<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>f73796ex99-1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
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[LOGO]
AGILENT TECHNOLOGIES, INC.
2000 FINANCIAL REPORT
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TABLE OF CONTENTS
<TABLE>
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PAGE
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Selected Financial Data....................................................................... 1
Management's Discussion and Analysis of Financial Condition and Results of Operations......... 2
Statement of Management Responsibility........................................................ 21
Report of Independent Accountants............................................................. 22
Consolidated Balance Sheet.................................................................... 23
Consolidated Statement of Earnings............................................................ 24
Consolidated Statement of Cash Flows.......................................................... 25
Consolidated Statement of Stockholders' Equity................................................ 26
Notes to Consolidated Financial Statements.................................................... 27
Quarterly Summary............................................................................. 48
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SELECTED FINANCIAL DATA
(UNAUDITED)
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YEARS ENDED OCTOBER 31,
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2000 1999 1998 1997 1996
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(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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CONSOLIDATED STATEMENT OF EARNINGS
DATA (1, 2, 3, 4):
Net revenue................................................ $9,361 $6,830 $6,612 $6,577 $6,135
Earnings from continuing operations before taxes........... $1,018 $463 $191 $633 $592
Net earnings from continuing operations.................... $672 $306 $126 $418 $373
Net earnings from discontinued operations.................. $85 $206 $131 $125 $169
Net earnings............................................... $757 $512 $257 $543 $542
Net earnings per share -- Basic:
Net earnings from continuing operations................. $1.49 $0.81 $0.33 $1.10 $0.98
Net earnings from discontinued operations............... $0.19 $0.54 $0.35 $0.33 $0.45
Net earnings............................................ $1.68 $1.35 $0.68 $1.43 $1.43
Net earnings per share -- Diluted:
Net earnings from continuing operations................. $1.48 $0.81 $0.33 $1.10 $0.98
Net earnings from discontinued operations............... $0.18 $0.54 $0.35 $0.33 $0.45
Net earnings............................................ $1.66 $1.35 $0.68 $1.43 $1.43
Average shares used in computing basic net
earnings per share....................................... 449 380 380 380 380
Average shares used in computing diluted net
earnings per share....................................... 455 380 380 380 380
</TABLE>
<TABLE>
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OCTOBER 31,
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2000 1999 1998 1997 1996
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(IN MILLIONS)
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CONSOLIDATED BALANCE SHEET DATA (1, 2, 4):
Working capital ........................................... $2,476 $ 1,275 $ 1,010 $ 937 $ 976
Total assets............................................... $8,330 $ 5,364 $ 4,922 $ 4,950 $ 4,672
Stockholders' equity....................................... $5,265 $ 3,382 $ 3,022 $ 3,110 $ 2,998
</TABLE>
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(1) Consolidated financial statements and notes for all periods present
Agilent's healthcare solutions business as a discontinued operation. See
further discussion in notes to the consolidated financial statements.
(2) The historical financial information from 1996 through 1999 was carved out
from the historical financial information of Hewlett-Packard using the
historical results of operations and historical bases of the assets and
liabilities of the Hewlett-Packard businesses that comprise our company.
Therefore, the historical financial information from 1996 through 1999 is
not indicative of our future performance and does not reflect what our
consolidated financial position and results of operations would have been
had we operated as a separate, stand-alone entity during the periods
presented.
(3) Earnings from continuing and discontinued operations include $155 million
and $8 million, respectively, in pre-tax restructuring charges for the
year ended October 31, 1998. Earnings from continuing operations for the
year ended October 31, 1999 includes a pre-tax asset impairment charge of
$51 million relating to a building under construction originally intended
as a manufacturing facility for eight-inch CMOS semiconductor wafers. See
Note 12, "Restructuring, Asset Impairment and Other Charges," of the
consolidated financial statements.
(4) Consolidated statement of earnings data for the year ended October 31,
2000 includes the impact of the sale of certain portions of our U.S.
portfolio of lease assets to The CIT Group, Inc. Net proceeds from this
sales transaction were $234 million and we recognized $197 million in net
revenue from continuing operations and $83 million in cost of products
from continuing operations. See Note 4, "Acquisitions and Dispositions,"
of the consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Financial Report. The following discussion contains forward-looking statements
including, without limitation, statements regarding the anticipated completion
of transactions and 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" and elsewhere in this financial report.
OVERVIEW
On March 2, 1999, Hewlett-Packard Company (Hewlett-Packard) announced a
plan to create a separate company, subsequently named Agilent Technologies, that
comprised Hewlett-Packard's businesses in test and measurement, semiconductor
products, healthcare solutions, chemical analysis, related portions of
Hewlett-Packard Laboratories and associated infrastructure. On November 1, 1999,
we began operating as a separate, stand-alone company. On November 18, 1999, we
launched our initial public offering of 72,000,000 shares of common stock at $30
per share. After the completion of our initial public offering in November 1999,
Hewlett-Packard owned approximately 84.1% of our outstanding common stock. On
November 23, 1999, we paid the net proceeds of the offering of $2.1 billion to
Hewlett-Packard as a dividend. On April 7, 2000, Hewlett-Packard announced that
its board of directors had declared a stock dividend of all of Hewlett-Packard's
shares in us. The dividend was distributed on June 2, 2000 to Hewlett-Packard
shareholders of record as of May 2, 2000. The distribution was made on the basis
of 0.3814 of an Agilent share for each Hewlett-Packard common share outstanding.
We were incorporated in Delaware in May 1999 as a wholly-owned subsidiary
of Hewlett-Packard. Our businesses historically were operated as internal units
of Hewlett-Packard. In November 1999, Hewlett-Packard transferred to us a
majority of the assets and liabilities relating to our businesses and also
provided us with cash funding of approximately $1.1 billion. Hewlett-Packard
retained some of our assets and liabilities including our accounts receivable
and accounts payable, accrued payroll and related items and taxes payable,
except deferred taxes, and transferred to us some of the assets and liabilities
related to its business, including some of the accounts receivable, accounts
payable and other liabilities of Agilent Technologies Japan, Ltd. (formerly
Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard transferred to us
$521 million to fund our acquisition of Yokogawa Electric Corporation's 25%
minority equity ownership of Agilent Technologies Japan, Ltd. In December 1999,
Hewlett-Packard provided us with additional cash funding of approximately $200
million based on our and Hewlett-Packard's balance sheets as of October 31,
1999.
We have entered into various agreements with Hewlett-Packard related to certain
ongoing relationships between the companies. In addition, we have entered into
agreements with Hewlett-Packard under which Hewlett-Packard will provide
services to us during a transition period which began November 1, 1999. For a
brief description of these agreements, see Note 15, "Transactions with
Hewlett-Packard," of the consolidated financial statements. The agreements
relate primarily to information technology, customer financing, accounting and
administrative, and building services. Under these agreements, we reimburse
Hewlett-Packard for its cost of the service plus 5%. The transition period
varies depending on the agreement but is generally less than two years. Some of
the agreements, including those for building services, customer services and
information technology services, may be extended beyond the initial transition
period. If these agreements are extended, we will reimburse Hewlett-Packard at
its cost plus 10% for information technology services and most other services
and at negotiated market rates for building services. The agreements do not
necessarily reflect the costs of obtaining the services from unrelated third
parties or of our providing the applicable services ourselves. However, we
believe that purchasing these services from Hewlett-Packard provides us with an
efficient means of obtaining these services during the transition period. In
addition, we provide some transition services to Hewlett-Packard, for which we
are reimbursed at our cost plus 5%.
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Basis of Presentation
Our fiscal year end is October 31. Unless otherwise stated, all years and
dates refer to our fiscal year.
The 2000 consolidated financial statements reflect the results of
operations, changes in cash flows, and the financial position of our businesses.
We began accumulating retained earnings on November 1, 1999.
The 1999 and 1998 consolidated financial statements were prepared using
Hewlett-Packard's historical bases in the assets and liabilities and our
historical results of operations. The 1999 and 1998 consolidated financial
statements include allocations of certain Hewlett-Packard corporate expenses,
including centralized research and development, legal, accounting, employee
benefits, real estate, insurance services, information technology services,
treasury and other Hewlett-Packard corporate and infrastructure costs. The
expense allocations were determined on bases that Hewlett-Packard and we
considered to be a reasonable reflection of the utilization of services provided
to us or the benefit received by us. Therefore, the financial information
presented in this Financial Report for 1999 and 1998 is not indicative of our
consolidated financial position, results of operations or cash flows in
subsequent periods nor is it necessarily indicative of what our consolidated
financial position, results of operations or cash flows would have been had we
been a separate, stand-alone entity in those periods prior to 2000.
In the first quarter of 2001, we agreed to sell our healthcare solutions
business to Koninklijke Philips Electronics, N.V. ("Philips") for approximately
$1.7 billion. Most of our healthcare solutions business' operational facilities
and certain associated assets and liabilities will transfer to Philips.
Virtually all employees of our healthcare solutions business, including the
healthcare solutions business-dedicated infrastructure employees, will be
offered employment by Philips, subject to local statutory laws. We will be
restricted from competing in the development, manufacturing, selling or
servicing of certain medical products for five years.
Our consolidated financial statements have been restated to 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 all
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 fiscal 2001 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,
including the valuation of certain assets and liabilities and the length of time
to the closing date of the sale.
Restructuring, Asset Impairment and Other Charges
In August 2000, Agilent announced a restructuring of its healthcare
solutions business. The restructuring resulted in a workforce reduction through
severance programs, as well as consolidation of its business operations. Since
the announcement, 396 regular employees located in the United States, Asia
Pacific and Europe have accepted severance packages and 200 temporary employees
have been terminated. Agilent recognized a $21 million pre-tax restructuring
charge comprised of $13 million for estimated severance benefits and $8 million
for non-cash asset write downs. The following amounts are included in Agilent's
net earnings from discontinued operations: $11 million in cost of products, $4
million in cost of services and other and the remainder is included in other
expenses. As of October 31, 2000, $2 million in severance benefits has been paid
and charged against the liability. The remainder of the liability is reported as
part of Agilent's net investment in discontinued operations and will be utilized
during 2001.
In 1999, we recognized an impairment loss of $51 million related to a
building that was under construction for the intended purpose of housing
manufacturing operations for eight-inch CMOS semiconductor wafers. At the time
construction was stopped, only the building shell was complete. After exhaustive
efforts to find a semiconductor manufacturing partner to utilize the building
for its initial intended use, management concluded that the highest fair value
to be realized from this building was based on selling it for use as an office
or general use facility. In 2000, we actively marketed the building shell
without success. In late 2000, in response to the increased demand in the
wireless semiconductor market and our need to increase gallium arsenide ("GaAs")
manufacturing capacity, management decided to resume construction of a portion
of the building shell. When completed, this portion of the
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building will manufacture six-inch GaAs semiconductor wafers. We anticipate that
the completed manufacturing facility will be put into service sometime in 2002,
at which time depreciation will commence.
During 1998, we recorded a pre-tax restructuring charge of $163 million,
primarily related to the transfer of the production of certain semiconductor
wafers to a third-party contractor. Of this amount, $138 million was included in
cost of products, $7 million in research and development and $18 million in
selling, general and administrative expenses. Included in this charge was $85
million for non-cash asset writedowns of equipment that was subsequently
abandoned or sold. Also included in this charge was $78 million for employee
severance benefits that have been paid. Of the total $163 million change, $8
million was included in net earnings from discontinued operations as it related
to restructuring a portion of the healthcare solutions group.
Also during 1998, we recorded a pre-tax charge of $37 million for the
writedown of an investment in convertible preferred stock of a medical products
company to its fair value because management had determined the impairment was
not temporary. The full charge was included in net earnings from discontinued
operations.
Sale of leasing portfolio to CIT
In the fourth quarter of 2000, we entered into a vendor financing
agreement with the CIT Group, Inc. ("CIT"), whereby CIT will provide equipment
financing and leasing services to our customers on a global basis. Under the
terms of the agreement, CIT established a wholly-owned subsidiary, Agilent
Financial Services, Inc. ("AFS"), and is offering financing products to our
customers under this name. CIT, through AFS, will be providing funding and
services related to equipment financing to customers in most of our businesses.
These services include credit review, document generation, pricing, invoicing
and collections. We also entered into an asset purchase agreement with CIT
pursuant to which we sold them certain portions of our U.S. portfolio of lease
assets during the fourth quarter of 2000. Net proceeds from this sales
transaction were $234 million and we recognized $197 million in net revenue and
$83 million in cost of products in continuing operations.
In 2001, Agilent sold additional portions of its portfolio of lease assets to
CIT. Net proceeds from these sales transactions for the six months ended April
30, 2001 were $231 million. Agilent has agreed in principle to sell the
remainder of its portfolio of lease assets to CIT during the remainder of 2001.
Acquisition of OSI
On January 5, 2001, we 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 was used for this transaction and accordingly
goodwill and other intangibles of $593 million were created and will be
amortized over three years. OSI is a leading provider of next-generation
operations-support-system software for communications service providers. Their
results of operations and assets will be reported within our test and
measurement business.
Sale of land in San Jose
On February 20, 2001, Agilent announced that it sold an approximately
40-acre parcel of surplus land in San Jose, California, resulting in a pre-tax
gain of approximately $269 million.
Cyclical Business and General Economic Conditions
The sales of our products and services are dependent, to a large degree,
on customers whose industries are subject to cyclical trends in the demand for
their products. Shifts in the semiconductor market, electronics industry,
computer industry and telecommunications markets, as well as rapidly shifting
global economic conditions, have had and will have significant impacts on our
businesses.
In 2001, an 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
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manufacturing industries. Management is uncertain as to how long and how severe
the current downturn may be in these markets. These forces resulted in orders
declining 22% in the first six months of fiscal 2001 as compared to the same
period in 2000. Substantially all of the impacts of this decline were on our
test and measurement and semiconductor products businesses. Since the incoming
order rate is a good indicator of future revenue, we expect revenue and net
earnings to be down substantially in the second half of fiscal 2001 compared to
the same period last year, and compared to the first half of fiscal 2001. It is
also very likely that revenue in the third quarter 2001 will also be lower than
in the second quarter of 2001.
