2016
AGILENT TECHNOLOGIES, INC.
ANNUAL REPORT
AGILENT TECHNOLOGIES
DELIVERING TRUSTED
ANSWERS TO CUSTOMERS’ CRITICAL
QUESTIONS AND CHALLENGES
Agilent provides laboratories worldwide
with complete workflow solutions—custom
packages of instruments, software, services,
informatics, consumables and, most of all,
knowledgeable people who partner with
customers to gain the insights they seek.
OVERVIEW
AGILENT TECHNOLOGIES, INC.
2016 ANNUAL REPORT
MARKETS
FOOD—Agilent solutions help ensure that our food is safe
(free of chemical, viral, bacterial or microbiological contam-
inants) and authentic (not blended, diluted or containing
lower-quality substitutions).
PHARMA—Agilent solutions help customers speed drug
discovery, development and manufacturing, as well as
ensure the purity of their therapeutics, and conform to the
strictest compliance regulations.
ENVIRONMENT—Agilent solutions provide fast, accurate
and sensitive methods for monitoring contaminants in air,
water and soil.
ACADEMIA AND GOVERNMENT—Agilent solutions
accelerate breakthrough discoveries in academic and
government research. This is our most diverse market, with
nearly every Agilent product in demand.
ENERGY AND CHEMICAL—Agilent solutions ensure
the quality of energy sources and verify that they meet
safety, regulatory and environmental standards. Agilent
also helps energy
investigate biofuels,
researchers
renewable fuels and other forms of alternative energy.
Agilent solutions are used in the develop ment and testing
of today’s cutting-edge polymers, composite materials and
alloys.
DIAGNOSTICS—Agilent solutions help pathology labs
meet regulatory demands and deliver fast, accurate
information to the medical professionals they serve, enabling
more accurate diagnoses and more effective therapies for
patients.
2016 ANNUAL REPORT
OVERVIEW
CONTINUED
Transformation
OVERVIEW
AGILENT TECHNOLOGIES, INC.
2016 ANNUAL REPORT
FISCAL 2016
We made major strides in transforming the
company and focusing on what we do best:
helping our customers achieve more with
trusted answers and new insights.
OUTGROWING THE MARKET
Two consecutive years of outgrowing the market with
$4.2 billion in revenues. New products that are transforming
the industry.
EXPANDING MARGINS
Seven consecutive quarters of year-over-year profitability
growth.
BALANCED CAPITAL ALLOCATION
Increased total cash return to shareholders with $150 million
in cash dividends, $434 million in share repurchases and
$480 million invested in the business.
SIMPLIFYING THE COMPANY
Simplifying the organ ization is making us faster and easier
to do business with, while lowering costs.
ONE AGILENT
CUSTOMER-CENTRIC CULTURE
Providing customers more complete products and solutions
by collaborating across organizational and geographic
boundaries.
2016 ANNUAL REPORT
OVERVIEW
Delivering
ON OUR COMMITMENTS
SHAREHOLDER LETTER
AGILENT TECHNOLOGIES, INC.
2016 ANNUAL REPORT
TO OUR SHAREHOLDERS
Fiscal 2016 was a year of tremendous growth and
progress for all of us at Agilent. Throughout the year we
solidified our transformation into a life sciences, diagnostics
and applied chemical company. We sustained above-market
growth, expanded our profits and invested for the future.
We made major strides in transforming the company and
focusing on what we do best: helping our customers
achieve more with trusted answers and new insights.
We deepened our cultural transformation as well,
learning to serve our customers better by working as One
Agilent across organizational and geographic boundaries.
The results included improved customer satisfaction,
winning against the competition and delivering strong
operating results.
We executed with financial discipline, achieving revenues
of $4.2 billion. This marks the second consecutive year we
have outgrown the marketplace. We expanded our
operating margins, ending fiscal year 2016 with our seventh
straight quarter of year-over-year profitability growth.
We significantly increased our total cash return to
shareholders, distributing $150 million in dividends and
repurchasing $434 million of our shares. We also invested
$480 million directly into the business with key acquisitions,
strategic transactions and capital expenditures.
TECHNOLOGY THAT REVOLUTIONIZES THE
INDUSTRY AND EMPOWERS CUSTOMERS
Our analytical lab business, which represents 83 percent
of the total company, is comprised of two externally
reported business segments: the Life Sciences and Applied
Markets Group and the Agilent CrossLab Group. Together,
these businesses serve customers in pharmaceuticals and
life sciences research, as well as in applied chemical
markets such as chemical and energy, food safety,
environmental and forensics. We offer our customers a
strong and comprehensive portfolio of instruments, software,
consum ables and services.
INNOVATIVE SOLUTIONS IN LIFE SCIENCES
AND APPLIED MARKETS
The Life Sciences and Applied Markets Group brings
together Agilent’s analytical laboratory instrumentation and
informatics. Throughout the year, we continued to
introduce new and innovative offerings with a significantly
differentiated customer experience.
In liquid chromatography, we launched the InfinityLab
portfolio, including a new line of liquid chromatography
instruments, columns, supplies and services. We added the
2016 ANNUAL REPORT
SHAREHOLDER LETTER
TO OUR SHAREHOLDERS
Agilent 1260 Infinity II LC system to complement our
flagship 1290 Infinity II LC. This instrument provides best-
in-class lab efficiency and improved performance with full
backward compatibility.
In gas chromatography, we introduced the trans-
formational Intuvo 9000 GC system. Building on our
recognized leadership in GC, the Intuvo system revolutionizes
the way users perform gas chromatography. It features
breakthrough innovations in its technology, footprint,
energy efficiency and environmental friendliness. The
development of this product harnesses the complete
Agilent portfolio of
Intuvo
comprises a complete ecosystem of instrumentation,
consumables, supplies, services and software.
technological capability.
Agilent’s latest GC Triple-Quad sets a new benchmark in
GC/MS, while our new 8900 Triple-Quad ICP-MS provides
customers in several key markets with better answers than
ever before. On the software side, our newest OpenLAB
software platform continues to expand its multi-technique
and multi-vendor capabilities. OpenLAB has full scalability
from single workstations to networked enterprise solutions.
INTEGRATED SERVICES AND CONSUMABLES
The Agilent CrossLab Group combines our analytical
laboratory services and consumables businesses under a
new Agilent brand. The Agilent CrossLab brand is focused
on delivering a new and integrated approach that offers
actionable insights to help customers achieve successful
outcomes.
We continued to bring novel new chemistries to market
under the Agilent CrossLab brand. One example is our
Advance Bio SEC family of products. These products rely
on a new and innovative chromatographic particle tech-
nology that simultaneously delivers superior performance,
lifetime and reproducibility. They provide a level of
economic value to our customers that is unsurpassed in
biopharma workflow applications. Our new bio columns
are the first in a family of products utilizing this technology,
with the next wave of products currently in development.
NEXT-GENERATION DIAGNOSTICS
AND GENOMICS
In addition to our continued growth through leadership
in analytical laboratories, we are leveraging Agilent’s
analytical strength to further penetrate the connected
clinical research and diagnostics laboratories. This is being
done through our third externally reported business
segment, the Diagnostics and Genomics Group.
The Diagnostics and Genomics Group is comprised
of five business divisions. Three divisions originate from our
2012 acquisition of Dako and focus on pathology,
companion diagnostics and reagent partnerships. The
includes our microarrays, next-
Genomics Division
generation sequencing target enrichment and Agilent’s
other genomics solutions. The Nucleic Acid Solutions
Division manufactures synthetic RNA for potential use as
active pharmaceutical ingredients.
In fiscal 2015, our complementary diagnostic for Bristol-
Myers Squibb Co.’s OPDIVO was approved by the U.S.
Food and Drug Administration for non-squamous, non-
small cell lung cancer (NSCLC). In fiscal 2016, the FDA
approved expanding the use of this PD-L1 diagnostic to
include patients with melanoma, and commercial
availability for both NSCLC and melanoma has expanded
to include the European Union. Agilent is the first company
to provide FDA-approved tests for lung cancer and melanoma
for PD-L1 markers.
