
could cause disruptions to our operations and the operations of our suppliers,
distributors and resellers, and customers. Agilent self-insures against such
disruptions and does not carry catastrophic insurance policies to cover
potential losses resulting from power shortages. In addition, California has
recently experienced rising energy costs that could negatively impact our
results.
WE ARE IN THE PROCESS OF DEVELOPING OUR OWN BUSINESS PROCESSES AND INFORMATION
SYSTEMS, AND PROBLEMS WITH THE REDESIGN AND IMPLEMENTATION OF THESE PROCESSES
AND SYSTEMS COULD INTERFERE WITH OUR OPERATIONS.
We are in the process of creating business processes and systems to
eventually replace our current systems. We may not be successful in implementing
these systems and transitioning data. For example, we plan to implement new
enterprise resource planning software applications to manage some of our
business operations beginning in the first quarter of 2002. Failure to smoothly
and successfully implement this and other systems could temporarily interrupt
our operations. Failure to successfully move to the new enterprise resource
planning systems could adversely impact our ability to run our business. Also,
we may not be able to develop and implement these systems before certain of our
transitional services agreements with Hewlett-Packard expire.
WE MAY NOT BE ABLE TO REPLACE OR MAY PAY INCREASED COSTS TO REPLACE TRANSITIONAL
SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD EXPIRE.
Currently we use Hewlett-Packard's systems to support a portion of our
operations, mainly customer support and networks. We also lease and sublease
certain office and manufacturing facilities from Hewlett-Packard. We have an
agreement with Hewlett-Packard for it to continue to provide these information,
administrative and leasing services to us through the end of 2001. We expect to
extend the particular agreements with regard to the use of Hewlett-Packard
customer support systems for two to three years. We are not developing our own
customer support systems at this time, and so we will continue to be dependent
on Hewlett-Packard for these systems. In addition, while we are developing our
other systems, we will be dependent on Hewlett-Packard for the provision of
information technology services that are critical to running our businesses.
Many of the systems we currently use are proprietary to Hewlett-Packard and are
very complex. After the expiration of these various arrangements, we may not be
able to replace the transitional services or enter into appropriate agreements
in a timely manner or on terms and conditions, including cost, as favorable as
those we receive from Hewlett-Packard. Failure to develop replacement systems in
a timely manner or to negotiate agreements with third parties, including
Hewlett-Packard, could have a negative impact on our operations.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH HEWLETT-PACKARD WITH
RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS
OPERATIONS.
Conflicts of interest may arise between Hewlett-Packard and us in a
number of areas relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Hewlett-Packard;
- intellectual property matters; and
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- the nature, quality and pricing of transitional and other services
Hewlett-Packard has agreed or will agree to provide us.
Nothing restricts Hewlett-Packard from competing with us other than some
restrictions on the use of patents licensed to Hewlett-Packard by us.
CONVERSION TO THE EURO MAY CAUSE DISRUPTION TO OUR BUSINESS
We have established a team to address the issues raised by the introduction of
the Euro. This team will utilize Hewlett-Packard's legacy customer support
systems, as well as our own systems in other areas. The Euro's initial
implementation as an alternative currency was effective as of January 1, 1999,
and the transition period will continue through January 1, 2002, when the Euro
will become the sole currency in participating countries. The team is continuing
to work on conversion issues during this transition period. As of the date of
this filing, our Euro project and testing is on schedule. To date, the
introduction of the Euro has not materially affected our competitive environment
and the manner in which we conduct our operations. We will continue to evaluate
the potential issues relating to the Euro conversion, including information
technology, the functional currency impact in our significant foreign
subsidiaries, derivatives and other financial instruments, continuity of
contracts, taxation and accounting. However, based on our work to date, we
believe that the introduction of the Euro and the phasing out of national
currencies is unlikely to have a material adverse effect on our consolidated
financial position, liquidity or results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency exchange rate risks inherent in our
sales commitments, anticipated sales, and assets and liabilities
denominated in currencies other than the United States dollar. Our
exposure to exchange rate risks has been managed on an enterprise-wide
basis. This strategy utilizes derivative financial instruments,
including option and forward contracts, to hedge certain foreign
currency exposures, with the intent of offsetting gains and losses that
occur on the underlying exposures with gains and losses on the
derivative contracts hedging them. We do not currently and do not intend
to utilize derivative financial instruments for trading or speculative
purposes.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates to the hedging contracts and the
underlying exposures described above. As of April 30, 2001, the analysis
indicated that these hypothetical market movements would not have a
material effect on our consolidated financial position, results of
operations or cash flows.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in
the ordinary course of business. There are no matters pending that we
expect to be material in relation to our business, consolidated
financial condition, results of operations or cash flows. There have
been no material developments in the litigation previously reported in
our Form 10-K for the period ended October 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
A list of exhibits is set forth in the Exhibit Index found on page 31 of
this report.
(b) Reports on Form 8-K:
None.