Our revenue and operating results for 2000 compared to 1999 improved as a
result of an upturn in the semiconductor industry. Additionally, as a capital
equipment provider, our revenue is driven by the capital expenditure budgets and
spending patterns of our customers who often delay or accelerate purchases in
reaction to variations in their businesses and in the economy. We expect some
portions of our businesses to remain cyclical in the future. Given that a high
proportion of our costs are fixed, variability in revenue as a result of these
business cycles could disproportionately affect our quarterly and annual
results.
Beginning in the second half of 1998 and continuing into the first half of
1999, our revenue and operating results declined as a result of the downturn in
Asian economies, particularly in Korea and Japan. Many of our major customers,
particularly those in the semiconductor and electronics industries, delayed or
canceled purchases of our products. This had a significant impact on us,
particularly our test and measurement business. These conditions began to
improve in the second half of 1999 and, accordingly, our revenue and operating
results improved.
Impact of Foreign Currencies
We sell our products in many countries and a portion of our sales and a
portion of our costs and expenses are denominated in foreign currencies,
especially in the Japanese yen and the Euro. In 2000 compared to 1999, the U.S.
dollar strengthened against both the Japanese yen and the Euro, which had an
immaterial effect on our net revenue and operating expense growth. Our foreign
currency exposures are hedged as part of our global risk management program,
which is designed to minimize exposure to foreign currency fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective November 1, 2000, Agilent adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative
financial instruments be recognized as either assets or liabilities on the
balance sheet and carried at fair value. Changes in the fair value of derivative
instruments are recognized periodically in earnings or stockholders' equity,
depending on the intended use of the instrument.
Agilent enters into certain foreign exchange contracts, primarily forwards
and purchased options, to hedge exposures to changes in foreign currency
exchange rates. Agilent does not use derivative financial instruments for
speculative or trading purposes.
Certain foreign exchange forward contracts are entered into to minimize the
exposure to changes in the value of foreign-currency denominated assets and
liabilities. Such forward contracts are considered to be effective economic
hedges of the underlying assets and liabilities. However, such contracts are not
afforded hedge accounting treatment under SFAS No. 133 and resultant changes in
value are recorded currently in earnings.
Forward contracts and purchased currency options which are designated as
cash flow hedges, are employed by Agilent to hedge committed and anticipated
foreign currency sales. Generally the maximum term of forward contracts and
options do not exceed three years and six months, respectively.
Agilent may also, from time to time, acquire warrants to purchase
securities of other companies as part of strategic relationships.
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 other
comprehensive income of $10 million.
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In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
Staff Accounting Bulletin, as amended, is effective no later than the fourth
quarter of 2001. We currently do not believe the adoption will have a material
effect on our annual consolidated financial statements.
RESULTS OF OPERATIONS
Our results of operations for the years ended October 31, 2000, 1999 and
1998 in dollars and as a percentage of total net revenue follow.
<TABLE>
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AS A PERCENTAGE OF
DOLLARS TOTAL NET REVENUE
----------------------------------- -----------------------------
YEARS ENDED OCTOBER 31,
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2000 1999 1998 2000 1999 1998
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(IN MILLIONS)
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Net revenue from continuing operations:
Products ......................................... $ 8,299 $ 5,895 $ 5,797 88.7% 86.3% 87.7%
Services and other ............................... 1,062 935 815 11.3 13.7 12.3
------- ------- ------- ----- ----- -----
Total net revenue ............................. 9,361 6,830 6,612 100.0% 100.0% 100.0%
------- ------- ------- ----- ----- -----
Costs and expenses:
Cost of products ................................. 4,143 3,098 3,346 44.3 45.4 50.6
Cost of services and other ....................... 592 529 463 6.3 7.7 7.0
Research and development ......................... 1,129 879 839 12.1 12.9 12.7
Selling, general and administrative .............. 2,573 1,902 1,766 27.5 27.8 26.7
------- ------- ------- ----- ----- -----
Total costs and expenses ...................... 8,437 6,408 6,414 90.1 93.8 97.0
------- ------- ------- ----- ----- -----
Earnings from continuing operations ................ 924 422 198 9.9 6.2 3.0
Other income (expense), net ........................ 94 41 (7) 1.0 .6 (.1)
------- ------- ------- ----- ----- -----
Earnings from continuing operations before taxes ... 1,018 463 191 10.9 6.8 2.9
Provision for taxes ................................ 346 157 65 3.7 2.3 1.0
------- ------- ------- ----- ----- -----
Net earnings from continuing operations ............ 672 306 126 7.2% 4.5% 1.9%
Net earnings from discontinued operations .......... 85 206 131
------- ------- -------
Net earnings ....................................... $ 757 $ 512 $ 257
======= ======= =======
Cost of products as a percentage of products revenue 49.9% 52.6% 57.7%
Cost of services and other as a percentage of
services and other revenue 55.7% 56.6% 56.8%
</TABLE>
Net revenue from continuing operations
Total net revenue from continuing operations increased 37.1 percent to $9.4
billion in 2000 from 1999 and 3.3 percent to $6.8 billion in 1999 from 1998.
Excluding the sale of certain portions of our U.S. portfolio of lease assets to
CIT, net revenue increased 34.2 percent in 2000 from 1999. The increase in 2000
was spurred by continued growth in net revenue from the communications and
electronics markets. This was especially due to the robust demand for our test
and measurement and semiconductor products, more specifically for our wireless,
fiber-optics, networking and imaging components. Increased demand in Asia also
contributed to net revenue growth in 2000. Net revenue for 2000 from our
chemical analysis business was essentially flat. The increase in 1999 compared
to 1998 was primarily due to growth in the communications market, improvement in
economic conditions in Asia and strengthening of the semiconductor industry in
general.
United States revenue increased 37.1 percent to $4.0 billion in 2000 and
increased 0.8 percent to $2.9 billion in 1999 from 1998. International revenue
increased 37.0 percent to $5.4 billion in 2000 and increased 5.2 percent to $3.9
billion in 1999 from 1998. Domestic growth came primarily from our businesses
which serve the communications and electronics markets. The relatively higher
net revenue growth internationally was primarily attributable to increased
demand in Asia, particularly in Taiwan, Korea and Japan. There was minimal
currency impact on net revenue growth in 2000. In the last half of 1998 and the
first half of 1999, economic conditions in Asia adversely affected revenue from
sales of our products and services to customers in Korea and Japan. In addition,
global weakness in the semiconductor industry caused our product revenue to
decline in 1998 and into the
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first half of 1999. These conditions began to improve in the second half of 1999
and, accordingly, our revenue improved, both within the United States and
internationally.
In 2000 compared to 1999, revenue from products increased 40.8 percent
while revenue from services and other increased 13.6 percent. In 1999 compared
to 1998, revenue from products increased 1.7 percent while revenue from services
and other increased 14.7 percent. The relatively higher product revenue growth
in 2000 was primarily due to growth in our businesses which serve the
communications and electronics markets, a strengthening of the semiconductor
industry and increased demand in Asia. 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. Lower product revenue growth in 1999 was primarily due to weak
economic conditions in Asia and weak demand in the semiconductor industry.
Earnings from continuing operations
Earnings from continuing operations before taxes increased 119.9 percent to
$1.0 billion in 2000 from 1999 and increased 142.4 percent to $463 million in
1999 from 1998. Excluding the sale of certain portions of our U.S. portfolio of
lease assets to CIT, earnings from continuing operations before taxes increased
95.3 percent in 2000 from 1999. The increase in 2000 was primarily due to strong
results in the test and measurement and semiconductor products businesses. These
improved results were partially offset by flat performance from our chemical
analysis business and additional on-going costs associated with operating on our
own and previously planned research and development in the life sciences. The
increase in 1999 was due to higher net revenue combined with cost savings of
approximately $80 million as a result of the 1998 restructuring. Also, 1999
results included a $51 million asset impairment charge related to a building
intended for the manufacture of eight-inch CMOS semiconductor wafers.
As a percentage of net revenue, cost of products and services decreased 2.5
percentage points in 2000 from 1999 and decreased 4.5 percentage points in 1999
from 1998. Excluding the sale of certain portions of our U.S. portfolio of lease
assets to CIT and the 1999 impairment charge of $51 million, cost of products
and services as a percentage of net revenue decreased 1.6 percentage points in
2000 from 1999. The decrease in 2000 was primarily attributable to higher
volumes in the test and measurement and semiconductor products businesses as
well as a more profitable product mix in the semiconductor products business.
The decrease was partially offset by manufacturing inefficiencies related to
parts shortages, and manufacturing consolidations. In 1999, all three business
segments recorded improvement in cost of products and services and other as a
percentage of net revenue with semiconductor products accounting for the most
significant improvement due primarily to cost improvements resulting from the
1998 restructuring.
Operating expenses as a percentage of net revenue decreased 1.2 percentage
points in 2000 from 1999 and increased 1.3 percentage points in 1999 from 1998.
The decrease in 2000 was primarily due to the leverage of expenses achieved from
the revenue growth in the communications and electronics markets partially
offset by increases in research and development spending and higher marketing
costs, including advertising and branding expenses. The increased marketing
costs were allocated to each of the three continuing operations segments. The
increase in 1999 was due to higher expenses related to our becoming an
independent company, including advertising and branding expense. This effect was
partially offset by higher net revenue and some cost savings resulting from the
1998 restructuring.
General overhead costs of $225 million in 2000, $194 million in 1999 and
$182 million in 1998 previously allocated to our healthcare solutions segment
have been reallocated to each of the three continuing operations segments.
Other income (expense), net
Other income (expense), net, increased $53 million to $94 million in 2000
from $41 million in 1999. The increase in 2000 was primarily due to
approximately $29 million of gain on sales of equity investments that no longer
supported our business strategies and interest income earned on the initial cash
funding received from Hewlett-Packard. Included in 1999 were gains of $50
million related to the divestiture of several portions of our businesses.
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Provision for taxes
The effective tax rate for continuing operations in the periods reported
was constant at 34%.
In 2001, the tax rate for continuing operations has changed from 2000,
primarily due to the goodwill from the acquisition of OSI, the amount of our
pre-tax earnings and the mix of those earnings amongst jurisdictions with
varying statutory rates. In 2001, the impact on the effective tax rate for
continuing operations from the sale of our healthcare solutions business is
expected to be immaterial. Our future effective tax rate will continue to 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.
Taxes on the anticipated sale of our healthcare solutions business will be
reflected in the gain on sale of discontinued operations.
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
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2000 1999 1998
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(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue .................... $6,108 $4,082 $4,100
Earnings from operations ....... 658 239 264
Operating margin ............... 10.8% 5.9% 6.4%
</TABLE>
Net revenue
Net revenue from our test and measurement business increased 49.6 percent
to $6.1 billion in 2000 from 1999 and remained essentially unchanged in 1999
from 1998. Excluding the sale of our U.S. portfolio of lease assets to CIT, net
revenue increased 44.9 percent in 2000 from 1999. The increase in 2000 was
attributable to strong growth in the sales of our products into the optical,
wireless and networking markets. Also, third-party manufacturing contractors
added capacity to meet demand and increased their purchases of our test and
measurement products. Net revenue growth in 1999 was negatively affected by
weakness in the semiconductor industry and decreased demand in Asia. Due to
competitive pressures and difficult market conditions, we granted more pricing
discounts and customer allowances than in previous years. This impact was
partially offset by increased sales volumes of communications products and
optical networks in the second half of 1999 as market conditions improved.
Net revenue from products increased 55.8 percent in 2000 from 1999 and
decreased 3.0 percent in 1999 from 1998. Excluding the sale of certain portions
of our U.S. portfolio of lease assets to CIT, net revenue from products
increased 50.1 percent in 2000 from 1999. Net revenue from services and other
increased 18.8 percent in 2000 from 1999 and 14.6 percent in 1999 from 1998. The
relatively greater product revenue growth in 2000 was primarily due to the
growing communications market and the increased demand in Asia. 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. Product revenue decreased in 1999
primarily due to weakness in the semiconductor industry and decreased demand in
Asia.
Earnings from operations
Earnings from operations from our test and measurement business increased
175.3 percent to $658 million in 2000 from 1999 and decreased 9.5 percent to
$239 million in 1999 from 1998. The increase in 2000 resulted primarily from
higher net revenue as discussed above. In 1999, the decrease resulted from lower
cost of products and services, partially offset by higher operating expenses as
a percentage of revenue.
Cost of products and services as a percentage of net revenue decreased 0.9
percentage points in 2000 from 1999 and 1.8 percentage points in 1999 from 1998.
The decrease in 2000 was primarily due to higher net revenue partially offset by
manufacturing inefficiencies incurred in our efforts to meet customer demand.
The decrease in 1999 was due to cost savings resulting from the 1998
restructuring and was partially offset by the effect of lower volumes of
products sold, primarily wireless communication test equipment and automated
test equipment, and higher service revenue and the associated higher cost of
this revenue.
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<PAGE> 11
Operating expenses as a percentage of net revenue decreased 4.0 percentage
points in 2000 from 1999 and increased 2.4 percentage points in 1999 from 1998.
The decrease in 2000 was due to higher net revenue partially offset by higher
marketing and research and development expenses. The increase in 1999 from 1998
was due to slightly lower net revenue combined with higher levels of expense. In
1999, continued savings from cost reduction programs initiated in the second
half of 1998 partially offset this trend. However, costs incurred as part of
becoming a stand-alone entity, particularly costs related to branding moved
overall operating expenses higher.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
2000 1999 1998
------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue ......................... $ 2,213 $ 1,722 $ 1,574
Earnings (loss) from operations ..... 241 100 (125)
Operating margin .................... 10.9% 5.8% (7.9)%
</TABLE>
Net revenue
Net revenue from our semiconductor products business increased 28.5 percent
to $2.2 billion in 2000 from 1999 and 9.4 percent to $1.7 billion in 1999 from
1998. The increase in 2000 was the result of strong growth in all semiconductor
products including wireless, networking and imaging components. Networking
component growth was the result of growth in the sales of fiber-optic
transceivers and high-speed networking products tailored for Metro Area Network
(MAN), as well as storage area networking products and Gigabit Ethernet Local
Area Network (LAN) applications. Imaging products for digital cameras and
optical mice also achieved particularly strong growth in 2000. The increase in
1999 was achieved despite the sale of the power amplifier business in late 1998.