In addition, Merck & Co.’s KEYTRUDA was approved by
the FDA for first-line treatment for metastatic NSCLC for
patients with high rates of PD-L1 expression. In conjunction,
Agilent’s pharmDx companion diagnostics PD-L1 test was
also approved for expanded use. This is the first time an
Agilent PD-L1 companion diagnostic has been approved
for first-line testing.
We launched a comprehensive offering of pooled
CRISPR libraries for functional genomics to help accelerate
research into complex diseases and drug discovery. We
also announced a $120 million investment over the next
three years to expand production capacity for our Nucleic
SHAREHOLDER LETTER
AGILENT TECHNOLOGIES, INC.
2016 ANNUAL REPORT
WHAT MAKES AGILENT GREAT
I tell our teams every day that what makes this company
great is quite simple. Our employees, working and
innovating in exciting and growing markets, enable us to
make a difference in the lives of people around the world.
As I traveled to numerous countries and sites during the
past year, I saw how truly motivated our employees are to
understand our customers’ goals. Our people are inspired
to bring their knowledge and their best ideas to solutions
that advance our customers’ objectives—whether improving
the safety of our food or saving lives with new ways to
match patients to the most effective drugs for their
conditions.
I am excited about the momentum we have developed
this year. Our products, software and services are driving
growth. Our people are empowering our customers with
answers they can count on. Agilent is making a difference
in the world. And I believe the best is ahead of us.
Mike McMullen
Agilent President and Chief Executive Officer
Acid Solutions Business, including a new factory in
Colorado that can double our manufacturing capacity.
SIMPLIFYING THE COMPANY
We continue to make strides in our multi-year “Agile
Agilent” initiative, designed to simplify the organization. It
is making us faster and easier to do business with, while
lowering costs. We have streamlined our IT systems and
overall infrastructure. In fiscal 2016 we migrated the
company’s financial systems onto a single platform, which
will continue to deliver savings in the coming fiscal year.
BUILDING A FOUNDATION OF GROWTH
During the past year, we supplemented our own research
and development with exciting acquisitions that further
enhance the broad range of solutions we can offer to our
customers.
We acquired iLab Solutions, a market leader in cloud-
based solutions for core laboratory management. This
acquisition expands Agilent’s portfolio in academic and
government markets, as iLab is an established provider to
leading universities, research hospitals and independent
institutions around the world. We see an opportunity to
expand the iLab business, both geographically and in
pharmaceutical markets.
We also announced an $80 million investment in
Lasergen Inc., an emerging biotechnology company with
innovative next-generation sequencing technology. Finally,
we signed an agreement with Burning Rock Biotech to
develop cancer diagnostics in China based on Agilent
SureSelect solutions.
In addition to filling gaps with strategic acquisitions, we
will continue to invest in technologies that yield new
products, software and services that differentiate us, excite
customers and add to our growth.
We will innovate for what our customers want to
achieve, focusing on both the science and economics of
the lab.
2016 ANNUAL REPORT
SHAREHOLDER LETTER
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
Form 10-K
_____________________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
or
Commission File Number: 001-15405
_____________________________________________________________
Agilent Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
Incorporation or organization
77-0518772
I.R.S. Employer
Identification No.
Address of principal executive offices: 5301 Stevens Creek Blvd., Santa Clara, California 95051
Registrant's telephone number, including area code: (408) 345-8886
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
par value $0.01 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
_____________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the registrant's common equity held by non-affiliates as of April 30, 2016, was approximately $9.4 billion. Shares
of stock held by officers, directors and 5 percent or more stockholders have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of December 1, 2016, there were 321,747,881 outstanding shares of common stock, par value $0.01 per share.
_____________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Document Description
Portions of the Proxy Statement for the Annual Meeting of Stockholders (the "Proxy Statement") to be held on March 15, 2017, and
to be filed pursuant to Regulation 14A within 120 days after registrant's fiscal year ended October 31, 2016 are incorporated by
reference into Part III of this Report
10-K Part
III
TABLE OF CONTENTS
Forward-Looking Statements
Item 1
Business
Item 1A Risk Factors
Item 1B Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4 Mine Safety Disclosures
PART I
PART II
Item 5 Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A Controls and Procedures
Item 9B Other Information
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
PART III
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
Item 15 Exhibits, Financial Statement Schedules
PART IV
Page
3
3
15
25
25
25
26
26
29
30
50
51
105
105
105
105
106
106
107
107
107
2
Forward-Looking Statements
This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality and
growth in, and drivers of, the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance,
earnings from our foreign subsidiaries, lease and site services income from Keysight, the impact of foreign currency movements
on our performance, our hedging programs, indemnification, new product and service introductions, the ability of our products
to meet market needs, adoption of our products, changes to our manufacturing processes, the use of contract manufacturers, out
sourcing and third-party package delivery services, source and supply of materials used in our products, the impact of local
government regulations on our ability to pay vendors or conduct operations, our liquidity position and cash availability, our ability
to generate cash from operations, growth in our businesses, our investments, including in research and development, the potential
impact of adopting new accounting pronouncements, our financial results, our operating margin, our sales, our purchase
commitments, our capital expenditures, our contributions to our pension and other defined benefit plans, our strategic initiatives,
our cost-control activities and other cost saving initiatives, uncertainties relating to Food and Drug Administration ("FDA") and
other regulatory approvals, the integration of our acquisitions and other transactions, impairment of goodwill and other intangible
assets, write down of investment values or loans and convertible notes, our stock repurchase program, our declared dividends,
and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the
results contemplated by these forward-looking statements due to various factors, including those discussed in Part I Item 1A and
elsewhere in this Form 10-K.
PART I
Item 1. Business
Overview
Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader
in life sciences, diagnostics and applied chemical markets, providing application focused solutions that includes instruments,
software, services and consumables for the entire laboratory workflow.
On November 1, 2014, we completed the distribution of 100% of the outstanding common shares of Keysight Technologies,
Inc. ("Keysight") to Agilent stockholders who received one share of Keysight common stock for every two shares of Agilent held
as of the close of business on the record date, October 22, 2014. The historical results of operations and the financial position of
Keysight are included in the consolidated financial statements of Agilent and are reported as discontinued operations within this
Form 10-K.
For fiscal year ended October 31, 2016, we have three business segments comprised of the life sciences and applied markets
business, the diagnostics and genomics business and the Agilent CrossLab business.
Our life sciences and applied markets business provides application-focused solutions that include instruments and software
that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well
as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Our diagnostics
and genomics business is comprised of three areas of activity providing solutions that include reagents, instruments, software and
consumables, which enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and
molecular level. The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which
is designed to improve customer outcomes. In addition, we conduct centralized order fulfillment and supply chain operations for
our businesses through the order fulfillment and supply chain organization (“OFS”). OFS provides resources for manufacturing,
engineering and strategic sourcing to our respective businesses. Each of our businesses, together with OFS, is supported by our
global infrastructure organization, which provides shared services in the areas of finance, information technology, legal, workplace
services and human resources.
We sell our products primarily through direct sales, but we also utilize distributors, resellers, manufacturer's representatives
and electronic commerce. Of our total net revenue of $4.2 billion for the fiscal year ended October 31, 2016, we generated 30
percent in the U.S. and 70 percent outside the U.S. As of October 31, 2016, we employed approximately 12,500 people worldwide.
Our primary research and development and manufacturing sites are in California, Colorado, Delaware, Massachusetts and Texas
in the U.S. and in Australia, China, Denmark, Germany, Italy, Japan, Malaysia, Singapore and the United Kingdom.
The net revenue, income from operations and assets by business segment, as of and for the fiscal year ended October 31,
2016 and for each of the past three years are shown in Note 19, "Segment Information", to our consolidated financial statements,
3
which we incorporate by reference herein.
Life Sciences and Applied Markets Business
Our life sciences and applied markets business provides application-focused solutions that include instruments and software
that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well
as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Key product
categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS")
systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems;
inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave
plasma-atomic emission spectrometry (“MP-AES”) instruments; inductively coupled plasma optical emission spectrometry ("ICP-
OES") instruments; cell analysis plate based assays; laboratory software and informatics systems; laboratory automation;
dissolution testing; vacuum pumps and measurement technologies.