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AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 14, 2001 By: /s/ ROBERT R. WALKER
--------------------------------------
Robert R. Walker
Executive Vice President and
Chief Financial Officer
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<PAGE> 33
AGILENT TECHNOLOGIES INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1 Not applicable.
2.1 Master Separation and Distribution Agreement between Hewlett-Packard and the Company effective as of August
12, 1999. Incorporated by reference from Exhibit 2.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-85249 ("S-1").
2.2 General Assignment and Assumption Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.2 of the Company's S-1.
2.3 Master Technology Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.3 of the Company's S-1.
2.4 Master Patent Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.4 of the Company's S-1.
2.5 Master Trademark Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.5 of the Company's S-1.
2.6 ICBD Technology Ownership and License Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.6 of the Company's S-1.
2.7 Employee Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit
2.7 of the Company's S-1.
2.8 Tax Sharing Agreement between Hewlett-Packard and the Company. Incorporated by reference from Exhibit 2.8
of the Company's S-1.
2.9 Master IT Service Level Agreement between Hewlett-Packard and the Company. Incorporated by reference from
Exhibit 2.9 of the Company's S-1.
2.10 Real Estate Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from
Exhibit 2.10 of the Company's S-1.
2.11 Environmental Matters Agreement between Hewlett-Packard and the Company. Incorporated by reference from
Exhibit 2.11 of the Company's S-1.
2.12 Master Confidential Disclosure Agreement between Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.12 of the Company's S-1.
2.13 Indemnification and Insurance Matters Agreement between Hewlett-Packard and the Company. Incorporated by
reference from Exhibit 2.13 of the Company's S-1.
2.14 Non U.S. Plan. Incorporated by reference from Exhibit 2.14 of the Company's S-1.
2.15 Agreement and Plan of Merger, dated as of November 24, 2000, by and among Agilent Technologies, Inc., Tahoe
Acquisition Corp. and Objective Systems Integrators, Inc. Incorporated by reference from Exhibit 99.1(A) of the
Schedule 13D filed by Agilent Technologies, Inc. on December 4, 2000.
2.16 Tender and Voting Agreement, dated as of November 24, 2000, by and among Agilent Technologies, Inc., Tahoe
Acquisition Corp. and Objective Systems Integrators, Inc. Incorporated by reference from Exhibit 99.1(B) of the
Schedule 13D filed by Agilent Technologies, Inc. on December 4, 2000.
2.17 Asset Purchase Agreement between the Company and Philips dated as of November 17, 2000. Incorporated by
reference from the Company's 10-Q filed on March 19, 2001.
3.1 Amended and Restated Certificate of Incorporation. Incorporated by reference from Exhibit 3.1 of the Company's
S-1.
3.2 Bylaws. Incorporated by reference from Exhibit 3.2 of the Company's S-1.
4.1 Preferred Stock Rights Agreement between the Company and Harris Trust and Savings Bank dated as of May 12,
2000. Incorporated by reference from Exhibit 1 of the Company's Form 8-A, filed on May 17, 2000.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
5-9 Not applicable.
10.1 Employee Stock Purchase Plan. Incorporated by reference from Exhibit 10.1 of the Company's S-1.*
10.2 1999 Stock Plan. Incorporated by reference from Exhibit 10.2 of the Company's S-1.*
10.3 1999 Non-Employee Director Stock Plan. Incorporated by reference from Exhibit 10.3 of the Company's S-1.*
10.4 Yokogawa Electric Corporation and Hewlett-Packard Company Agreement for the Redemption and Sale of Shares
and Termination of Joint Venture Relationship. Incorporated by reference from Exhibit 10.4 of the Company's S-
1.
10.5 Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.
Incorporated by reference from Exhibit 10.5 of the Company's S-1.*
10.6 Executive Deferred Compensation Plan. Incorporated by reference from the Company's Form 10-K filed January
25, 2000.*
10.7 Employee Stock Purchase Plan. Incorporated by reference from the Company's Form S-8 filed September 29, 2000.*
10.8 Five Year Credit Agreement dated as of November 5, 1999. Incorporated by reference from Exhibit 2.15 of the
Company's S-1.
10.9 Amended and Restated 364-Day Credit Agreement dated November 3, 2000. Incorporated by reference from
Exhibit (d)(11) of the Company's Form SC TO-T/A as filed with the Commission on January 3, 2001.
10.10 Asset Purchase Agreement, dated September 29, 2000, between Agilent Technologies, Inc. and The CIT
Group/Equipment Financing, Inc. Incorporated by reference from Exhibit 10.10 of the Company's 10-Q filed on
March 19, 2001.
10.11 Purchase and Sale Agreement dated February 1, 2001, between Agilent Technologies, Inc. and BEA Systems, Inc.
11. See Item 6 in Notes to Condensed Consolidated Financial Statements on page 7.
12-14. Not applicable.
15. None.
16-17. Not applicable.
18-19. None.
20-21. Not applicable.
22-24. None.
25-26. Not applicable.
27. Not applicable.
28. Not applicable.
99. None.
</TABLE>
------------
* Indicates management contract or compensatory plan, contract or arrangement.
32
</TEXT>
</DOCUMENT>