If net revenue in 1998 were adjusted to exclude revenue of the power amplifier
business, net revenue would have increased by 15.2 percent in 1999 over 1998.
Net revenue growth in 1999 primarily reflects increased shipments of fiber
optics products, application specific integrated circuits (ASICs), motion
control products, wireless semiconductor products, and high-speed networking
products. 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 30.3 percent in 2000, 37.0 percent in 1999 and
34.5 percent in 1998.
In 2000, we expanded our existing joint venture relationship with Philips
to develop our manufacturing light-emitting diodes (LED) and transferred a
portion of our LED business into the joint venture. LEDs are used for various
lighting and display purposes. Since we do not have a majority ownership
interest in the joint venture, the revenue, costs and expenses of the LED
business transferred to the joint venture are no longer consolidated in our
results. Instead, we record our portion of the joint venture's net earnings or
loss in other income (expense), net, which in 2000, was minimal. Adjusting the
1999 base for revenues relating to the LED business and our exit from the
microprocessor business, net revenue growth for 2000 would have been 40.3
percent.
Earnings (loss) from operations
Earnings from operations from our semiconductor products business increased
141 percent to $241 million in 2000 from 1999 and increased to $100 million in
1999 from a loss of $125 million in 1998. The increase in 2000 resulted from
higher net revenue and lower cost of products as a percentage of net revenue,
partially offset by higher operating expenses. The increase in 1999 resulted
from higher revenue and cost savings from the 1998 restructuring.
Cost of products as a percentage of net revenue decreased 6.2 percentage
points in 2000 from 1999 and decreased 13.5 percentage points in 1999 from 1998.
Adjusting for the 1999 impairment charge of $51 million and the transfer of a
portion of our LED business to Philips, cost of products as a percentage of net
revenue decreased 2.6 percentage points in 2000 from 1999. The decrease in 2000
was primarily related to increased volumes and a more favorable product mix.
Adjusting for both the 1999 impairment charge and the 1998 restructuring, cost
of products as a percentage of net revenue decreased 7.7 percentage points in
1999 from 1998. The decrease in 1999 resulted from increased sales volumes of
ASIC's and a more profitable product mix, especially higher volumes of fiber
optic communications products, motion control devices and microprocessors.
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<PAGE> 12
Operating expenses as a percentage of net revenue increased 1.1 percentage
points in 2000 from 1999 and decreased 0.2 percentage points in 1999 from 1998.
The increase in 2000 was primarily due to infrastructure costs related to
operating on our own and increased research and development costs, particularly
in the areas of fiber optics, high-speed networking, and image and position
sensor products. The decrease in 1999 was primarily the result of higher net
revenue.
CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue .................... $1,040 $1,026 $ 938
Earnings from operations ....... 25 83 59
Operating margin ............... 2.4% 8.1% 6.3%
</TABLE>
Net revenue
Net revenue from our chemical analysis business was essentially flat at
$1.0 billion in 2000 and 1999 and increased 9.4 percent to $1.0 billion in 1999
from 1998. In 2000, revenue growth in our products sold to the pharmaceutical
and life sciences markets was partially offset by weakness in our traditional
chemical and environmental markets. New product releases contributed to
increased sales of our liquid chromatography and mass spectrometry products.
Services and other revenue were flat in 2000 from 1999. The net revenue increase
in 1999 was generated by growth across all product lines and included a 14.5
percent increase in services and other revenue. Demand within the pharmaceutical
industry was especially strong, leading to increased sales of our liquid
chromatography products. In addition, sales to our customers in Asia in the
second half of 1999 increased as economic conditions in the region continued to
improve.
Earnings from operations
Earnings from operations from our chemical analysis business decreased 69.9
percent to $25 million in 2000 from 1999 and increased 40.7 percent to $83
million in 1999 from 1998. The decrease in 2000 was primarily due to higher
infrastructure costs and branding expenses related to the costs of operating on
our own as well as planned research and development in life sciences to launch
new products. The increase in 1999 was due primarily to higher net revenue,
partially offset by higher costs and expenses.
Cost of products and services as a percentage of net revenue increased by
0.8 percentage points in 2000 from 1999 and decreased by 3.5 percentage points
in 1999 from 1998. In 2000, the increase was primarily due to lower volumes,
start-up costs for life sciences products as well as higher infrastructure costs
and branding expenses relating to operating on our own. In 1999, the improvement
was related to higher volumes, greater manufacturing efficiencies in our mass
spectrometer and liquid chromatography product lines and lower warranty costs.
In addition, greater efficiency within the service business accounted for 0.8
percentage points of the improvement.
Operating expenses as a percentage of net revenue increased 4.9 percentage
points in 2000 from 1999 and increased 1.7 percentage points in 1999 from 1998.
In 2000, the increase resulted primarily from increased life sciences research
and development activities, higher infrastructure costs and branding expenses
relating to operating on our own. The increase in 1999 resulted from greater
growth in marketing and selling costs than in net revenue.
HEALTHCARE SOLUTIONS - DISCONTINUED OPERATIONS
Our healthcare solutions business is now classified as discontinued
operations. The following table shows the results of operations of Agilent's
healthcare solutions business.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
2000 1999 1998
------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue ...................................... $ 1,412 $ 1,501 $ 1,340
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
2000 1999 1998
------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Costs and expenses................................ 1,283 1,182 1,096
Earnings from discontinued operations ............ 129 319 244
Other income (expense), net ...................... 17 5 (39)
------- ------- -------
Earnings from discontinued operations before taxes 146 324 205
Provision for taxes .............................. 61 118 74
------- ------- -------
Net earnings from discontinued operations ........ $ 85 $ 206 $ 131
======= ======= =======
</TABLE>
In the first quarter of 2001, we announced an agreement to sell our
healthcare solutions business to Philips. See Overview section of the MD&A. The
sale is contingent upon customary closing conditions, but is expected to
complete by the end of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remained strong at October 31, 2000, with cash and
cash equivalents of $996 million.
Prior to November 1, 1999, cash receipts associated with our businesses
were transferred to Hewlett-Packard on a daily basis and Hewlett-Packard
provided funds to cover our disbursements. Accordingly, we reported no cash or
cash equivalents at October 31, 1999 and 1998. In accordance with our separation
agreement with Hewlett-Packard, as of November 1, 1999, Hewlett-Packard retained
some of our assets and liabilities and transferred to us some of the assets and
liabilities related to its business. In November and December 1999,
Hewlett-Packard made cash payments to us totaling $1.3 billion to fund our
working capital and other needs of our operations as a separate, stand-alone
entity. In addition, Hewlett-Packard transferred approximately $0.5 billion to
fund our acquisition of Yokogawa Electric Corporation's (Yokagawa) 25% minority
interest in Agilent Technologies Japan, Ltd. The net proceeds of our initial
public offering of $2.1 billion were received in November 1999 and immediately
distributed to Hewlett-Packard as a dividend.
Of the total $1.8 billion received from Hewlett-Packard, $1.1 billion was
classified as net cash provided by financing activities and $0.7 billion was
classified among several categories as net cash provided by operating activities
in the consolidated statement of cash flows for the year ended October 31, 2000.
We generated cash from continuing operations of $536 million in 2000
compared to $341 million in 1999 and $542 million in 1998. In 2000, 1999 and
1998, cash from continuing operations was primarily a result of net earnings. In
addition, lower cash from continuing operations in 1999 resulted from a
significant increase in accounts receivable due to particularly strong shipments
in October 1999.
Net cash utilized for investing activities was $1,062 million in 2000
compared to $336 million in 1999 and $250 million in 1998. In all periods,
capital expenditures for property, plant and equipment and business acquisitions
partially offset by proceeds from divestitures and the disposal of excess,
unused or retired assets constituted substantially all of our cash used in
investing activities. We used $691 million in 2000 to pay for the first and
second installments of the purchase of Yokagawa's minority interest in Agilent
Technologies Japan, Ltd and several other companies. We purchased the remaining
4.2% of Agilent Technologies Japan, Ltd's shares owned by Yokogawa in January
2001. Hewlett-Packard provided the funding for the Yokogawa transaction in
November 1999.
Future sales of our portfolio of lease assets to CIT are anticipated during
2001. In the first six months of fiscal 2001, we realized net proceeds of $213
million from the sale of certain portions of our lease portfolio to CIT. We are
currently negotiating the details of the future sales agreements.
In February 2001, we sold a parcel of land in San Jose, California for
$287 million, net of transaction costs.
In the first quarter of 2001, we entered into an agreement to sell our
healthcare solutions business to Phillips for approximately $1.7 billion in
cash. We expect to complete the transaction before the end of fiscal 2001.
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
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<PAGE> 14
facilities. In addition to these committed facilities, we have access to
uncommitted credit lines through our banking partners.
On January 5, 2001, we 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 granted.
Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
fluctuations related to global economies and markets. We believe that cash
generated from operations, the anticipated proceeds from the sale of our
healthcare solutions business and our bank credit facilities will be sufficient
to satisfy our working capital, capital expenditure and research and development
funding requirements for the foreseeable future. However, we may require or
choose to obtain additional debt or equity financing in the future. We cannot
assure that additional financing, if needed, will be available on favorable
terms.
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 2001 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
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<PAGE> 15
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.
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;
13
<PAGE> 16
- 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 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 consolidated 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.
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<PAGE> 17
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.
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
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<PAGE> 18
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
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.
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<PAGE> 19
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 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
17
<PAGE> 20
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.
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.
18
<PAGE> 21
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
- 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.
OUR HISTORICAL 1999 AND 1998 FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
OUR RESULTS AS A SEPARATE COMPANY
19
<PAGE> 22
The historical 1999 and 1998 financial information we have included has been
carved out from Hewlett-Packard's consolidated financial statements and does not
reflect what our consolidated financial position, results of operations and cash
flows would have been, had we been a separate, stand-alone entity during the
periods presented. Hewlett-Packard did not account for us as, and we were not
operated as, a single stand-alone entity for the 1999 and 1998 periods
presented. In addition, the historical information is not necessarily indicative
of what our results of operations, financial position and cash flows will be in
the future. We did not make adjustments to reflect the many significant changes
that will occur in our cost structure, funding and operations as a result of our
separation from Hewlett-Packard, including changes in our employee base, changes
in our tax structure, increased costs associated with reduced economies of
scale, increased marketing expenses related to establishing a new brand identity
and increased costs associated with being a public, stand-alone company.
20
<PAGE> 23
STATEMENT OF MANAGEMENT RESPONSIBILITY
Agilent Technologies' management is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. The accompanying consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and reflect the effects of
certain estimates and judgments made by management.
Management maintains an effective system of internal control that is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management review
and by internal auditors who conduct audits throughout the company. We select
and train qualified people who are provided with and expected to adhere to
Agilent Technologies' standards of business conduct. These standards, which set
forth strong principles of business ethics and conduct, are a key element of our
control system.
Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Their audits were conducted
in accordance with auditing standards generally accepted in the United States of
America, and included a review of financial controls and tests of accounting
records and procedures as they considered necessary in the circumstances.
The Audit and Finance Committee of the Board of Directors, which consists
of outside directors, meets regularly with management, the internal auditors and
the independent accountants to review accounting, reporting, auditing and
internal control matters. The committee has direct and private access to both
the internal auditors and the independent accountants.