We employed approximately 4,300 people as of October 31, 2016 in our life sciences and applied markets business. This
business generated revenue of $2.1 billion in fiscal 2016, $2.0 billion in fiscal 2015 and $2.1 billion in fiscal 2014
Life Sciences and Applied Markets
Our life sciences and applied markets business focuses primarily on the following five markets:
The Pharmaceutical, Biotechnology, CRO & CMO Market. This market consists of “for-profit” companies who participate
across the pharmaceutical value chain in the areas of therapeutic research, discovery & development, clinical trials, manufacturing
and quality assurance and quality control. One sub-segment of this market is core and emerging pharmaceutical companies
(“pharma”). A second sub-segment includes biotechnology companies (“biotech”), contract research organizations (“CROs”) and
contract manufacturing organizations (“CMOs”). Biotech companies and, to a somewhat lesser extent, CROs and CMOs typically
participate in specific points in the pharmaceutical industry value chain. Additionally, due to the relatively low drug efficacy within
oncology, pharma companies are partnering with diagnostic companies to bring validated tests to the market with their new drugs.
The Life Science Research Market. This market consists primarily of “not-for-profit” organizations and includes academic
institutions, large government institutes and privately funded organizations. The life science research market plays an influential
role in technology adoption and therapeutic developments for pharmaceutical and molecular diagnostics companies. After decades
of investment in basic biomedical research by government funding bodies, the focus has widened to include translational research -
multidisciplinary scientific efforts directed at accelerating therapy development.
The Chemical & Energy Market. The natural gas and petroleum refining markets use our products to measure and control
the quality of their finished products and to verify the environmental safety of their operations. Petroleum refiners use our
measurement solutions to analyze crude oil composition, perform raw material analysis, verify and improve refining processes
and ensure the overall quality of gasoline, fuels, lubricants and other products. Our solutions are also used in the development,
manufacturing and quality control of fine chemicals.
The Environmental & Forensics Market. Our instruments, software and workflow solutions are used by the environmental
market for applications such as laboratory and field analysis of chemical pollutants in air, water, soil and solid waste. Environmental
industry customers include all levels of government, the industrial and manufacturing sectors, engineering and consulting
companies, commercial testing laboratories and colleges and universities. Drug testing and forensics laboratories use our
instruments, software and workflow solutions for applications such as analyzing evidence associated with crime, screening athletes
for performance enhancing drugs, analyzing samples for recreational drugs, or detecting and identifying biological and chemical
warfare agents. This instrumentation is used in either static or mobile laboratories. Customers include local, state, federal, and
international law enforcement agencies and health laboratories.
The Food Market. Our instruments, software, and workflow solutions are used throughout the food production chain,
including incoming inspection, new product development, quality control and assurance, and packaging. For example, our mass
spectrometer portfolio is used to analyze contaminants and residual pesticides in food. There is also a significant food safety market
involved in analyzing food for pathogen contamination, accurate verification of species type and evidence of genetically modified
content.
4
Life Sciences and Applied Markets Products and Applications
Our products fall into nine main areas of work: liquid chromatography, gas chromatography, mass spectrometry,
spectroscopy, software and informatics, lab automation and robotics, automated electrophoresis and microfluidics, vacuum
technology and cell analysis.
Our key product and applications include the following technologies:
Liquid Chromatography
A liquid chromatograph ("LC") or a high performance liquid chromatograph (“HPLC”) is used to separate molecules of a
liquid mixture to determine the quantity and identity of the molecules present. The Agilent LC portfolio is modular in construction
and can be configured as analytical and preparative systems. These systems can be stepwise upgraded to highly sophisticated,
automated workflow solutions such as method development,
high-capacity/high-throughput or
analyzers e.g. for bio-molecular separations, chiral analysis or
LC and can be extended to
size exclusion chromatography. As a leader in liquid chromatography, we continue to expand our application space with new
HPLC columns, new services and diagnostics offerings and ongoing instrument and software product enhancements.
Gas Chromatography
Agilent is the world's leading provider of gas chromatographs, both laboratory and portable models. GC's are used to separate
any gas, liquid or solid that can be vaporized and then detect the molecules present to determine their identity and quantity. Agilent
provides custom or standard analyzers configured for specific chemical analysis applications, such as detailed speciation of a
complex hydrocarbon stream, calculation of gas calorific values in the field, or analysis of a new bio-fuel formulation. We also
offer related software, accessories and consumable products for these and other similar instruments.
Mass Spectrometry
A mass spectrometer (“MS”) identifies and quantifies chemicals based on a chemical's molecular mass and characteristic
patterns of fragment ion masses that result when a molecule is broken apart. Liquid chromatography is commonly used to separate
compounds and introduce them to the MS system. The combined use of LC and MS is frequently used both to identify and quantify
chemical compounds. Mass spectrometry is an important tool in analyzing small molecules and can also be used to characterize
and quantify proteins and other biological entities. Agilent's LCMS portfolio includes instruments built around four main analyzer
types - single quadrupole, triple quadrupole, time-of-flight (“TOF”) and quadrupole time-of-flight (“QTOF”). We significantly
expanded our mass spectrometry portfolio in recent years with a focus on improving performance, sensitivity, and ease of use.
Spectroscopy
Spectroscopy is a technique for analyzing the individual chemical components of substances based on the absorption or
emission of electromagnetic radiation of specific wavelengths of light. Our spectroscopy instruments include AA spectrometers,
microwave plasma-atomic emission spectrometers (“MP-AES”), ICP-OES, ICP-MS, fluorescence spectrophotometers,
ultraviolet- visible ("UV-Vis") spectrophotometers, Fourier Transform infrared ("FT-IR") spectrophotometers, near-infrared
("NIR") spectrophotometers, Raman spectrometers and sample automation products. We also offer related software, accessories
and consumable products for these and other similar instruments.
Software and Informatics
We provide software for instrument control, data acquisition, data analysis, laboratory content and business process
management, and informatics. Our software facilitates the compliant use of instruments in pharmaceutical quality assurance/
quality control environments. With OpenLab Laboratory Software Suite, Agilent has a scalable, open software platform that enables
customers to capture, analyze, and share scientific data throughout the lab and across the enterprise.
Lab Automation and Robotics
We offer a comprehensive suite of workflow solutions to our life science customers with the addition of automated liquid
handling and robotics that range from standalone instrumentation to bench-top automation solutions. These solutions strengthen
our offering of automated sample preparation solutions across a broad range of applications.
5
Automated Electrophoresis and Microfluidics
Automated electrophoresis is a separation technique for bio molecules such as proteins, peptides and nucleic acids (RNA
and DNA) and is used to determine the identity of a molecule by either size or charge. It is widely used as a QC tool to check
sample integrity prior to subsequent analysis. Prominent examples are nucleic acid preparation products in front of polymerase
chain reaction, NGS and microarrays.
Vacuum Technology
Our vacuum technologies products are used to create, control, measure and test vacuum environments in life science,
industrial and scientific applications where ultra-clean, high-vacuum environments are needed. Vacuum technologies' customers
are typically OEMs that manufacture equipment for these applications. Products include a wide range of high and ultra-high
vacuum pumps (diffusion, turbomolecular and ion getter), intermediate vacuum pumps (rotary vane, sorption and dry scroll),
vacuum instrumentation (vacuum control instruments, sensor gauges and meters) and vacuum components (valves, flanges and
other mechanical hardware). These products also include helium mass spectrometry and helium-sensing leak detection instruments
used to identify and measure leaks in hermetic or vacuum environments. In addition to product sales, we also offer a wide range
of services including an exchange and rebuild program, assistance with the design and integration of vacuum systems, applications
support and training in basic and advanced vacuum technologies.
Cell Analysis
Our cell analysis tools are used to study cell signaling pathways and function through metabolic profile analysis for cells.
The multi-well plate assays and readers are used to understand the impact of stimuli on cells as part of the drug development
process. Cell analysis customers are typically academia and pharma companies who need to assess the metabolic state of the cell
and use mass spectromety to study the related metabolites as part of research and drug development processes.
Life Sciences and Applied Markets Customers
We had approximately 23,000 customers for our life sciences and applied markets business in fiscal 2016. No single customer
represented a material amount of the net revenue of the life sciences and applied markets business. A significant number of our
life sciences and applied markets customers are also customers of our Agilent CrossLab business.