Edward W. Barnholt Robert R. Walker
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Agilent
Technologies, Inc. and its subsidiaries at October 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
San Jose, California
June 29, 2001
22
<PAGE> 25
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ....................................................... $ 996 $--
Accounts receivable, net ........................................................ 1,938 1,230
Inventory ....................................................................... 1,610 1,240
Other current assets ............................................................ 595 406
------- -------
Total current assets ......................................................... 5,139 2,876
Property, plant and equipment, net ................................................ 1,685 1,316
Goodwill and other intangible assets, net ......................................... 467 87
Other assets ...................................................................... 442 326
Net investment in discontinued operations ......................................... 597 759
------- -------
Total assets ................................................................. $ 8,330 $ 5,364
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 857 $ 510
Notes payable and short-term borrowings ......................................... 110 --
Employee compensation and benefits .............................................. 679 534
Deferred revenue ................................................................ 322 201
Other accrued liabilities ....................................................... 695 356
------- -------
Total current liabilities .................................................... 2,663 1,601
Other liabilities ................................................................. 402 381
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; 453,976,000 shares
at October 31, 2000 and 380,000,000 shares at October 31, 1999 issued and
outstanding .................................................................. 5 4
Additional paid-in capital ...................................................... 4,508 3,378
Retained earnings ............................................................... 757 --
Accumulated comprehensive loss .................................................. (5) --
------- -------
Total stockholders' equity ................................................... 5,265 3,382
------- -------
Total liabilities and stockholders' equity ................................... $ 8,330 $ 5,364
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE> 26
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net revenue:
Products ..................................................... $ 8,299 $ 5,895 $ 5,797
Services and other ........................................... 1,062 935 815
------- ------- -------
Total net revenue ......................................... 9,361 6,830 6,612
------- ------- -------
Costs and expenses:
Cost of products ............................................. 4,143 3,098 3,346
Cost of services and other ................................... 592 529 463
Research and development ..................................... 1,129 879 839
Selling, general and administrative .......................... 2,573 1,902 1,766
------- ------- -------
Total costs and expenses .................................. 8,437 6,408 6,414
------- ------- -------
Earnings from continuing operations ............................ 924 422 198
Other income (expense), net .................................... 94 41 (7)
------- ------- -------
Earnings from continuing operations before taxes ............... 1,018 463 191
Provision for taxes ............................................ 346 157 65
------- ------- -------
Net earnings from continuing operations ........................ 672 306 126
Net earnings from discontinued operations
(net of taxes, note 3).................................... 85 206 131
------- ------- -------
Net earnings ................................................... $ 757 $ 512 $ 257
======= ======= =======
Net earnings per share -- Basic:
Net earnings from continuing operations ..................... $ 1.49 $ 0.81 $ 0.33
Net earnings from discontinued operations ................... $ 0.19 $ 0.54 $ 0.35
------- ------- -------
Net earnings ................................................ $ 1.68 $ 1.35 $ 0.68
======= ======= =======
Net earnings per share -- Diluted:
Net earnings from continuing operations ..................... $ 1.48 $ 0.81 $ 0.33
Net earnings from discontinued operations ................... $ 0.18 $ 0.54 $ 0.35
------- ------- -------
Net earnings ................................................ $ 1.66 $ 1.35 $ 0.68
======= ======= =======
Average shares used in computing net earnings per share:
Basic ....................................................... 449 380 380
Diluted ..................................................... 455 380 380
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
24
<PAGE> 27
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings from continuing operations ............................... $ 672 $ 306 $ 126
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization ...................................... 460 440 449
Deferred taxes ..................................................... (59) (12) (140)
Non-cash restructuring and asset impairment charges ................ 8 51 85
Gain on sale of equity investments ................................. (29) -- --
Gain on divestitures ............................................... (123) (50) (21)
Changes in assets and liabilities:
Accounts receivable .............................................. (697) (297) 23
Inventory ........................................................ (361) (46) (69)
Accounts payable ................................................. 356 75 (60)
Taxes on earnings ................................................ 235 -- --
Other current assets and liabilities ............................. 153 (63) 127
Other, net ....................................................... (79) (63) 22
------- ------- -------
Net cash provided by operating activities ..................... 536 341 542
------- ------- -------
Cash flows from investing activities:
Investments in property, plant and equipment .......................... (824) (429) (388)
Dispositions of property, plant and equipment ......................... 120 71 78
Sale of equity investments ............................................ 60 -- --
Purchase of equity investments ........................................ (32) -- --
Acquisitions, net of cash acquired .................................... (634) (55) (2)
Proceeds from dispositions ............................................ 234 71 57
Other, net ............................................................ 14 6 5
------- ------- -------
Net cash used in investing activities ......................... (1,062) (336) (250)
------- ------- -------
Cash flows from financing activities:
IPO proceeds .......................................................... 2,068 -- --
IPO proceeds transferred to Hewlett-Packard ........................... (2,068) -- --
Issuance of common stock under employee stock plans ................... 84 -- --
Proceeds from notes payable and short-term borrowings ................. 110 -- --
Financing from (transfer to) Hewlett-Packard .......................... 1,081 (152) (479)
------- ------- -------
Net cash provided by (used in) financing activities ........... 1,275 (152) (479)
------- ------- -------
Net cash provided by discontinued operations ............................ 247 147 187
------- ------- -------
Change in cash and cash equivalents ..................................... 996 -- --
Cash and cash equivalents at beginning of year .......................... -- -- --
------- ------- -------
Cash and cash equivalents at end of year ................................ $ 996 $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
25
<PAGE> 28
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
ADDITIONAL STOCKHOLDER'S OTHER TOTAL
NUMBER OF PAR PAID-IN NET RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES VALUE CAPITAL INVESTMENT EARNINGS LOSS EQUITY
--------- ------- ---------- ------------- -------- ------------- ------------
(IN MILLIONS, EXCEPT NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of October 31, 1997......... -- $ -- $ -- $ 3,110 $ -- $ -- $ 3,110
Net earnings ........................... -- -- -- 257 -- -- 257
Transfer of net assets from
Hewlett-Packard Company related
to the Heartstream acquisition ....... -- -- -- 134 -- -- 134
Net cash transfers to
Hewlett-Packard Company .............. -- -- -- (479) -- -- (479)
-------- ---- -------- -------- -------- -------- --------
Balance as of October 31, 1998 ......... -- -- -- 3,022 -- -- 3,022
Net earnings ........................... -- -- -- 512 -- -- 512
Net cash transfers to
Hewlett-Packard Company .............. -- -- -- (152) -- -- (152)
Transfer to common stock and
additional paid-in capital ........... 380,000 4 3,378 (3,382) -- -- --
-------- ---- -------- -------- -------- -------- --------
Balance as of October 31, 1999 ......... 380,000 4 3,378 -- -- -- 3,382
Net earnings ........................... -- -- -- -- 757 -- 757
Shares issued in the IPO ............... 72,000 1 2,067 -- -- -- 2,068
Proceeds from IPO transferred
to Hewlett-Packard ................... -- (1) (2,067) -- -- -- (2,068)
Shares issued for employee
benefit plans and other .............. 1,976 1 109 -- -- -- 110
Cash funding from Hewlett-Packard ...... -- -- 1,858 -- -- -- 1,858
Transfer of net assets to
Hewlett-Packard ...................... -- -- (853) -- -- -- (853)
Tax benefit associated with
stock option exercises ............... -- -- 16 -- -- -- 16
Other comprehensive loss ............... -- -- -- -- -- (5) (5)
-------- ---- -------- -------- -------- -------- --------
Balance as of October 31, 2000 ......... 453,976 $ 5 $ 4,508 $ -- $ 757 $ (5) $ 5,265
======== ==== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION
Agilent Technologies, Inc. (Agilent) was incorporated in Delaware in May
1999 as a wholly-owned subsidiary of Hewlett-Packard Company (Hewlett-Packard).
Agilent authorized 125,000,000 shares of $.01 par value preferred stock and
2,000,000,000 shares of $.01 par value common stock and issued 10,000,000 shares
of common stock to Hewlett-Packard. No shares of preferred stock were issued and
outstanding.
Agilent has entered into an agreement to sell its healthcare solutions
business to Koninklijke Phillips Electronics, N.V. The results of the healthcare
solutions business are presented as discontinued operations for all periods in
the consolidated financial statements included herein. See Note 3 "Discontinued
operations".
Effective October 21, 1999, Agilent's board of directors declared a
38-for-one stock split in the form of a stock dividend. As of result of the
stock split, common stock issued and outstanding increased to 380,000,000
shares. Shares outstanding and net earnings per share amounts have been adjusted
for all periods.
On November 18, 1999, Agilent launched its initial public offering of
72,000,000 shares of common stock at $30 per share. The net proceeds of the
offering of $2.1 billion were paid to Hewlett-Packard as a dividend on November
23, 1999. On April 7, 2000, Hewlett-Packard announced that its board of
directors had declared a stock dividend of all of Hewlett-Packard's shares in
Agilent. The dividend was distributed on June 2, 2000 (the distribution date),
to Hewlett-Packard shareholders of record as of May 2, 2000. The distribution
was made on the basis of 0.3814 of an Agilent share for each Hewlett-Packard
common share outstanding.
Agilent's fiscal year end is October 31. Unless otherwise stated, all years
and dates refer to Agilent's fiscal year.
The consolidated 1999 and 1998 financial information was prepared using
Hewlett-Packard's historical bases in the assets and liabilities and the
historical results of operations of Agilent. Agilent began accumulating retained
earnings on November 1, 1999.
The consolidated 1999 and 1998 financial information includes allocations
of certain Hewlett-Packard corporate expenses, including centralized research
and development, legal, accounting, employee benefits, real estate, insurance
service, information technology services, treasury and other Hewlett-Packard
corporate and infrastructure costs. The expense allocations were determined on
bases that Hewlett-Packard and Agilent considered to be a reasonable reflection
of the utilization of services provided or the benefit received by Agilent.
Therefore, the 1999 and 1998 financial information included herein is not
indicative of the consolidated financial position, results of operations or cash
flows of Agilent in the future or what they would have been had Agilent operated
as a separate, stand-alone entity during 1999 and 1998. In 1999, Agilent entered
into interim service level agreements with Hewlett-Packard for information
technology, financial, accounting, building, legal and other services. See Note
15, "Transactions with Hewlett-Packard."
Effective November 1, 1999, Agilent began operating as a stand-alone
company. In November 1999, Hewlett-Packard transferred to Agilent a majority of
the assets and liabilities relating to its businesses and also provided Agilent
with cash funding of approximately $1.1 billion. Hewlett-Packard retained some
of Agilent's assets and liabilities, including some of its accounts receivable
and accounts payable, accrued payroll and related items and taxes payable,
except deferred taxes, and transferred to Agilent some of the assets and
liabilities related to its business, including some of the accounts receivable,
accounts payable and other liabilities of Agilent Technologies Japan, Ltd.
(formerly called Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard
transferred to Agilent $521 million to fund its acquisition of Yokogawa Electric
Corporation's 25% ownership of Agilent Technologies Japan, Ltd. In December
1999, Hewlett-Packard provided Agilent with additional cash funding of
approximately $200 million based on its and Hewlett-Packard's balance sheets as
of October 31, 1999.
Of the total $1.8 billion of funding received from Hewlett-Packard in 2000,
$1.1 billion was classified as net cash provided by financing activities and
$0.7 billion was classified among several categories as net cash provided by
operating activities in the consolidated statement of cash flows for the year
ended October 31, 2000.
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying financial data has been prepared
by Agilent pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain amounts in the consolidated balance sheet, statement
of earnings and cash flow statement for 1999 and 1998 have been reclassified to
conform to the presentation in 2000.
Principles of consolidation. The consolidated financial statements include
the accounts of Agilent and its wholly- and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of estimates. 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 Agilent's consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue recognition. Revenue from product sales, net of trade discounts and
allowances, is recognized at the time the product is shipped or upon
installation and customer acceptance, if the acceptance criteria are
substantive. Provisions are established for estimated costs that may be incurred
for product warranties and post-sales support. Revenue from services, including
operating leases, is recognized over the contractual period or as services are
rendered and accepted by the customer.
Goodwill and purchased intangible assets. Goodwill and purchased intangible
assets are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally three to ten years.
Advertising. Advertising costs are expensed as incurred and amounted to
$178 million in 2000, $117 million in 1999 and $87 million in 1998.
Taxes on earnings. Income tax expense for 2000 is based on earnings before
taxes. Prior to June 3, 2000, Agilent's operating results were included in
Hewlett-Packard's consolidated U.S. and state income tax returns and in tax
returns of certain Hewlett-Packard foreign subsidiaries. The provision for taxes
in Agilent's consolidated financial statements has been determined on a
separate-return basis. Deferred tax assets and liabilities are recognized
principally for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts.
Net earnings per share. Basic net earnings per share is computed by
dividing net earnings (numerator) by the weighted average number of common
shares outstanding (denominator) during the period excluding the dilutive effect
of stock options and other employee stock plans. Diluted net earnings per share
gives effect to all potentially dilutive common stock equivalents outstanding
during the period. In computing diluted net earnings per share, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the proceeds of stock option exercises.
Cash and cash equivalents. Agilent classifies investments as cash
equivalents if the original maturity of an investment is three months or less.
Cash equivalents are stated at cost, which approximates fair value. Prior to
2000, Hewlett-Packard managed cash and cash equivalents on a centralized basis.
Cash receipts associated with Agilent's businesses were transferred to
Hewlett-Packard on a daily basis and Hewlett-Packard funded Agilent's
disbursements. For this reason, Agilent had cash balances of zero in previous
years.
Fair Value of Financial Instruments. The carrying values of certain of the
Company's financial instruments, including cash and cash equivalents, accrued
compensation, and other accrued liabilities, approximate fair value
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
because of their short maturities. The fair values of investments are determined
using quoted market prices for those securities or similar financial
instruments.
Concentration of credit risk. Agilent sells the majority of its products
through its direct sales force. No single customer accounted for 10% or more of
the combined accounts receivable balance at October 31, 2000 and 1999. Credit
risk with respect to accounts receivable is generally diversified due to the
large number of entities comprising Agilent's customer base and their dispersion
across many different industries and geographies. Agilent performs ongoing
credit evaluations of its customers' financial condition, and requires
collateral, such as letters of credit and bank guarantees, in certain
circumstances.
Derivative Instruments. Agilent enters into foreign exchange contracts,
primarily forwards and purchased options, to hedge exposures to changes in
foreign currency exchange rates. These contracts are designated at inception as
hedges of the related foreign currency exposures, which include committed and
anticipated foreign currency sales and assets and liabilities that are
denominated in currencies other than the U.S. dollar. To achieve hedge
accounting, contracts must reduce the foreign currency exchange rate risk
otherwise inherent in the amount and duration of the hedged exposures and comply
with established risk management policies; hedging contracts generally mature
within six months. Agilent does not use derivative financial instruments for
speculative or trading purposes.
When hedging sales-related exposure, foreign exchange contract expirations
are set so as to occur in the same month the hedged shipments occur, allowing
realized gains and losses on the contracts to be recognized in net revenue in
the same periods in which the related revenues are recognized. Premiums paid
related to purchased option contracts are amortized to income over the life of
the contract. When hedging balance sheet exposure, realized gains and losses on
foreign exchange contracts are recognized in other income (expense), net in the
same period as the realized gains and losses on remeasurement of the foreign
currency denominated assets and liabilities occur. Discounts or premiums on
forward contracts are amortized to income over the life of the contract. The
gains and losses, which have not been material, are included in cash flows from
operating activities in the consolidated statement of cash flows.
Agilent may also, from time to time, acquire warrants to purchase
securities of other companies as part of strategic relationships.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement, as amended, establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in the balance sheet and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 2000. Agilent adopted SFAS 133 during
first quarter of 2001 resulting in a cumulative pre-tax reduction in earnings of
$41 million ($25 million after-tax) and a pre-tax increase in other
comprehensive income of $10 million.
Inventory. Inventory is valued at standard cost which approximates actual
cost computed on a first-in, first-out basis, not in excess of market value.
Property, plant and equipment. Property, plant and equipment are stated at
cost less accumulated depreciation. Additions, improvements and major renewals
are capitalized; maintenance, repairs and minor renewals are expensed as
incurred. Depreciation is provided using accelerated methods, principally over
fifteen to forty years for buildings and improvements and three to ten years for
machinery and equipment, including equipment leased to customers under operating
leases. Depreciation of leasehold improvements is provided using the
straight-line method over the life of the asset or the term of the lease or the
asset, whichever is shorter.
Impairment of long-lived assets. Agilent continually monitors events and changes
in circumstances that could indicate carrying amounts of long-lived assets,
including intangible assets, may not be recoverable. When such events or changes
in circumstances are present, Agilent assesses the recoverability of long-lived
assets by
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
determining whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. If the total of the future cash flows
is less than the carrying amount of those assets, Agilent recognizes an
impairment loss based on the excess of the carrying amount over the fair value
of the assets.
Foreign currency translation. Agilent uses the U.S. dollar as its
functional currency. Foreign currency assets and liabilities are remeasured into
U.S. dollars at current exchange rates except for inventory, property, plant and
equipment, other assets and deferred revenue which are remeasured at historical
exchange rates. Revenue and expenses are generally translated at average
exchange rates in effect during each period, except for those expenses related
to balance sheet amounts that are remeasured at historical exchange rates. Gains
or losses from foreign currency remeasurement are included in consolidated net
earnings. In 2000, the effect of foreign currency exchange rate fluctuations on
Agilent's cash and cash equivalents denominated in foreign currencies was not
material.
Recent accounting pronouncements. Agilent adopted SFAS 133 in the first
quarter of fiscal 2001. See "Derivative Instruments," above for a detailed
description of the impacts of the adoption.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." In
June 2000, the SEC delayed the implementation date of this Staff Accounting
Bulletin. This Staff Accounting Bulletin is effective no later than the fourth
quarter of Agilent's year 2001. Agilent currently does not believe that the
adoption will have a material annual impact on its consolidated financial
statements.
3. DISCONTINUED OPERATIONS - MEASUREMENT DATE FOR THE SALE OF AGILENT'S
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 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,
Agilent's consolidated financial statements reflect its 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 Agilent's healthcare solutions
business have been classified as discontinued, for all periods presented,
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>
OCTOBER 31, OCTOBER 31,
----------- -----------
2000 1999
---- ----
(IN MILLIONS)
<S> <C> <C>
Current assets ............................... $516 $662
Property, plant and equipment, net ........... 56 71
Goodwill and other intangible assets, net .... 90 55
Other assets ................................. 30 51
Current liabilities .......................... 95 80
---- ----
Net investment in discontinued operations .... $597 $759
==== ====
</TABLE>
The following table shows the results of operations of Agilent's healthcare
solutions business.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenue ...................................... $ 1,412 $ 1,501 $ 1,340
Costs and expenses ............................... 1,283 1,182 1,096
Earnings from discontinued operations ............ 129 319 244
Other income (expense), net ...................... 17 5 (39)
------- ------- -------
Earnings from discontinued operations before taxes 146 324 205
Provision for taxes .............................. 61 118 74
------- ------- -------
Net earnings from discontinued operations ........ $ 85 $ 206 $ 131
======= ======= =======
</TABLE>
Certain notes to these consolidated financial statements have been restated
to reflect Agilent's presentation of discontinued operations. Generally,
information in the notes has been restated where amounts were included in net
earnings from, or net investment in, discontinued operations.
4. ACQUISITIONS AND DISPOSITIONS
Acquisitions. During 2000, 1999 and 1998, Agilent acquired several
companies that were not significant to its financial position, results of
operations or cash flows. All of these acquisitions were accounted for under the
purchase method. The results of operations of the acquired companies were
included prospectively from the date of acquisition and the acquisition cost was
allocated to the acquired tangible and identifiable intangible assets and
liabilities based on fair market values at the date of acquisition. Residual
amounts were recorded as goodwill. In-process research and development
write-offs have not been significant. Goodwill is amortized on a straight-line
basis over its estimated economic life, generally three to five years except as
discussed below. The net book value of goodwill and other intangible assets
associated with continuing operations' acquisitions including Yokogawa was $467
million at October 31, 2000 and $87 million at October 31, 1999.
In July 1999, Hewlett-Packard entered into an agreement with Yokogawa
Electric Corporation (Yokogawa) to acquire Yokogawa's 25% equity interest in
Agilent Technologies Japan, Ltd. for approximately $521 million. Under the terms
of the separation agreement, Agilent assumed Hewlett-Packard's obligations. The
agreement specified that Agilent would acquire Yokogawa's minority interest
through a series of purchase transactions. In the initial step, which occurred
in January 2000, Agilent purchased approximately 10.4% of Agilent Technologies
Japan, Ltd. shares from Yokogawa for approximately $206 million. In the second
step, which occurred in April 2000, Agilent purchased approximately 10.4% of
additional Agilent Technologies Japan, Ltd. shares from Yokogawa for
approximately $216 million. Agilent purchased the remaining 4.2% of Agilent
Technologies Japan, Ltd. shares owned by Yokogawa in January 2001.
Hewlett-Packard has provided the funding for all steps of this transaction. An
independent valuation has been performed to determine the portion of the
Yokogawa purchase price attributable to Agilent's business and the remaining
Hewlett-Packard business and to allocate the purchase price to identifiable
assets and liabilities. Of the total purchase price, $391 million is
attributable to Agilent's business, of which approximately $278 million is
attributable to goodwill and is amortized over 10 years. The net book value of
goodwill associated with the two payments for the purchase of approximately
20.8% of Agilent Technologies Japan, Ltd. shares from Yokogawa was approximately
$201 million at October 31, 2000. The remainder of the purchase price was
allocated to tangible assets. Net investment in discontinued operations as of
October 31, 2000 includes $18 million of the goodwill associated with the
Yokogawa transaction.
Dispositions. In the fourth quarter of 2000, Agilent entered into a vendor
financing agreement with the CIT Group, Inc. ("CIT"), whereby CIT will provide
equipment financing and leasing services to Agilent's customers on a global
basis. Under the terms of the agreement, CIT established a wholly-owned
subsidiary, Agilent Financial Services, Inc. ("AFS"), and is offering financing
products to Agilent's customers under this name. CIT, through AFS, will be
providing funding and services related to equipment financing to customers in
most of Agilent's businesses. These services include credit review, document
generation, pricing, invoicing and collections. Agilent also entered into an
asset purchase agreement with CIT pursuant to which Agilent has sold them
certain portions of its U.S. portfolio of lease assets during the fourth quarter
of 2000. Net proceeds from this sales transaction were $234 million and Agilent
recognized $197 million in net revenue from continuing operations and $83
million in cost
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of products from continuing operations. Agilent will be selling additional
portions of its portfolio of lease assets to CIT during 2001 pursuant to various
asset purchase agreements.
In 2000, 1999 and 1998, Agilent sold assets related to portions of its
businesses to third parties. Gross proceeds from these dispositions were $2
million in 2000, $121 million in 1999 and $57 million in 1998. Gains from the
dispositions are included in other income (expense), net, in the consolidated
statement of earnings and were not material in 2000, totaled $54 million in 1999
and $21 million in 1998.
Unaudited pro forma statement of earnings information has not been
presented because the effects of these acquisitions and divestitures were not
material on either an individual or aggregated basis.
5. FINANCIAL INSTRUMENTS
Derivative instruments. The notional amount of all outstanding foreign
currency option and forward contracts outstanding was $1.8 billion at October
31, 2000 and $2.5 billion at October 31, 1999. The contracts related to
exposures in approximately 20 foreign currencies. The notional amount represents
the future cash flows under contracts to both purchase and sell foreign
currencies and is not a measure of market or credit exposure. Unrealized gains
and losses on hedging contracts amounted to $28 million and $28 million,
respectively, at October 31, 2000; and $81 million and $16 million,
respectively, at October 31, 1999. Unamortized premiums and realized gains
deferred under currency options were not material.
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>
FOR THE YEARS ENDED
OCTOBER 31,
------------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net earnings from continuing operations ................................ $672 $306 $126
Net earnings from discontinued operations .............................. $ 85 $206 $131
Net earnings ........................................................... $757 $512 $257
Denominators:
Basic weighted average shares .......................................... 449 380 380
Potentially dilutive common stock equivalents -- stock options and other
employee stock plans ................................................ 6 -- --
---- ---- ----
Diluted weighted average shares ........................................ 455 380 380
</TABLE>
Options to purchase 14,596,000 shares of common stock at a weighted average
price of $79 per share were outstanding during 2000 but were not included in the
computation of diluted net earnings per share because the options' exercise
price was greater than the average market price of the common shares. The
options, which expire in 2010, were still outstanding at the end of 2000.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes in 2000 was $546 million. No amounts were paid
for income taxes in 1999 and 1998 as Hewlett-Packard made such payments on
Agilent's behalf. Cash paid for interest was not material in 2000, 1999 and
1998.
Non-cash transactions in 2000 primarily related to the issuance of common
stock under various employee stock plans in the amount of $44 million and
acquisitions in the amount of $25 million.
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMPREHENSIVE EARNINGS
Other comprehensive earnings are not material for all years presented and
therefore are not presented separately.
9. INVENTORY
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Finished goods ................... $ 356 $ 444
Work in progress ................. 340 270
Raw materials .................... 914 526
------ ------
$1,610 $1,240
====== ======
</TABLE>
10. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Land ................................... $ 155 $ 89
Buildings and leasehold improvements ... 1,556 1,445
Machinery and equipment ................ 2,109 2,052
------- -------
3,820 3,586
Accumulated depreciation ............... (2,135) (2,270)
------- -------
$ 1,685 $ 1,316
======= =======
</TABLE>
Agilent leases certain of its products to customers under operating leases.
Equipment on operating leases was $201 million at October 31, 2000 and $219
million at October 31, 1999 and is included in machinery and equipment.
Accumulated depreciation related to equipment on operating leases was $49
million at October 31, 2000 and $73 million at October 31, 1999. At October 31,
2000, minimum future rentals on noncancelable operating leases with original
terms of one year or longer were not material.
11. TAXES ON EARNINGS
The provision for income taxes is comprised of:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
U.S. federal taxes from continuing operations:
Current .................................. $ 77 $ 63 $ 158
Deferred ................................. (42) (15) (133)
Non-U.S. taxes from continuing operations:
Current .................................. 310 104 47
Deferred ................................. (18) 3 (8)
State taxes from continuing operations ..... 19 2 1
----- ----- -----
Total from continuing operations: .......... 346 157 65
</TABLE>
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included on the consolidated
balance sheet are:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------------------
2000 1999
--------------------------- ---------------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Inventory ................................. $157 $ 7 $134 $ 4
Property, plant and equipment ............. 71 5 34 7
Warranty reserves ......................... 34 -- 21 --
Retiree medical benefits .................. 70 -- 83 --
Other retirement benefits ................. 15 54 -- 70
Employee benefits, other than retirement .. 220 22 178 15
Unremitted earnings of foreign subsidiaries -- 160 -- 119
Other ..................................... 110 19 106 15
---- ---- ---- ----
$677 $267 $556 $230
==== ==== ==== ====
</TABLE>
The current portion of the net deferred tax asset is $304 million at
October 31, 2000 and $232 million at October 31, 1999 and is included in other
current assets.
Tax benefits of $16 million in 2000 associated with the exercise of
employee stock options was allocated to stockholders' equity.
The differences between the U.S. federal statutory income tax rate and
Agilent's effective tax rate are:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate ..... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit . 2.1 0.7 0.9
Lower rates in other jurisdictions, net .... (4.0) (5.6) (3.6)
Other, net ................................. 0.9 3.9 1.7
---- ---- ----
34.0% 34.0% 34.0%
==== ==== ====
</TABLE>
The domestic and foreign components of earnings from continuing operations
before taxes are:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
U.S. continuing operations ................. $ 66 $ 84 $ 42
Non-U.S. continuing operations ............. 952 379 149
------- ------- -------
$ 1,018 $ 463 $ 191
======= ======= =======
</TABLE>
As a result of certain employment and capital investment actions undertaken
by Agilent, income from manufacturing activities in certain countries is subject
to reduced tax rates, and in some cases is wholly exempt from taxes for years
through 2007. The income tax benefits attributable to the tax status of these
subsidiaries are estimated to be $41 million in 2000, $31 million in 1999 and
$21 million in 1998.
Agilent has not provided for U.S. federal income and foreign withholding
taxes on $761 million of cumulative undistributed earnings of non-U.S.
subsidiaries as of October 31, 2000. Such earnings are intended to be reinvested
indefinitely. Where excess cash has accumulated in Agilent's non-U.S.
subsidiaries and it is advantageous for tax or foreign exchange reasons,
subsidiary earnings are remitted.
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
See Note 15, "Transactions with Hewlett-Packard," for a description of the
tax sharing agreement between Agilent and Hewlett-Packard.
12. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES
In August 2000, Agilent announced a restructuring of its healthcare
solution business. The restructuring resulted in a workforce reduction through
severance programs, as well as consolidation of its business operations. Since
the announcement, 396 regular employees located in the United States, Asia
Pacific and Europe have accepted severance packages and 200 temporary employees
have been terminated. Agilent recognized a $21 million pre-tax restructuring
charge comprised of $13 million for estimated severance benefits and $8 million
for non-cash asset write downs. The following amounts are included in Agilent's
net earnings from discontinued operations: $11 million in cost of products, $4
million in cost of services and other and the remainder is included in other
expenses. As of October 31, 2000, $2 million in severance benefits has been paid
and charged against the liability. The remainder of the liability is reported as
part of Agilent's net investment in discontinued operations and will be utilized
during 2001.
In 1999, we recognized an impairment loss of $51 million related to a
building that was under construction for the intended purpose of housing
manufacturing operations for eight-inch CMOS semiconductor wafers. At the time
construction was stopped, only the building shell was complete. After exhaustive
efforts to find a semiconductor manufacturing partner to utilize the building
for its initial intended use, management concluded that the highest fair value
to be realized from this building was based on selling it for use as an office
or general use facility. In 2000, we actively marketed the building shell
without success. In late 2000, in response to the increased demand in the
wireless semiconductor market and our need to increase gallium arsenide ("GaAs")
manufacturing capacity, management decided to resume construction of a portion
of the building shell. When completed, this portion of the building will
manufacture six-inch GaAs semiconductor wafers. We anticipate that the completed
manufacturing facility will be put into service sometime in 2002, at which time
depreciation will commence.