The life sciences and applied markets business is susceptible to seasonality in its orders and revenues primarily based on
U.S. and foreign government budgets and large pharmaceutical company budgets. Historically, the result is that our first and fourth
fiscal quarters tend to deliver the strongest profits for this group. However, general economic trends, new product introductions
and competition might overshadow this trend in any given year.
Life Sciences and Applied Markets Sales, Marketing and Support
The life science and applied markets channels focus on the therapeutics and human disease research customer base (pharma,
biotech, CRO, CMO and generics), clinical customer base (high complexity clinical testing labs) and on emerging life sciences
opportunities in life science research institutes. We deploy a multi-channel approach, marketing products to our customers through
direct sales, electronic commerce, resellers, manufacturers' representatives and distributors. We primarily use direct sales to market
our solutions to our pharmaceutical, biopharmaceutical and clinical accounts. Sales agents supplement direct sales by providing
broader geographic coverage and coverage of smaller accounts. Our active reseller program augments our ability to provide more
complete solutions to our customers. We sell our consumable products through distributors, electronic commerce and direct sales.
Our products typically come with standard warranties, and extended warranties are available for additional cost.
Life Sciences and Applied Markets Manufacturing
Our manufacturing supports our diverse product range and
focus. We assemble highly configurable
products to individual customer orders and make standard products to stock. We employ advanced manufacturing techniques and
supply chain management systems to reduce costs and manufacturing cycle times. Our manufacturing process then converts these
designs into custom products for shipment to customers. We selectively use third parties to provide some supply chain processes
for manufacturing, warehousing and logistics. We have manufacturing facilities in California, Delaware and Massachusetts in the
U.S. Outside of the U.S., we have manufacturing facilities in Germany, Malaysia and Singapore. We have FDA registered sites
in California, Germany and Singapore. We utilize just-in-time manufacturing.
6
Life Sciences and Applied Markets Competition
The markets for analytical instruments in which we compete are characterized by evolving industry standards and intense
competition. Our principal competitors in the life sciences and applied markets arena include: Danaher Corporation, PerkinElmer
Inc., Shimadzu Corporation, Thermo Fisher Scientific Inc. and Waters Corporation. Agilent competes on the basis of product
performance, reliability, support quality, applications expertise, global channel coverage and price.
Diagnostics and Genomics Business
Our diagnostics and genomics business includes genomics, nucleic acid contract manufacturing and the pathology, companion
diagnostics and reagent partnership businesses.
Our diagnostics and genomics business is comprised of five areas of activity providing solutions that include reagents,
instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate
samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping,
gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling,
as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software.
Second, our nucleic acid solutions business provides equipment and expertise focused on production of synthesized
oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as active pharmaceutical
ingredients ("API") in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Next, our pathology
solutions business is focused on product offerings to cancer diagnostics and anatomic pathology workflows. The broad portfolio
of offerings includes immunohistochemistry (“IHC”), in situ hybridization (“ISH”), hematoxylin and eosin (“H&E”) staining and
special staining. We also collaborate with a number of major pharmaceutical companies to develop new potential
pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from
a specific targeted therapy. Finally, the reagent partnership business is a provider of reagents used for turbidimetry and flow
cytometry.
We employed approximately 1,900 people as of October 31, 2016 in our diagnostics and genomics business. This business
generated revenue of $0.7 billion in fiscal 2016, $0.7 billion in fiscal 2015, and $0.7 billion in fiscal 2014.
Diagnostics and Genomics Market
Within diagnostics and genomics business, we focus primarily on the following market:
The Diagnostics and Clinical Market. A significant part of our clinical diagnostic customers are in pathology labs throughout
the world. Our high-quality, automated pathology tissue staining platforms and solutions are used most heavily by the large labs
located in hospitals, medical centers, and reference labs. The market is skewed towards mature economies, with most of the market
in North America, Western Europe and Japan. The mix is changing, however, as emerging markets increase spending on human
health.
The clinical market for genomics consists of high complexity clinical labs performing patient testing, including “for-profit”
reference laboratories, hospital labs, and molecular diagnostic companies. While these labs primarily purchase in vitro diagnostics
(“IVD”) labeled testing kits, they often develop and validate their own molecular based tests. Analyte Specific Reagents (“ASRs”)
are often used by these labs.
Diagnostics and Genomics Products
Our products fall into six main areas of work: pathology products, specific proteins and flow reagents, target enrichment,
cytogenetic research solutions and microarrays, PCR and qPCR instrumentation and molecular biology reagents and nucleic acid
solutions.
Pathology
This area consists of routine clinical solutions for tissue based cancer diagnostics with solutions that comprise antibodies,
reagents, instruments and software targeting both primary and advanced cancer diagnostics. Our CoverStainer and Artisan based
product families target primary cancer diagnostics through Hematoxylin and Eosin staining as well as Special Stains for additional
insights and detection of potentially carcinogenic tissue. In the fourth quarter of 2013, we launched our new combined IHC/ISH
platform, Dako Omnis. The Dako Omnis and Autostainer based IHC solution and Instant Quality Fluorescence In Situ Hybridization
7
("IQFISH") technologies provide advanced tumor typing through investigation of protein and gene expression. These products
also include companion diagnostic tests that are used to help identify patients most likely to benefit from a specific targeted therapy.
Specific Proteins and Flow Reagents
Our reagent OEM business is a provider of clinical diagnostic products within the areas of specific proteins for turbidimetry
and reagents for flow cytometry. These are sold OEM as customized reagent solutions supplied to top IVD companies or through
retail partners.
Companion Diagnostics
In our Companion Diagnostics business, we partner with a number of major pharmaceutical companies to develop new
potential pharmacodiagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy.
Target Enrichment
Agilent continues to be a strong player in the next generation sequencing market. We provide a target enrichment portfolio
composed of two main platforms, SureSelect and HaloPlex, both enabling customers to select specific target regions of the genome
for sequencing. Customers can customize our products for their regions of interest using the SureDesign software, or they can
choose from a wide range of catalog products, including gene panels for specific applications and Exome designs, which allow
analysis of the entire coding sequences of the genome. After preparing samples with SureSelect and HaloPlex, products can be
sequenced in the main next generation sequencing platforms available in the market. The technologies provide an easy sample
prep workflow that can be automated with the Agilent Bravo platform for scalability. HaloPlex provides less-than-24-hours fast
workflow, which makes it suitable for labs that require fast turnaround time from sample to results. These products are used for
mutation detection and genotyping. Results can be easily analyzed using Agilent software solutions GeneSpring or SureCall.
Cytogenetic Research Solutions and Microarrays
Agilent is a leading provider of microarrays for Comparative Genomic Hybridization (“CGH”), mostly used by customers
in cytogenetic laboratories. The arrays allow customers to detect genome-wide copy number alterations, with high levels of
resolution (from entire chromosomal copy number changes to specific microdeletions or duplications). The arrays are offered in
many formats allowing the customers to choose from different levels of resolution and number of samples per arrays. Arrays can
also be customized using the SureDesign software. In addition to the microarrays, Agilent's solution includes reagents for sample
processing, hardware for reading the microarrays, and software to help users view the data in a meaningful way. In addition to
the CGH portfolio, the cytogenetics solution comprises a line of oligonucleotide probes for Fluorescent In Situ Hybridization
("FISH") called SureFISH. Over 400 probes are available in our catalog, covering most relevant regions in the genome. Cytogenetic
labs can use SureFISH probes to detect specific translocations or copy number changes in samples. Additionally, Agilent provides
a wide range of microarrays to the research market for different types of applications: gene expression, microRNA, methylation,
splice variants, and chromatin immunoprecipitation applications. Arrays are offered as catalog designs or customizable designs,
with no minimum order size and short delivery time, which differentiates us from other vendors and enables researchers the
maximum flexibility in their studies. Our end-to-end solution includes reagents for sample preparation and microarray processing;
hardware for sample QC and high-throughput microarray scanning; microarrays on industry-standard 1” × 3” glass slides for key
applications; custom microarray design services; and GeneSpring and CytoGenomics software products for data analysis.