During 1998, we recorded a pre-tax restructuring charge of $163 million
related to the transfer of the production of certain semiconductor wafers to a
third-party contractor. Of this amount, $138 million was included in cost of
products, $7 million in research and development and $18 million in selling,
general and administrative expenses. Included in this charge was $85 million for
non-cash asset writedowns of equipment that was subsequently abandoned or sold.
Also included in this charge was $78 million for employee severance benefits
that have been paid. Of the total $163 million charge, $8 million was included
in net earnings from discontinued operations as it related to restructuring a
portion of the healthcare solutions group.
Also during 1998, we recorded a pre-tax charge of $37 million for the
writedown of an investment in convertible preferred stock of a medical products
company to its fair value because management had determined the impairment was
not temporary. The full charge was included in net earnings from discontinued
operations.
13. STOCK BASED COMPENSATION
Employee Stock Purchase Plans. Prior to February 2, 2000, virtually all
Agilent employees were able to contribute up to ten percent of their base
compensation to the quarterly purchase of Hewlett-Packard's common stock under
the Hewlett-Packard Stock Purchase Plan ("the legacy plan"). Under the
provisions of the legacy plan, employee contributions to purchase shares were
partially matched with shares contributed by Hewlett-Packard. These matching
shares generally vested over two years. After February 2, 2000, Agilent
implemented the Agilent Employee Stock Purchase Plan ("the Agilent plan") that
was similar to the legacy plan and that allowed eligible employees to contribute
up to ten percent of their base compensation to the purchase of Agilent common
stock. Under the provisions of the Agilent plan, employee contributions were
partially matched with shares contributed by Agilent. These matching shares also
generally vested over two years. On June 2, 2000, all unvested matching shares
of Hewlett-Packard stock held by our employees were forfeited and replaced by
similar shares of Agilent common
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock. Compensation expense for the matching provision for both the legacy plan
and the Agilent plan was measured using the fair value of shares on the date of
purchase by Hewlett-Packard for the legacy plan and by Agilent for the Agilent
plan and was recognized by Agilent over the two-year vesting period.
Compensation expense under both plans included within earnings from continuing
operations was $34 million in 2000, $39 million in 1999 and $29 million in 1998.
Amounts from 1999 and 1998 were allocated from Hewlett-Packard. At October 31,
2000, 9,802,100 shares of Agilent common stock had been authorized for issuance
under the Agilent plan and 2,748,062 of these shares had been issued.
Effective October 31, 2000, purchases and contributions under the Agilent
plan ceased. All unvested matching shares under the Agilent plan will maintain
their original vesting terms based on the employee's continued employment with
Agilent. Vesting of these matching shares will be completed no later than
October 31, 2002.
Effective November 1, 2000, Agilent adopted a new plan, the Agilent
Technologies, Inc. Employee Stock Purchase Plan ("new plan"). Under the
provisions of the new plan, eligible employees may contribute up to 10% of their
base compensation to purchase shares of Agilent common stock at 85% of the lower
of the fair market value at the entry date or purchase date as defined by the
new plan. As of November 1, 2000, 35,000,000 shares of Agilent common stock were
registered for issuance under the new plan.
Incentive Compensation Plans. Prior to November 1999, certain of Agilent's
employees participated in Hewlett-Packard's stock-based incentive compensation
plans under which they received stock options and other equity based awards. On
September 17, 1999, Agilent adopted the Agilent Technologies, Inc. 1999 Stock
Plan ("the Agilent stock plan") and subsequently reserved 67,800,000 shares of
Agilent common stock for issuance under the plan. Stock options, stock
appreciation rights, stock awards and cash awards may be granted under the
Agilent stock plan. Options granted under the Agilent stock plan may be either
"incentive stock options," as defined in section 422 of the Internal Revenue
Code, or non-statutory. Options generally vest at a rate of 25 percent per year
over a period of four years from the date of grant. The exercise price for
incentive stock options may not be less than 100 percent of the fair market
value of the underlying Agilent stock on the date the stock award is granted.
Effective June 2000, a majority of the Hewlett-Packard awards held by
Agilent employees were converted to Agilent awards of equivalent value. The
conversion of Hewlett-Packard options into Agilent options was done in such a
manner that (1) the aggregate intrinsic value of the options immediately before
and after the exchange is the same, (2) the ratio of the exercise price per
option to the market value per option is not reduced, and (3) the vesting
provisions and options period of the replacement Agilent options are the same as
the original vesting terms and option period of the Hewlett-Packard options.
At October 31, 2000, shares available for option and restricted stock
grants were 40,000,870. In 2000, discounted options totaling 27,300 shares were
granted. Another 2,138,649 discounted options were granted as a result of the
conversion of Hewlett-Packard awards held by Agilent employees. The stock based
compensation expense related to Agilent employees' discounted options, stock
appreciation rights and restricted stock included within earnings from
continuing operations was $24 million in 2000, and was not material in 1999 and
1998. Amounts for 1999 and 1998 were allocated from Hewlett-Packard.
The following table summarizes option activity for the entire plan during
the year ended October 31, 2000:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
-------- ----------------
<S> <C> <C>
Outstanding options at the beginning of year ............... -- $ --
Converted from Hewlett-Packard ............................. 17,667 31
Granted .................................................... 30,202 59
Exercised .................................................. (645) 23
Cancelled .................................................. (1,333) 59
-------- --------
Outstanding at end of year ................................. 45,891 $ 48
======== ========
Options exercisable at year-end ............................ 10,914 $ 26
Weighted-average fair value of options granted and converted
during the year ........................................ $ 48
</TABLE>
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about all options outstanding at
October 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ----------------------------------
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0 -- 25 ............... 4,711 3.2 years $ 12 4,405 $ 5
$26 -- 50 .............. 25,192 8.5 years 37 6,032 33
$51 -- 75 .............. 1,645 9.3 years 65 276 61
$76 -- 100 ............. 14,026 9.4 years 78 197 78
$101 and over........... 317 9.4 years 117 4 119
------ --------- ------- ------- -------
45,891 $ 48 10,914 $ 26
====== ======= ======= =======
</TABLE>
Pro Forma Information. Agilent has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for stock-based compensation granted to Agilent employees.
Accordingly, compensation expense is recognized only when options are granted
with a discounted exercise price. Any compensation expense is recognized ratably
over the associated service period, which is generally the option vesting term.
Pro forma net earnings and net earnings per share information, as required
by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"), has been
determined as if Agilent had accounted for all employee stock options granted to
Agilent employees under SFAS No. 123's fair value method. The fair value of
these options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
------- -------- --------
(1) (2) (2)
<S> <C> <C> <C>
Risk-free interest rate ....... 5.75% 5.53% 5.38%
Dividend yield ................ 0% 1.00% 1.00%
Volatility .................... 67% 30% 30%
Expected option life .......... 7 years 7 years 7 years
</TABLE>
----------
(1) Assumptions for Agilent options awarded during 2000.
(2) Assumptions for Hewlett-Packard Options for the years 1999 and 1998.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the four-year average vesting period of the
options. The pro forma effect of recognizing compensation expense in accordance
with SFAS No. 123 would have been to reduce Agilent's reported net earnings by
$281 million in 2000, $38 million in 1999, and $20 million in 1998. Had
compensation expense been recorded by Agilent in accordance with SFAS No. 123,
the effect would have been to reduce basic net earnings per share by $0.63 and
diluted net earnings per share by $0.62 in 2000. In comparison, the effect would
have been to reduce both basic and diluted net earnings per share by $0.10 and
$0.05 in 1999 and 1998, respectively. These pro forma amounts include amortized
fair values attributable to options granted after October 31, 1995 only, and
therefore are not representative of future pro forma amounts. These amounts were
calculated using all options granted to employees across all segments of
Agilent's business operations.
14. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
General. Substantially all of Agilent's employees are covered under
various Agilent defined benefit plans. Additionally, Agilent sponsors
postretirement health care and life insurance benefits to U.S. employees.
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The impact of the sale of our Healthcare Solutions business on our plan
assets and benefit obligations is expected to be reflected in our fiscal 2001
Form 10-K, after the sale to Philips is completed. Pension and postretirement
plan costs for all periods presented have been restated to reflect the costs
included within net earnings from discontinued operations.
Spin-off from Hewlett-Packard. On or before June 2, 2000, Agilent assumed
responsibility for pension, deferred profit-sharing, 401(k) and other post
retirement benefits from Hewlett-Packard for current and former employees whose
last work assignment prior to the distribution date was with Agilent. These
current and former employees are collectively referred to as "Agilent
Employees." In the U.S., the Hewlett-Packard Company Retirement Plan and
Deferred Profit-Sharing Plan Master Trust, was converted to the Group Trust for
the Hewlett-Packard Company Deferred Profit-Sharing Plan and Retirement Plan and
the Agilent Technologies, Inc. Deferred Profit-Sharing Plan and Retirement Plan
(the "Group Trust") and a pro rata share of the assets of the Group Trust were
assigned to the Agilent Retirement Plan Trust and the Agilent Deferred
Profit-Sharing Trust. Outside the U.S., generally, a pro rata share of the
Hewlett-Packard pension assets, if any, were transferred or otherwise assigned
to the Agilent entity in accordance with local law or practice. The pro rata
share was in the same proportion as the projected benefit obligation for Agilent
Employees was to the total projected benefit obligation of Hewlett-Packard and
Agilent combined. For all the periods presented, the consolidated financial
statements include the trust assets, liabilities and expenses that were assigned
to Agilent.
Pension and deferred profit-sharing plans. Worldwide pension and deferred
profit-sharing costs included in earnings from continuing operations were $69
million in 2000, $111 million in 1999 and $96 million in 1998. 1999 and 1998
amounts were allocations from Hewlett-Packard Plans.
U.S. employees who meet eligibility criteria are provided benefits under
Agilent's Retirement Plan ("Retirement Plan"). Defined benefits are generally
based on an employee's average pay during the final five years of employment and
length of service. For eligible service through October 31, 1993, the benefit
payable under the defined benefit plan is reduced by any amounts due to the
eligible employee under Agilent's fixed and frozen defined contribution deferred
profit-sharing plan ("DPSP"), which has been closed to new participants.
The combined status of the Retirement Plan and DPSP for U.S. Agilent
Employees follows.
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Fair value of plan assets .................. $2,379 $1,907
Retirement benefit obligation .............. $2,309 $1,864
</TABLE>
Eligible employees outside the U.S. generally receive retirement benefits
under various retirement plans based upon factors such as years of service and
employee compensation levels. Eligibility is generally determined in accordance
with local statutory requirements.
Postretirement Benefit Plans. In addition to receiving pension benefits,
Agilent Employees may participate in Agilent's medical and life insurance plans
that provide benefits to U.S. retired employees. Substantially all of Agilent's
current U.S. employees could become eligible for these benefits, and the
existing benefit obligation relates primarily to those employees. Once
participating in the medical plan, retirees may choose from managed-care and
indemnity options, with their contributions dependent on options chosen and
length of service.
401(k) plan. Agilent's U.S. eligible employees may participate in Agilent
Savings Accumulation Plan (ASAP), a clone of the Tax Savings Capital
Accumulation Plan (TAXCAP), as of June 2, 2000, which was established as a
supplemental retirement program. Hewlett-Packard's savings plans' assets and
liabilities related to Agilent Employees were transferred to Agilent effective
June 2, 2000. Beginning February 1, 1998, enrollment in TAXCAP/ASAP became
automatic for employees who meet eligibility requirements unless they decline
participation. Under the TAXCAP/ASAP program, Agilent matches contributions by
employees up to a maximum of 4 percent of an employee's annual compensation.
Prior to November 1, 2000, the maximum combined
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contribution to the Employee Stock Purchase Plan and ASAP was 25 percent of an
employee's annual eligible compensation subject to certain regulatory and plan
limitations. Agilent's expense included in earnings from continuing operations
related to TAXCAP/ASAP was $48 million in 2000, $44 million in 1999 and $42
million in 1998. 1999 and 1998 amounts were allocations from Hewlett-Packard.
Components of net periodic cost. For the years ended October 31, 2000, 1999
and 1998, net pension and postretirement benefit costs for Agilent are comprised
of:
<TABLE>
<CAPTION>
PENSIONS
------------------------------------------------- U.S. POSTRETIREMENT
U.S. PLANS NON-U.S. PLANS BENEFIT PLANS
---------------------- ---------------------- ----------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned
during the period ........... $ 74 $ 72 $ 69 $ 51 $ 54 $ 40 $ 10 $ 10 $ 10
Interest cost on benefit
obligation .................. 35 25 20 39 38 33 18 14 13
Expected return on plan
assets ...................... (51) (30) (25) (58) (57) (41) (33) (17) (15)
Amortization and deferrals:
Actuarial (gain) loss ....... (12) 3 -- (1) (4) (11) (10) (6) (4)
Transition obligation (asset) (3) (3) (3) -- -- -- -- -- --
Prior service cost .......... 2 2 2 1 1 1 (4) (3) (4)
---- ---- ---- ---- ---- ---- ---- ---- ----
Net plan costs ................ $ 45 $ 69 $ 63 $ 32 $ 32 $ 22 $(19) $ (2) $ --
==== ==== ==== ==== ==== ==== ==== ==== ====
Distribution of Net Plan Costs:
Continuing operations ....... $ 40 $ 62 $ 57 $ 29 $ 29 $ 20 $(17) $ (2) $ --
Discontinued operations ..... 5 7 6 3 3 2 (2) -- --
Net plan costs ................ $ 45 $ 69 $ 63 $ 32 $ 32 $ 22 $(19) $ (2) $ --
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Funded status. As of October 31, 2000 and 1999 (assigned to Agilent), the
funded status of the defined benefit and postretirement benefit plans is:
<TABLE>
<CAPTION>
U.S. DEFINED NON-U.S. DEFINED U.S. POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS BENEFIT PLANS
------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Change in fair value of plan assets:
Fair value -- beginning of year .............................. $ 477 $ 343 $ 706 $ 705 $ 306 $ 189
Addition of plans ............................................ -- -- -- 7 -- --
Actual return on plan assets ................................. 172 152 99 48 110 79
Employer contributions ....................................... 13 60 84 65 -- 1
Participants' contributions .................................. -- -- 7 8 5 4
Change in population estimate ................................ 16 (60) 8 (100) 15 40
Benefits paid ................................................ (23) (18) (10) (15) (10) (7)
Currency impact .............................................. -- -- (87) (12) -- --
----- ----- ----- ----- ----- -----
Fair value -- end of year .................................... 655 477 807 706 426 306
----- ----- ----- ----- ----- -----
Change in benefit obligation:
Benefit obligation -- beginning of year ...................... 434 420 773 750 238 204
Addition/reclassification of plans ........................... -- -- -- 6 14 --
Service cost ................................................. 74 72 51 54 10 10
Interest cost ................................................ 35 25 39 38 18 14
Participants' contributions .................................. -- -- -- -- 5 4
Plan amendment ............................................... -- -- -- -- 59 --
Change in population estimate ................................ 12 (40) 7 (99) 5 31
Actuarial (gain) loss ........................................ 53 (25) 48 35 (22) (18)
Benefits paid ................................................ (23) (18) (10) (15) (10) (7)
Currency impact .............................................. -- -- (87) 4 -- --
----- ----- ----- ----- ----- -----
Benefit obligation -- end of year ............................ 585 434 821 773 317 238
----- ----- ----- ----- ----- -----
Plan assets in excess of (less than)
</TABLE>
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
U.S. DEFINED NON-U.S. DEFINED U.S. POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS BENEFIT PLANS
------------------ ------------------ -------------------
2000 1999 2000 1999 2000 1999
------ ------ ------ ------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
benefit obligation ........................................... 70 43 (14) (67) 109 68
Unrecognized net actuarial (gain) loss ......................... (160) (97) 102 105 (304) (199)
Unrecognized prior service cost (benefit)
related to plan changes ...................................... 10 11 8 10 3 (58)
Unrecognized net transition asset* ............................. -- (3) (1) (1) -- --
----- ----- ----- ----- ----- -----
Net prepaid (accrued) costs .................................... $ (80) $ (46) $ 95 $ 47 $(192) $(189)
===== ===== ===== ===== ===== =====
Amounts recognized in the consolidated balance sheet consist of:
Prepaid (accrued) defined benefit plan costs .................. (80) (46) 86 42 -- --
Prepaid defined benefit plan costs allocated
to discontinued operations ................................. -- -- 9 5 -- --
(Accrued) post retirement benefits costs ...................... -- -- -- -- (192) (189)
------ ------ ----- ----- ----- -----
Net prepaid (accrued) costs ** ................................ $ (80) $ (46) $ 95 $ 47 $(192) $(189)
===== ===== ===== ===== ===== =====
</TABLE>
----------
* Amortized over 15 years for the U.S. plan and over periods ranging from 10
to 22 years for the non-U.S. plans.
** The asset and pension obligation amounts that will be transferred to Royal
Phillips Electronics for the sale of Agilent's Healthcare Solutions Group
are subject to final adjustment. The final amounts to be transferred to
Philips are not expected to be materially different from the estimated
amounts
Plan assets consist primarily of listed stocks and bonds.
Defined benefit plans whose benefit obligations are in excess of the fair
value of the plan assets are:
<TABLE>
<CAPTION>
NON-U.S.
U.S. EXCESS DEFINED
BENEFIT PLANS BENEFIT PLANS
OCTOBER 31, OCTOBER 31,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Aggregate benefit obligation ........... $ (50) $ (22) $(541) $(681)
Aggregate fair value of plan assets .... -- -- $ 506 $ 608
</TABLE>
The non-current portion of the liability for retirement and post retirement
benefits plans is included in other liabilities and totaled $221 million at
October 31, 2000 and $239 million at October 31, 1999.
Assumptions. The assumptions used to measure the benefit obligations and to
compute the expected long-term return on assets for Agilent's defined benefit
and postretirement benefit plans are:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------------
2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
U.S. defined benefit plan:
Discount rate.................................................. 7.5% 7.25% 6.5%
Average increase in compensation levels........................ 6.0% 5.0% 5.0%
Expected long-term return on assets............................ 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate.................................................. 3.0 - 6.5% 3.3 - 6.0% 3.0 - 6.5%
Average increase in compensation levels........................ 3.5 - 5.5% 3.5 - 5.3% 3.75 - 5.0%
Expected long-term return on assets............................ 6.1 - 8.5% 6.1 - 8.5% 6.5 - 8.5%
U.S. postretirement benefits plans:
Discount rate.................................................. 7.5% 7.25% 6.5%
Expected long-term return on assets............................ 9.0% 9.0% 9.0%
Current medical cost trend rate................................ 7.75% 8.2% 8.65%
Ultimate medical cost trend rate............................... 5.5% 5.5% 5.5%
Medical cost trend rate decreases to ultimate rate in year..... 2007 2007 2007
</TABLE>
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assumed health care trend rates could have a significant effect on the
amounts reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates for the year ended October 31, 2000 would
have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Effect on total service and interest cost components........... $ 6 $ (4)
Effect on postretirement benefit obligations................... $44 $(34)
</TABLE>
15. TRANSACTIONS WITH HEWLETT-PACKARD
On June 2, 2000, all Agilent shares owned by Hewlett-Packard were
distributed as a stock dividend to Hewlett-Packard shareholders of record as of
May 2, 2000. As a result of this action, Hewlett-Packard is no longer a related
party to Agilent as of June 2, 2000.
Agilent's net revenue from sales of products to Hewlett-Packard was $341
million for the period from November 1, 1999 through June 2, 2000. Agilent's net
revenue from sales of products to Hewlett-Packard was $832 million in 1999 and
$696 million in 1998.
In 2000, 1999 and 1998, Agilent purchased certain products from
Hewlett-Packard. These products were purchased for inclusion in Agilent products
sold to third parties and for internal use. In 2000, Agilent purchased products
from Hewlett-Packard at prices that management believes approximated the prices
an unrelated party would have paid. These purchases from Hewlett-Packard
amounted to approximately $122 million in the period from November 1, 1999
through June 2, 2000. Agilent purchased products from Hewlett-Packard in the
amount of $61 million in 1999 and $86 million in 1998. Purchases from Hewlett-
Packard at cost for internal use totaled $99 million in 1999 and $65 million in
1998.
Agilent's costs and expenses during the years ended October 31, 1999 and
1998 included allocations from Hewlett-Packard for centralized research and
development, legal, accounting, employee benefits, real estate, insurance
services, information technology services, treasury and other Hewlett-Packard
corporate and infrastructure costs. These allocations were determined on bases
that Hewlett-Packard and Agilent considered to be a reasonable reflection of the
utilization of services provided or the benefit received by Agilent. The
allocation methods included relative sales, headcount, square footage,
transaction processing costs, adjusted operating expenses and others. Allocated
costs included in the accompanying consolidated statements of earnings for the
years ended October 31, 1999 and 1998 follow.
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
-------------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Costs of products and services.................... $ 188 $ 197
Research and development.......................... 150 143
Selling, general and administrative............... 432 440
</TABLE>
Agilent has entered into interim service level agreements with
Hewlett-Packard covering the provision of various services, including
information technology, financial, accounting, building, legal and other
services by Hewlett-Packard to Agilent or, in some circumstances, vice versa.
These services are generally being provided for fees equal to the actual direct
and indirect costs of providing the services plus 5%. The interim service level
agreements generally have a term of two years or less from the date of
separation from Hewlett-Packard. However, some interim service level agreements,
including those for building services and information technology services, may
be extended beyond the initial two-year period. If these agreements are
extended, their terms will be changed in order that the lessor will receive fair
market rental value for the rental component of the building services and cost
plus 10% for information technology and other services and non-rental components
of building services. The total cost of
41
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
services Agilent received from Hewlett-Packard was approximately $267 million
from November 1, 1999 through June 2, 2000. The total cost of services
Hewlett-Packard received from Agilent was approximately $95 million in the same
period.
For purposes of governing certain of the ongoing relationships between
Agilent and Hewlett-Packard at November 1, 1999 (the separation date) and
thereafter, Agilent and Hewlett-Packard have entered into various agreements. A
brief description of each of the agreements follows. Each of these agreements
was filed as exhibits to Agilent's Registration Statement on Form S-1.
Master Separation and Distribution Agreement. The separation agreement
contains the key provisions relating to the separation, Agilent's initial
funding, initial public offering and the distribution. The agreement lists the
documents and items that the parties had to deliver in order to accomplish the
transfer of assets and liabilities from Hewlett-Packard to Agilent, effective on
the separation date. The agreement also contains conditions that had to occur
prior to the initial public offering and the distribution. The parties also
entered into ongoing covenants that survive the transactions, including
covenants to establish interim service level agreements, exchange information,
notify each other of changes in their accounting principles and resolve disputes
in particular ways.
General Assignment and Assumption Agreement. The General Assignment and
Assumption Agreement identifies the assets that Hewlett-Packard transferred to
Agilent and the liabilities that Agilent assumed from Hewlett-Packard in the
separation. In general, the assets that were transferred and the liabilities
that were assumed are those that appear on the consolidated balance sheet at
October 31, 1999, after adjustment for certain assets and liabilities that were
retained by Hewlett-Packard.
Indemnification and Insurance Matters Agreement. Effective as of the
separation date, Agilent and Hewlett-Packard each released the other from any
liabilities arising from events occurring on or before the separation date. The
agreement also contains provisions governing indemnification. In general,
Agilent and Hewlett-Packard will each indemnify the other from all liabilities
arising from its business, any of its liabilities, any of its contracts or a
breach of the separation agreement. In addition, Hewlett-Packard and Agilent
will each indemnify the other against liability for specified environmental
matters. Agilent reimbursed Hewlett-Packard for the cost of any insurance
coverage from the separation date to the distribution date.
Employee Matters Agreement. The Employee Matters Agreement allocates
responsibility for, and liability related to, the employment of those employees
of Hewlett-Packard who have become Agilent employees. The agreement also
contains provisions describing Agilent's benefit and equity plans. Agilent
established employee benefit plans comparable to those of Hewlett-Packard for
its active, inactive and former employees. However, in certain cases, certain of
its employees will continue to participate in the Hewlett-Packard benefit plans.
The transfer to Agilent of employees at certain of Hewlett-Packard's
international operations, and of certain pension and employee benefit plans, may
not take place until Agilent receives consents or approvals or has satisfied
other applicable requirements.
Tax Sharing Agreement. The tax sharing agreement provides for
Hewlett-Packard's and Agilent's obligations concerning various tax liabilities.
The tax sharing agreement provides that Hewlett-Packard generally will pay, and
indemnify Agilent if necessary, for all federal, state, local and foreign taxes
relating to Agilent's business for any taxable period ending prior to the
separation date. In addition, the tax sharing agreement provides that
Hewlett-Packard and Agilent make payments between them such that the amount of
taxes to be paid by Hewlett-Packard and Agilent after the separation date will
be determined, subject to specified adjustments, as if Hewlett-Packard and
Agilent and each of their subsidiaries included in Hewlett-Packard's
consolidated tax returns had filed their own consolidated, combined or unitary
tax return for that period. For U.S. federal income tax purposes, such
consolidated return period is November 1, 1999 through June 2, 2000.
The tax sharing agreement allocates responsibility for various taxes
arising from restructurings related to the spinoff between Hewlett-Packard and
Agilent. In addition, Agilent will bear 18% of unanticipated taxes related to
the distribution where neither party is at fault.
42
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax sharing agreement provides that Agilent will indemnify
Hewlett-Packard for any taxes arising out of the failure of the distribution or
certain of the transactions related to it to qualify as tax free as a result of
actions taken, or the failure to take required actions, by Agilent.
Specifically, Agilent is required under the tax sharing agreement to comply with
the representations made to the Internal Revenue Service (IRS) in connection
with the private letter ruling that has been issued to Hewlett-Packard from the
IRS regarding the tax-free nature of the distribution of Agilent's stock by
Hewlett-Packard to Hewlett-Packard's stockholders.
The tax sharing agreement further provides for cooperation with respect to
certain tax matters, the exchange of information and the retention of records
which may affect the income tax liability of either party.
Real Estate Matters Agreement. The Real Estate Matters Agreement addresses
real estate matters relating to the Hewlett-Packard leased and owned properties
that Hewlett-Packard transferred to or shares with Agilent. The agreement
describes the manner in which Hewlett-Packard transferred to or shares with
Agilent various leased and owned properties. The Real Estate Matters Agreement
also provided that all costs required to effect the transfers, including
landlord consent fees, landlord attorneys' fees, title insurance fees and
transfer taxes, were paid by Hewlett-Packard.
Master IT Service Level Agreement. The Master IT Service Level Agreement
governs the provision of information technology services by Hewlett-Packard and
Agilent to each other, on an interim basis, until November 1, 2001, unless
extended for specific services or otherwise indicated in the agreement. The
services include data processing and telecommunications services, such as voice
telecommunications and data transmission. Specified charges for such services
are generally intended to allow the providing company to recover the direct and
indirect cost of providing the services, plus 5% until November 1, 2001 and such
costs plus 10% thereafter. The Master IT Service level Agreement also covers the
provision of certain additional information technology services identified from
time to time after the separation date that were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the separation agreement, so long as the
provision of such services would not significantly disrupt the providing
company's operations or significantly increase the scope of the agreement.
In addition, the Master IT Service Level Agreement provides for the
replication of some computer systems, including hardware, software, data storage
or maintenance and support components. Generally, the party needing the
replicated system bears the costs and expenses of replication. Generally, the
party purchasing new hardware or licensing new software bears the costs and
expenses of purchasing the new hardware or obtaining the new software licenses.