PCR and qPCR Instrumentation and Molecular Biology Reagents
Polymerase Chain Reaction (“PCR”) is a standard laboratory method used to amplify the amount of genetic material of a
given sample to enable further interrogation. Quantitative PCR (“qPCR”) or real time PCR is also a standard method used in
genomic research facilities to measure the amount of a specific nucleic acid sequence within a sample. There are several applications
for qPCR, among the most common are identifying the expression level of a specific gene, or calculating the amount of a specific
pathogen present in a sample. Agilent offers a complete portfolio of PCR & qPCR instruments, as well as specialty enzymes for
amplifying difficult sample types. In addition to PCR and qPCR enzymes, Agilent offers a wide range of molecular biology reagents
including tools for cloning and mutagenesis applications.
Nucleic Acid Solutions
Our Nucleic Acid Solutions division ("NASD") is a contract manufacturing and development services business with
equipment and expertise focused on mid to large scale production of synthesized oligonucleotide APIs (Active Pharmaceutical
Ingredients) under pharmaceutical GMP conditions for an emerging class of drugs that utilize oligonucleotide molecules for disease
8
therapy. State of the art for these drugs has advanced from single strand DNA molecules to complex, highly modified molecules
including antisense, aptamers, double-stranded RNA, and RNA mixtures. These advancements in the technology have greatly
improved the efficacy of delivery and stability of the oligos in-vivo. NASD offers industry leading experience to efficiently advance
our customer’s oligo drug candidates from clinical trials to commercial launch with a common goal of patient health and safety.
Diagnostics and Genomics Customers
We had approximately 14,000 customers for our diagnostics and genomics business in fiscal 2016. No single customer
represented a material amount of the net revenue of the diagnostics and genomics business.
Diagnostics and Genomics Sales, Marketing and Support
The diagnostics and genomics channels focus on the therapeutics and human disease research customer base (pharma,
biotech, CRO, CMO and generics), clinical customer base (pathology labs and high complexity clinical testing labs) and on
emerging life sciences opportunities in life science research institutes. We deploy a multi-channel approach, marketing products
to our customers through direct sales, electronic commerce, resellers, manufacturers' representatives and distributors. We primarily
use direct sales to market our solutions to our pharmaceutical, biopharmaceutical and clinical accounts. Sales agents supplement
direct sales by providing broader geographic coverage and coverage of smaller accounts. Our active reseller program augments
our ability to provide more complete solutions to our customers. We sell our consumable products through distributors, telesales,
electronic commerce and direct sales. We utilize telesales for more mature product lines, as well as for reorders of reagent products.
Diagnostics and Genomics Manufacturing
Our manufacturing supports our diverse product range and customer-centric focus. We assemble highly configurable
products to individual customer orders and make standard products to stock. We employ advanced manufacturing techniques and
supply chain management systems to reduce costs and manufacturing cycle times. We selectively use third parties to provide some
supply chain processes for manufacturing, warehousing and logistics. We have manufacturing facilities in California, Colorado
and Texas in the U.S. Outside of the U.S., we have manufacturing facilities in Denmark, Malaysia and Germany. Our FDA registered
sites include California, Colorado, Texas and Denmark. We utilize just-in-time manufacturing and so typically do not maintain a
high level of inventory.
Diagnostics and Genomics Competition
The markets for diagnostics and genomics analytical products in which we compete are characterized by evolving industry
standards and intense competition. Our principal competitors in the diagnostics and genomics arena include: Roche Ventana
Medical Systems, Inc., a member of the Roche Group, Leica Biosystems, Inc., a division of Danaher Corporation, Abbott
Laboratories, Ilumina, Inc. and Affymetrix, Inc. Agilent competes on the basis of product performance, reliability, support quality,
applications expertise, whole solution offering, global channel coverage and price.
Diagnostics and Genomics Government Regulation
Some of the products the diagnostics and genomics business sells are subject to regulatory approval by the FDA and other
regulatory bodies throughout the world. These regulations govern a wide variety of product related activities, from quality
management, design and development to labeling, manufacturing, promotion, sales and distribution. We continually invest in our
manufacturing infrastructure to gain and maintain certifications necessary for the level of clearance. During 2014 and 2015, we
have made investments to address the issues identified in the FDA warning letter, now lifted, received by our Glostrup, Denmark
facility.
Agilent CrossLab Business
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed
to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning Agilent can serve and supply customers
regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping
to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products,
custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and
compliance support, as well as asset management and consultative services that help increase customer productivity. Custom
service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments
fully operational and compliant with the respective industry requirements.
9
Our Agilent CrossLab business employed approximately 3,800 people as of October 31, 2016. Our Agilent CrossLab business
generated $1.4 billion in revenue in fiscal 2016, $1.3 billion in revenue in fiscal 2015 and $1.3 billion in revenue in fiscal 2014.
Agilent CrossLab Markets
The Pharmaceutical, Biotechnology, CRO & CMO Market. Our services and consumable products support customers in
this market that consists of “for-profit” companies who participate across the pharmaceutical value chain in the areas of therapeutic
research, discovery and development, clinical trials, manufacturing and quality assurance and quality control. One sub-segment
of this market is core and emerging pharmaceutical companies (“pharma”). A second sub-segment includes biotechnology
companies (“biotech”), contract research organizations (“CROs”) and contract manufacturing organizations (“CMOs”). Biotech
companies and, to a somewhat lesser extent, CROs and CMOs typically participate in specific points in the pharmaceutical industry
value chain. Additionally, due to the relatively low drug efficacy within oncology, pharma companies are partnering with diagnostic
companies to bring validated tests to the market with their new drugs.
The Life Science Research Market. Our services and consumable products support customers in this market that consists
primarily of “not-for-profit” organizations and includes academic institutions, large government institutes and privately funded
organizations. The life science research market plays an influential role in technology adoption and therapeutic developments for
pharmaceutical and molecular diagnostics companies. After decades of investment in basic biomedical research by government
funding bodies, the focus has widened to include translational research - multidisciplinary scientific efforts directed at accelerating
therapy development.
The Chemical & Energy Market. The natural gas and petroleum refining markets use our services and consumable products
to support their quality control and environmental safety reviews.
The Environmental & Forensics Market. Our services and consumable products support the environmental industry
customers that perform laboratory and field analysis of chemical pollutants in air, water, soil and solid waste. Environmental
industry customers include all levels of government, the industrial and manufacturing sectors, engineering and consulting
companies, commercial testing laboratories and colleges and universities. Our services and consumable products also support
drug testing and forensics laboratories that are involved with analyzing evidence associated with crime, screening athletes for
performance enhancing drugs, analyzing samples for recreational drugs, or detecting and identifying biological and chemical
warfare agents. Customers include local, state, federal, and international law enforcement agencies and commercial testing
laboratories.
The Food Market. Our services and consumable products support the food production chain, including incoming
inspection, new product development, quality control and assurance, and packaging.
The Diagnostics and Clinical Market. Our services and consumable products support clinical diagnostic customers in
pathology labs throughout the world. The market is skewed towards the mature economies, with most of the market in North
America, Western Europe and Japan. The mix is changing, however, as emerging markets increase spending on human health.
Agilent CrossLab Applications
Chemistries and Supplies
We offer a broad range of consumable products, which support our technology platforms, including sample preparation
consumables such as solid phase extraction ("SPE") and filtration products, self-manufactured GC and LC columns, chemical
standards, and instrument replacement parts. Consumable products also include scientific instrument parts and supplies such as
filters and fittings for GC systems; xenon lamps and cuvettes for UV-Vis-NIR, fluorescence, FT-IR and Raman spectroscopy
instruments; and graphite furnace tubes, hollow cathode lamps and specialized sample introduction glassware for our AA, ICP-
OES and ICP-MS products.
Services and Support
We offer a wide range of startup, operational, educational and compliance support services for our measurement and data
handling systems. Our support services include maintenance, troubleshooting, repair and training for all of our chemical and
bioanalytical instrumentation hardware and software products. Special service bundles have also been designed to meet the specific
application needs of various industries. As customers continue to outsource laboratory operations and consolidate suppliers, our
10
enterprise services consist of a broad portfolio of integrated laboratory management services including instrument services, lab
supply management, asset management, procurement, informatics and scientific services.
Remarketed Instruments
We refurbish and resell certified pre-owned instruments to value oriented customers who demand Agilent quality and
performance at a budget conscious price.
Agilent CrossLab Customers
We had approximately 43,000 Agilent CrossLab customers in fiscal 2016 and no single customer represented a material
amount of the net revenue of the Agilent CrossLab business. A significant number of our Agilent CrossLab customers are also
customers of our life sciences and applied markets business.
The service and consumables business is mostly recurring in nature, and is not as susceptible to market seasonality and
industry cycles in comparison to our instrument businesses. The vendor neutral portion of the portfolio allows the business to
perform relatively independent from our instrument business.
Agilent CrossLab Sales, Marketing and Support
We deploy a multi-channel approach, marketing products and services to our customers through direct sales, electronic
commerce, resellers, manufacturers' representatives and distributors. We primarily use direct sales to market our solutions to our
large accounts. Sales agents supplement direct sales by providing broader geographic coverage and coverage of smaller accounts.
Our active reseller program augments our ability to provide more complete solutions to our customers. We utilize telesales to
enhance the transactional sales model of our products. All channels are supported by technical product and application specialists
to meet our customer’s specific requirements.
We deliver our support services to customers in a variety of ways, including on-site assistance with repair or exchange of
returned products, telephone support and self-diagnostic services provided over the Internet. We also offer special industry-focused
service bundles that are designed to meet the specific needs of hydrocarbon processing, environmental, pharmaceutical and
biopharmaceutical customers to keep instruments fully operational and compliant with the respective industry requirements. Our
products typically come with standard warranties, and extended warranties are available for additional cost.
Agilent CrossLab Manufacturing
Our primary manufacturing sites for the consumables business are in California and Delaware in the U.S., and outside of the
U.S. in the Netherlands and the United Kingdom. Our direct service delivery organization is regionally based operating in 30
countries.
Agilent CrossLab Competition
Our principal competitors in the services and consumable products arena include many of our competitors from the instrument
business, such as: Danaher Corporation, PerkinElmer Inc., Shimadzu Corporation, Thermo Fisher Scientific Inc. and Waters
Corporation, as well as numerous niche consumables and service providers. Agilent competes on the basis of product performance,
reliability, support quality, applications expertise, global channel coverage and price.
Agilent Technologies Research Laboratories
Agilent Technologies Research Laboratories ("Research Labs") is our research organization based in Santa Clara, California,
with offices in Europe and Asia. The Research Labs create competitive advantage through high-impact technology, driving market
leadership and growth in Agilent's core businesses and expanding Agilent's footprint into adjacent markets. At the cross-roads of
the organization, the Research Labs are able to identify and enable synergies across Agilent's businesses to create competitive
differentiation and compelling customer value.
The technical staff have advanced degrees that cover a wide range of scientific and engineering fields, including biology,
chemistry, distributed measurement, image processing, mathematics, nano/microfabrication, microfluidics, software, informatics,
physics and physiology.
11
Global Infrastructure Organization
We provide support to our businesses through our global infrastructure organization. This support includes services in the
areas of finance, legal, workplace services, human resources and information technology. Generally, these organizations are
centrally operated from Santa Clara, California, with services provided worldwide. As of the end of October 2016, our global
infrastructure organization employed approximately 2,500 people worldwide.
Agilent Order Fulfillment Organizations
Our order fulfillment and supply chain organization (“OFS”) centralizes all order fulfillment and supply chain operations
in our businesses. OFS provides resources for manufacturing, engineering and strategic sourcing to our respective businesses. In
general, OFS employees are dedicated to specific businesses and the associated costs are directly allocated to those businesses.
The following discussions of Research and Development, Backlog, Intellectual Property, Materials, Environmental,
International Operations and Acquisition and Disposal of Material Assets include information common to each of our
businesses.
Research and Development
Research and development ("R&D") expenditures were $329 million in 2016, $330 million in 2015 and $358 million in
2014, the vast majority of which was company-sponsored. We anticipate that we will continue to have significant R&D expenditures
in order to maintain our competitive position with a continuing flow of innovative, high-quality products and services.
Backlog
We believe that backlog is not a meaningful indicator of future business prospects for our business segments since a significant
portion of our revenue for a given quarter is derived from the current quarter's orders. Therefore, we believe that backlog information
is not material to an understanding of our business.
Intellectual Property
We generate patent and other intellectual property rights covering significant inventions and other innovations in order to
create a competitive advantage. While we believe that our licenses, patents and other intellectual property rights have value, in
general no single license, patent or other intellectual property right is in itself material. In addition, our intellectual property rights
may be challenged, invalidated or circumvented or may otherwise not provide significant competitive advantage.
Materials
Our life sciences and applied markets, diagnostics and genomics and Agilent CrossLab businesses all purchase materials
from thousands of suppliers on a global basis. Some of the parts that require custom design work are not readily available from
alternate suppliers due to their unique design or the length of time necessary for design work. Our long-term relationships with
suppliers allow us to proactively manage technology road maps and product discontinuance plans and monitor their financial
health. Even so, some suppliers may still extend their lead times, limit supplies, increase prices or cease to produce necessary parts
for our products. If these are unique components, we may not be able to find a substitute quickly or at all. To address the potential
disruption in our supply chain, we use a number of techniques, including qualifying multiple sources of supply and redesign of
products for alternative components. In addition, while we generally attempt to keep our inventory at minimal levels, we do
purchase incremental inventory as circumstances warrant to protect the supply chain.
Environmental
Our R&D, manufacturing and distribution operations involve the use of hazardous substances and are regulated under
international, federal, state and local laws governing health and safety and the environment. We apply strict standards for protection
of the environment and occupational health and safety to sites inside and outside the U.S., even if not subject to regulation imposed
by foreign governments. We believe that our properties and operations at our facilities comply in all material respects with applicable
environmental laws and occupational health and safety laws. However, the risk of environmental liabilities cannot be completely
eliminated and there can be no assurance that the application of environmental and health and safety laws to Agilent will not
require us to incur significant expenditures. We are also regulated under a number of international, federal, state, and local laws
regarding recycling, product packaging and product content requirements. The environmental, product content/disposal and
recycling laws are gradually becoming more stringent and may cause us to incur significant expenditures in the future.
12
In connection with the sale of several of our businesses, we have agreed to indemnity the buyers of such business, their
respective affiliates and other related parties against certain damages that they might incur in the future. The continuing
indemnifications primarily cover damages relating to liabilities of the business that Agilent retained and did not transfer to the
buyers as we well as other specified items, including potential liabilities for environmental matters. In our opinion, the fair value
of these indemnification obligations was not material as of October 31, 2016.
We maintain a comprehensive Environmental Site Liability insurance policy which may cover certain clean-up costs or
legal claims related to environmental contamination. This policy covers specified active, inactive and divested locations.
International Operations
Our net revenue originating outside the U.S., as a percentage of our total net revenue, was approximately 70 percent in fiscal
2016, 70 percent in fiscal 2015 and 75 percent in fiscal 2014, the majority of which was from customers other than foreign
governments. Annual revenues derived from China were approximately 20 percent in fiscal 2016, 16 percent in fiscal 2015 and
13 percent in fiscal 2014. Revenues from external customers are generally attributed to countries based on where we ship the
products or provide the services.
Long-lived assets located outside of the U.S., as a percentage of our total long-lived assets, was approximately 44 percent(cid:3)
in fiscal year 2016 and 49 percent in fiscal year 2015.
Most of our sales in international markets are made by foreign sales subsidiaries. In countries with low sales volumes, sales
are made through various representatives and distributors. However, we also sell into international markets directly from the U.S.
Our international business is subject to risks customarily encountered in foreign operations, including interruption to
transportation flows for delivery of parts to us and finished goods to our customers, changes in a specific country's or region's
political or economic conditions, trade protection measures, import or export licensing requirements, consequences from changes
in tax laws and regulatory requirements, difficulty in staffing and managing widespread operations, differing labor regulations,
differing protection of intellectual property and geopolitical turmoil, including terrorism and war. We are also exposed to foreign
currency exchange rate risk inherent in our sales commitments, anticipated sales and expenses, and assets and liabilities denominated
in currencies other than the local functional currency, and may also become subject to interest rate risk inherent in any debt we
incur, or investment portfolios we hold. There may be an increased risk of political unrest in regions where we have significant
manufacturing operations such as Southeast Asia. However, we believe that our international diversification provides stability to
our worldwide operations and reduces the impact on us of adverse economic changes in any single country. Financial information
about our international operations is contained in Note 19, "Segment Information", to our consolidated financial statements.