Intellectual Property Agreements. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement, the Master
Trademark Ownership and License Agreement and the ICBD Technology Ownership and
License Agreement together are referred to as the Intellectual Property
Agreements. Under the Intellectual Property Agreements, Hewlett-Packard
transferred to Agilent its rights in specified patents, specified trademarks and
other intellectual property related to Agilent's current business and research
and development efforts. Hewlett-Packard and Agilent each are licensed under the
other's patents issued on patent applications with effective filing dates before
November 1, 2004, subject to field restrictions. Hewlett-Packard and Agilent are
also licensed to use technology that has been disclosed to such licensed company
or that is in the licensed company's possession as of the separation date, with
certain limitations. The agreements include certain rights to sublicense for
both parties. Agilent is licensed to use some Hewlett-Packard trademarks, and
this license is royalty-bearing after five years.
Environmental Matters Agreement. Hewlett-Packard has agreed to retain and
indemnify Agilent for liabilities associated with properties transferred to
Agilent which are undergoing environmental investigation and remediation and for
which Hewlett-Packard had accrued a reserve as of the separation date. The
purpose of the environmental Matters Agreement is to address, in a general way,
Hewlett-Packard's and Agilent's rights and obligations with respect to that
investigation and remediation.
43
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. NOTES PAYABLE AND SHORT-TERM DEBT
Notes payable and short-term debt. Notes payable and short-term debt as of
October 31, 2000 consisted of notes payable to banks of $106 million and other
short-term debt of $4 million dollars. The average interest rate for the notes
payable to banks is 7.0%. For 1999, there were no notes payable or short-term
debt balances as working capital needs were provided by Hewlett-Packard.
Lines of Credit. In November 1999, Agilent executed two revolving credit
agreements totaling $500 million, with $250 million expiring in one year and
$250 million expiring in five years. Interest is based on the Citicorp base
rate, a margin over LIBOR, or a fixed rate based on competitive bids. Under the
agreements, Agilent must not exceed a defined debt to earnings ratio. As of
November 3, 2000, the Company has executed an amended and restated agreement for
$250 million expiring in one year. The five-year revolving credit line was
extended for an additional year on November 5, 2000. 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.
17. COMMITMENTS
Operating lease commitments. Agilent leases certain real and personal
property from unrelated third parties under noncancelable operating leases.
Future minimum lease payments under these leases at October 31, 2000 were $79
million for 2001, $74 million for 2002, $62 million for 2003, $55 million for
2004, $50 million for 2005 and $44 million thereafter. Certain leases require
Agilent to pay property taxes, insurance and routine maintenance, and include
escalation clauses. Rent expense was $69 million in 2000, $102 million in 1999
and $105 million in 1998.
Agilent Technologies Japan. On July 6, 1999, Hewlett-Packard entered into
an agreement with Yokogawa to acquire Yokogawa's 25% equity interest in Agilent
Technologies Japan, Ltd. for approximately $521 million. Under the terms of the
separation agreement, Agilent assumed Hewlett-Packard's obligations. Agilent has
purchased approximately 20.8% of Agilent Technologies Japan Ltd. shares from
Yokogawa for $422 million as of October 31, 2000. Agilent purchased the
remaining 4.2% in January 2001 for $98 million.
18. CONTINGENCIES
Agilent is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters that arise in the
ordinary course of business. There are no such matters pending that Agilent
expects to be material in relation to its business, consolidated financial
condition, results of operations or cash flows. See Note 15, "Transactions with
Hewlett-Packard," for a discussion of Agilent's indemnification agreement with
Hewlett-Packard.
19. SEGMENT INFORMATION
Description of segments. Agilent is a diversified technology company that
provides enabling solutions to customers in high growth markets within the
communications, electronics, and life science industries. Agilent designs and
manufactures test, measurement and monitoring instruments, systems and solutions
and semiconductors and optical components. The results of our Healthcare
Solutions business, previously reported as a segment, are disclosed in Note 3
"Discontinued Operations -- Measurement Date for The Sale of Agilent's
Healthcare Solutions Business" above.
Agilent organizes its business operations into three major groups--test and
measurement, semiconductor products, and chemical analysis, each of which
comprises a reportable segment. The segments were determined based primarily on
how management views and evaluates Agilent's operations. Other factors,
including customer base, homogeneity of products, technology and delivery
channels, were also considered in determining Agilent's reportable segments.
Agilent measures segment performance based on earnings from operations.
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Agilent includes the following businesses:
- test and measurement, which provides test instruments, standard and
customized test, measurement and monitoring systems for the design,
manufacture and support of electronic and communication devices, and
software for the design of high-frequency electronic and communication
devices. The test and measurement business includes operating segments
that have been aggregated based on the similarity of the nature of
their products and services, their production processes, their class
of customers, their distribution methods and their economic
characteristics;
- semiconductor products, which provides fiber optic communications
devices and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronics and image
sensors;
- chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
Segment revenue and profit. The accounting policies used to derive
reportable segment results are generally the same as those described in Note 2,
"Summary of Significant Accounting Policies." Internal revenue and earnings from
operations include transactions between segments that are intended to reflect an
arm's length transfer at the best price available for comparable external
customers.
A significant portion of the segments' expenses arise from shared services
and infrastructure that Agilent (Hewlett-Packard for 1999 and 1998) has
historically provided to the segments in order to realize economies of scale and
to efficiently use resources. These expenses include costs of centralized
research and development, legal, accounting, employee benefits, real estate,
insurance services, information technology services, treasury and other Agilent
corporate (Hewlett-Packard in 1999 and 1998) infrastructure costs. These
expenses are allocated to the segments and the allocations have been determined
on bases that Agilent considered to be a reasonable reflection of the
utilization of services provided to or benefits received by the segments. A
different result could be arrived at for any segment if costs were specifically
identified to each segment.
The following tables reflect the results of Agilent's reportable segments
under Agilent's management system. These results are not necessarily a depiction
that is 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.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR CHEMICAL TOTAL
MEASUREMENT PRODUCTS ANALYSIS SEGMENTS
----------- ------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 2000:
External revenue ............................. $ 6,108 $ 2,213 $ 1,040 $ 9,361
Internal revenue ............................. -- 51 -- 51
------- ------- ------- -------
Total net revenue ............................ $ 6,108 $ 2,264 $ 1,040 $ 9,412
======= ======= ======= =======
Depreciation and amortization expense ........ $ 168 $ 142 $ 23 $ 333
======= ======= ======= =======
Earnings from continuing operations .......... $ 658 $ 241 $ 25 $ 924
======= ======= ======= =======
YEAR ENDED OCTOBER 31, 1999:
External revenue ............................. $ 4,082 $ 1,722 $ 1,026 $ 6,830
Internal revenue ............................. 4 40 -- 44
------- ------- ------- -------
Total net revenue ............................ $ 4,086 $ 1,762 $ 1,026 $ 6,874
======= ======= ======= =======
Depreciation and amortization expense ........ $ 152 $ 156 $ 16 $ 324
======= ======= ======= =======
Earnings from continuing operations .......... $ 239 $ 100 $ 83 $ 422
======= ======= ======= =======
YEAR ENDED OCTOBER 31, 1998:
External revenue ............................. $ 4,100 $ 1,574 $ 938 $ 6,612
</TABLE>
45
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR CHEMICAL TOTAL
MEASUREMENT PRODUCTS ANALYSIS SEGMENTS
----------- ------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Internal revenue ............................. -- 39 -- 39
------- ------- ------- -------
Total net revenue ............................ $ 4,100 $ 1,613 $ 938 $ 6,651
======= ======= ======= =======
Depreciation and amortization expense ........ $ 133 $ 205 $ 15 $ 353
======= ======= ======= =======
Earnings (loss) from continuing operations ... $ 264 $ (125) $ 59 $ 198
======= ======= ======= =======
</TABLE>
RECONCILIATION TO AGILENT, AS REPORTED.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenue from continuing operations:
Total reportable segments ................................................ $ 9,412 $ 6,874 $ 6,651
Elimination of internal revenue .......................................... (51) (44) (39)
------- ------- -------
Total net revenue, as reported ........................................ $ 9,361 $ 6,830 $ 6,612
======= ======= =======
Earnings from continuing operations before taxes:
Total reportable segments' earnings from operations ...................... $ 924 $ 422 $ 198
Other income (expense), net .............................................. 94 41 (7)
------- ------- -------
Total earnings from continuing operations before taxes, as reported ... $ 1,018 $ 463 $ 191
======= ======= =======
Depreciation and amortization expense:
Total reportable segments ................................................ $ 333 $ 324 $ 353
Corporate and unallocated ................................................ 128 116 96
------- ------- -------
Total depreciation and amortization expense, as reported .............. $ 461 $ 440 $ 449
======= ======= =======
</TABLE>
Major Customers. No customer represented 10% or more of Agilent's total net
revenue from continuing operations in 2000. In 1999 and 1998, Hewlett-Packard
accounted for approximately 12% and 11% of Agilent's total net revenue,
respectively. See Note 15 "Transactions with Hewlett-Packard." No other customer
represented 10% or more of Agilent's total net revenue from continuing
operations in any period presented.
Segment assets and other items. Segment assets directly managed by the
segment primarily consist of accounts receivable, inventory, property, plant and
equipment and certain other current and non-current assets. In some cases,
several segments may occupy the same location and therefore will share a common
building and certain machinery and equipment. In these cases, there will not be
a precise correlation between a segment's earnings from operations and the
segment's assets. Capital expenditures for each segment also reflect the asset
assignment by segment.
Corporate-held assets not allocated to the segments include property, plant
and equipment assigned to corporate functions, equity investments managed at the
corporate level, cash held and managed by corporate treasury functions, deferred
tax assets and other current and non-current assets managed at the corporate
level.
46
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The equity investment totals disclosed for each segment represent equity
investments directly managed by the segment.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR CHEMICAL TOTAL
MEASUREMENT PRODUCTS ANALYSIS SEGMENTS
----------- ------------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AS OF OCTOBER 31, 2000:
Assets .................................. $3,637 $1,565 $ 595 $5,797
Capital expenditures .................... 389 161 21 571
Investment in equity-method investees ... 16 46 20 82
AS OF OCTOBER 31, 1999:
Assets .................................. $2,555 $1,014 $ 528 $4,097
Capital expenditures .................... 185 96 9 290
Investment in equity-method investees ... 13 15 12 40
AS OF OCTOBER 31, 1998:
Assets .................................. $2,188 $1,134 $ 517 $3,839
Capital expenditures .................... 155 162 8 325
Investment in equity-method investees ... 11 19 -- 30
</TABLE>
RECONCILIATION TO AGILENT, AS REPORTED.
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
2000 1999 1998
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Assets:
Total reportable segments ................... $5,797 $4,097 $3,839
Unallocated corporate assets ................ 1,936 508 426
Net investment in discontinued operations ... 597 759 657
------ ------ ------
Total assets, as reported ................... $8,330 $5,364 $4,922
====== ====== ======
</TABLE>
GEOGRAPHIC INFORMATION.
<TABLE>
<CAPTION>
UNITED REST OF THE
STATES JAPAN WORLD TOTAL
------ ------ ----------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revenue (based on location of customer):
Year ended October 31, 2000 ............. $3,992 $1,032 $4,337 $9,361
Year ended October 31, 1999 ............. 2,912 759 3,159 6,830
Year ended October 31, 1998 ............. 2,889 777 2,946 6,612
Long-lived assets (all non-current assets):
October 31, 2000 ........................ $1,316 $ 356 $ 922 $2,594
October 31, 1999 ........................ 878 237 614 1,729
October 31, 1998 ........................ 874 236 611 1,721
</TABLE>
20. SUBSEQUENT EVENTS
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.
On February 20, 2001, Agilent announced that it sold an approximately
40-acre parcel of surplus land in San Jose, California, resulting in a pre-tax
gain of approximately $269 million.
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
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.
47
<PAGE> 50
QUARTERLY SUMMARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- -----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
2000
Net revenue ............................................ $1,851 $2,142 $2,351 $3,017
Cost of products and services and other ................ $ 955 $1,069 $1,189 $1,522
Earnings from continuing operations .................... $ 104 $ 184 $ 189 $ 447
Net earnings from continuing operations ................ $ 88 $ 140 $ 143 $ 301
Net earnings from discontinued operations .............. $ 43 $ 26 $ 12 $ 4
Net earnings ........................................... $ 131 $ 166 $ 155 $ 305
Net earnings per share -- Basic:
Net earnings from continuing operations ........... $ 0.20 $ 0.31 $ 0.31 $ 0.66
Net earnings from discontinued operations ......... $ 0.10 $ 0.06 $ 0.03 $ 0.01
Net earnings ...................................... $ 0.30 $ 0.37 $ 0.34 $ 0.67
Net earnings per share -- Diluted:
Net earnings from continuing operations ........... $ 0.20 $ 0.31 $ 0.31 $ 0.65
Net earnings from discontinued operations ......... $ 0.10 $ 0.05 $ 0.03 $ 0.01
Net earnings ...................................... $ 0.30 $ 0.36 $ 0.34 $ 0.66
Average shares used in computing net Earnings per share:
Basic ............................................. 439 452 453 454
Diluted ........................................... 440 457 461 462
Range of closing stock prices on NYSE .................. $40 - 79.25 $71 - 159 $40.75 - 100.75 $38.81 - 63
1999
Net revenue ............................................ $1,492 $1,633 $1,715 $1,990
Cost of products and services and other ................ $ 813 $ 841 $ 925 $1,048
Earnings from continuing operations .................... $ 66 $ 140 $ 102 $ 114
Net earnings from continuing operations ................ $ 52 $ 94 $ 75 $ 85
Net earnings from discontinued operations .............. $ 22 $ 63 $ 60 $ 61
Net earnings ........................................... $ 74 $ 157 $ 135 $ 146
Net earnings per share -- Basic and Diluted:
Net earnings from continuing operations .............. $ 0.13 $ 0.25 $ 0.20 $ 0.23
Net earnings from discontinued operations ............ $ 0.06 $ 0.16 $ 0.16 $ 0.16
Net earnings ...................................... $ 0.19 $ 0.41 $ 0.36 $ 0.39
Average shares used in computing basic and
diluted net earnings per share ....................... 380 380 380 380
</TABLE>
48
</TEXT>
</DOCUMENT>