Acquisition and Disposal of Material Assets
On September 19, 2013, Agilent announced plans to separate into two publicly traded companies, one comprising of the
life sciences, diagnostics and chemical analysis businesses that retained the Agilent name, and the other one that comprised of the
electronic measurement business that was renamed Keysight Technologies, Inc. (“Keysight”). Keysight was incorporated in
Delaware as a wholly-owned subsidiary of Agilent on December 6, 2013. On November 1, 2014, we completed the distribution
of 100% of the outstanding common shares of Keysight to Agilent stockholders who received one share of Keysight common
stock for every two shares of Agilent held as of the close of business on the record date, October 22, 2014.
Executive Officers of the Registrant
The names of our current executive officers and their ages, titles and biographies appear below:
Henrik Ancher-Jensen, 51, has served as Senior Vice President, Agilent and President, Order Fulfillment since September
2013. From September 2012 to September 2013, Mr. Ancher-Jensen served as our Vice President, Global Product Supply,
Diagnostics and Genomics Group. From September 2010 to September 2012 he served as Corporate Vice President, Global
Operations of Dako A/S, a Danish diagnostics company, and as Dako’s Vice President, Supply Chain and Chief Information Officer
from 2006 to September 2010. Prior to joining Dako, he spent more than 15 years in senior management roles and management
consulting with Chr. Hansen, Deloitte Consulting and NVE.
Mark Doak, 61, has served as our Senior Vice President, Agilent and President, Agilent CrossLab Group (formerly a group
within the Life Sciences & Applied Markets Group) since September 2014. From August 2008 to September 2014, Mr. Doak
13
served as our Vice President and General Manager of the Services and Support Division. Prior to that, he held several senior
management positions across functions in marketing, quality and services.
Rodney Gonsalves, 51, has served as our Vice President, Corporate Controllership and Chief Accounting Officer since May
2015. From September 2009 to May 2015, Mr. Gonsalves served as Vice President and operational CFO for various business
groups within the Company, most recently for the Life Sciences and Applied Markets Group. From January 2007 to August 2009
he served as our vice president of Investor Relations. Prior to assuming this position, Mr. Gonsalves served in various capacities
for Agilent, including as controller, corporate governance and customer financing in Agilent’s Global Infrastructure Organization,
and controller for the Photonics Systems Business Unit. Prior to joining Agilent, Mr. Gonsalves held a variety of positions in
finance with Hewlett- Packard Co. Mr. Gonsalves holds a master’s degree in business administration from Santa Clara University
in California.
Dominique P. Grau 57, has served as our Senior Vice President, Human Resources since August 2014. From May 2012 to
August 2014 Mr. Grau served as Vice President, Worldwide Human Resources. Prior to that, he served as Vice President,
Compensation, Benefits and HR Services from May 2006 to May 2012. Mr. Grau had previously served in various capacities for
Agilent and Hewlett-Packard Company.
Didier Hirsch, 65, has served as our Senior Vice President and Chief Financial Officer since July 2010 and served as interim
Chief Financial Officer from April 2010 to July 2010. Prior to that he served as Vice President, Corporate Controllership and Tax
from November 2006 to July 20, 2010 and as Chief Accounting Officer from November 2007 to July 20, 2010. From April 2003
to October 2006, Mr. Hirsch served as Vice President and Controller. Prior to assuming this position, Mr. Hirsch served as Vice
President and Treasurer from September 1999 to April 2003. Mr. Hirsch had joined
Company in 1989 as Director
of Finance and Administration of
Packard Asia Pacific, and in 1996 Director of Finance and Administration of
Mr. Hirsch serves on the Board of Directors of Logitech International and Knowles Corporation.
France. In 1993, he became Director of Finance and Administration of
Packard Europe, Middle East, and Africa.
Patrick K. Kaltenbach, 53, has served as Senior Vice President, Agilent and President, Life Sciences and Applied Markets
Group since November 2014. From January 2014 to November 2014 he served as Vice President and General Manager of the
Life Sciences Products and Solutions organization. Prior to that he served as Vice President and General Manager of the Liquid
Phase Division from December 2012 to January 2014. From July 2010 to December 2012 he served as Vice President and General
Manager of the Liquid Phase Separations Business. Prior to that he served as General Manager of the Liquid Chromatography
Business from February 2008 to July 2010. Mr. Kaltenbach has held various positions in R&D management and senior management
beginning at Hewlett-Packard Co.
Michael R. McMullen, 55, has served as Chief Executive Officer since March 2015 and as President since September 2014.
From September 2014 to March 2015 he also served as Chief Operating Officer. From September 2009 to September 2014 he
served as Senior Vice President, Agilent and President, Chemical Analysis Group. From January 2002 to September 2009, he
served as our Vice President and General Manager of the Chemical Analysis Solutions Unit of the Life Sciences and Chemical
Analysis Group. Prior to assuming this position, from March 1999 to December 2001, Mr. McMullen served as Country Manager
for Agilent's China, Japan and Korea Life Sciences and Chemical Analysis Group. Prior to this position, Mr. McMullen served as
our Controller for the
Company and Yokogawa Electric Joint Venture from July 1996 to March 1999.
Michael Tang, 42, has served as our Senior Vice President, General Counsel and Secretary since January 2016. From May
2015 to January 2016 he served as Vice President, Assistant General Counsel and Secretary and from November 2013 to April
2015 he served as Vice President, Assistant General Counsel and Assistant Secretary. From March 2012 to October 2013 he served
as Business Development Manager in Agilent’s Corporate Development group. From November 2009 to February 2012 he served
as Senior Counsel. From August 2006 to October 2009 he served in various capacities in Agilent’s legal department. Prior to
joining Agilent, Mr. Tang represented public and private technology companies in a broad range of corporate and securities matters
at Wilson Sonsini Goodrich & Rosati, a Palo Alto, California, law firm and Fenwick & West LLP, a Mountain View, California,
law firm.
Jacob Thaysen, 41, has served as Senior Vice President, Agilent and President, Diagnostics and Genomics Group since
November 2014. From October 2013 to November 2014 he served as Vice President and General Manager of the Diagnostics
and Genomics business. Prior to that he served as Vice President and General Manager of the Genomics Solutions unit from
January 2013 to October 2013. Before joining Agilent, he was Corporate Vice President of R&D at Dako A/S, a Danish diagnostics
company from April 2011 to January 2013. His previous positions at Dako include Vice President, System Development, R&D
from March 2010 to April 2011, Vice President, Strategic Marketing from April 2009 to March 2010 and Vice President, Global
14
Sales Operations from August 2008 to March 2009. Prior to Dako, Mr. Thaysen worked as a management consultant and Chief
Technical Officer and founder of a high-tech start-up company.
Investor Information
We are subject to the informational requirements of the Securities Exchange Act of 1934 (“Exchange Act”). Therefore, we
file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Such reports,
proxy statements and other information may be read and copied by visiting the Public Reference Room of the SEC at 100 F Street
N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC(cid:3)
at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and(cid:3)
information statements and other information regarding issuers that file electronically.
You can access financial and other information at our Investor Relations website. The address is www.investor.agilent.com.
We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.
Our Amended and Restated Corporate Governance Standards, the charters of our Audit and Finance Committee, our
Compensation Committee, our Executive Committee and our Nominating/Corporate Governance Committee, as well as our
Standards of Business Conduct (including code of ethics provisions that apply to our principal executive officer, principal financial
officer, principal accounting officer and senior financial officers) are available on our website at www.investor.agilent.com under
“Corporate Governance”. These items are also available in print to any stockholder in the United States and Canada who requests
them by calling (877) 942-4200. This information is also available by writing to the company at the address on the cover of this
Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
Our operating results and financial condition could be harmed if the markets into which we sell our products decline or
do not grow as anticipated.
Visibility into our markets is limited. Our quarterly sales and operating results are highly dependent on the volume and
timing of orders received during the fiscal quarter, which are difficult to forecast and may be cancelled by our customers. A large
amount of our orders are back-end loaded toward the end of our second and fourth fiscal quarters and their timing may be influenced
by the sales incentive programs we have in place. In addition, our revenue and earnings forecasts for future fiscal quarters are
often based on the expected seasonality of our markets. However, the markets we serve do not always experience the seasonality
that we expect. Any decline in our customers' markets or in general economic conditions would likely result in a reduction in
demand for our products and services. Also, if our customers' markets decline, we may not be able to collect on outstanding
amounts due to us. Such declines could harm our consolidated financial position, results of operations, cash flows and stock price,
and could limit our profitability. Also, in such an environment, pricing pressures could intensify. Since a significant portion of our
operating expenses is relatively fixed in nature due to sales, research and development and manufacturing costs, if we were unable
to respond quickly enough these pricing pressures could further reduce our operating margins.
15
If we do not introduce successful new products and services in a timely manner to address increased competition through
frequent new product and service introductions, rapid technological changes and changing industry standards, our products
and services will become obsolete, and our operating results will suffer.
We generally sell our products in industries that are characterized by increased competition through frequent new product
and service introductions, rapid technological changes and changing industry standards. In addition, many of the markets in which
we operate are seasonal. Without the timely introduction of new products, services and enhancements, our products and services
will become technologically obsolete over time, in which case our revenue and operating results would suffer. The success of our
new products and services will depend on several factors, including our ability to:
properly identify customer needs and predict future needs;
•
innovate and develop new technologies, services and applications;
•
•
successfully commercialize new technologies in a timely manner;
• manufacture and deliver our products in sufficient volumes and on time;
•
•
•
•
differentiate our offerings from our competitors' offerings;
price our products competitively;
anticipate our competitors' development of new products, services or technological innovations; and
control product quality in our manufacturing process.
General economic conditions may adversely affect our operating results and financial condition.
Our business is sensitive to negative changes in general economic conditions, both inside and outside the United States.
Slower global economic growth and uncertainty in the markets in which we operate may adversely impact our business resulting
in:
•
•
•
•
reduced demand for our products, delays in the shipment of orders, or increases in order cancellations;
increased risk of excess and obsolete inventories;
increased price pressure for our products and services; and
greater risk of impairment to the value, and a detriment to the liquidity, of our investment portfolio.
Failure to adjust our purchases due to changing market conditions or failure to accurately estimate our customers' demand
could adversely affect our income.
Our income could be harmed if we are unable to adjust our purchases to reflect market fluctuations, including those caused
by the seasonal nature of the markets in which we operate. The sale of our products and services are dependent, to a large degree,
on customers whose industries are subject to seasonal trends in the demand for their products. During a market upturn, we may
not be able to purchase sufficient supplies or components to meet increasing product demand, which could materially affect our
results. In the past we have seen a shortage of parts for some of our products. In addition, some of the parts that require custom
design are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work.
Should a supplier cease manufacturing such a component, we would be forced to reengineer our product. In addition to discontinuing
parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. In order
to secure components for the production of products, we may continue to enter into non-cancelable purchase commitments with
vendors, or at times make advance payments to suppliers, which could impact our ability to adjust our inventory to declining
market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories
and be forced to incur additional expenses.
Demand for some of our products and services depends on the capital spending policies of our customers, research and
development budgets and on government funding policies.
Our customers include pharmaceutical companies, laboratories, universities, healthcare providers, government agencies
and public and private research institutions. Many factors, including public policy spending priorities, available resources, mergers
and consolidations, spending priorities, institutional and governmental budgetary policies and product and economic cycles, have
a significant effect on the capital spending policies of these entities. Fluctuations in the research and development budgets at these
organizations could have a significant effect on the demand for our products and services. Research and development budgets
fluctuate due to changes in available resources, consolidation, spending priorities, general economic conditions and institutional
and governmental budgetary policies. The timing and amount of revenue from customers that rely on government funding or
research may vary significantly due to factors that can be difficult to forecast, including changes in spending authorizations and
budgetary priorities for our products and services. If demand for our products and services is adversely affected, our revenue and
operating results would suffer.
16
Economic, political, foreign currency and other risks associated with international sales and operations could adversely
affect our results of operations.
Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We
anticipate that revenue from international operations will continue to represent a majority of our total revenue. International revenue
and costs are subject to the risk that fluctuations in foreign currency exchange rates could adversely affect our financial results
when translated into U.S. dollars for financial reporting purposes. The unfavorable effects of changes in foreign currency exchange
rates has decreased revenues by approximately 2 percentage points in the year ended October 31, 2016. In addition, many of our
employees, contract manufacturers, suppliers, job functions and manufacturing facilities are located outside the United States.
Accordingly, our future results could be harmed by a variety of factors, including:
•
•
•
•
•
•
•
•
•
•
interruption to transportation flows for delivery of parts to us and finished goods to our customers;
changes in foreign currency exchange rates;
changes in a specific country's or region's political, economic or other conditions;
trade protection measures and import or export licensing requirements;
negative consequences from changes in tax laws including changes to U.S. tax legislation that could materially
increase our effective tax rate;
difficulty in staffing and managing widespread operations;
differing labor regulations;
differing protection of intellectual property;
unexpected changes in regulatory requirements; and
geopolitical turmoil, including terrorism and war.
We centralized most of our accounting and tax processes to two locations: India and Malaysia. These processes include
general accounting, cost accounting, accounts payable, accounts receivables and tax functions. If conditions change in those
countries, it may adversely affect operations, including impairing our ability to pay our suppliers and collect our receivables. Our
results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial
results.
Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt
Practices Act, the U.K. Bribery Act, and other local laws prohibiting corrupt payments to governmental officials, anti-competition
regulations and sanctions imposed by the U.S. Office of Foreign Assets Control and other similar laws and regulations. Violations
of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on
our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain
employees, our international operations, our business and our operating results. Although we have implemented policies and
procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees,
contractors, or agents will not violate our policies.
In addition, although the majority of our products are priced and paid for in U.S. dollars, a significant amount of certain
types of expenses, such as payroll, utilities, tax, and marketing expenses, are paid in local currencies. Our hedging programs
reduce, but do not always entirely eliminate, within any given twelve-month period, the impact of currency exchange rate
movements, and therefore fluctuations in exchange rates, including those caused by currency controls, could impact our business,
operating results and financial condition by resulting in lower revenue or increased expenses. However, for expenses beyond that
twelve-month period, our hedging strategy does not mitigate our exposure. In addition, our currency hedging programs involve
third party financial institutions as counterparties. The weakening or failure of financial institution counterparties may adversely
affect our hedging programs and our financial condition through, among other things, a reduction in available counterparties,
increasingly unfavorable terms, and the failure of the counterparties to perform under hedging contracts.
17
Our strategic initiatives could have long-term adverse effects on our business and we may not realize the operational or
financial benefits from such actions.
We have implemented multiple strategic initiatives across our businesses to adjust our cost structure, and we may engage
in similar activities in the future. These strategic initiatives and our regular ongoing cost reduction activities may distract
management, could slow improvements in our products and services and limit our ability to increase production quickly if demand
for our products increases. In addition, delays in implementing our strategic initiatives, unexpected costs or failure to meet targeted
improvements may diminish the operational and financial benefits we realize from such actions. Any of the above circumstances
could have an adverse effect on our business and financial statements.
Our business will suffer if we are not able to retain and hire key personnel.
Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing,
executive and administrative personnel. If we fail to retain and hire a sufficient number of these personnel, we will not be able to
maintain or expand our business. The markets in which we operate are very dynamic, and our businesses continue to respond with
reorganizations, workforce reductions and site closures. We believe our pay levels are very competitive within the regions that we
operate. However, there is an intense competition for certain highly technical specialties in geographic areas where we continue
to recruit, and it may become more difficult to hire and retain our key employees.
Our acquisitions, strategic investments and alliances, joint ventures, exiting of businesses 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 investments and alliances, joint ventures and divestitures, and generally expect to complete several transactions per year.
In addition, we may decide to exit a particular business within our product portfolio. As a result of such transactions, our financial
results may differ from our own or the investment community's expectations in a given fiscal quarter, or over the long term. We
may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances
the performance of our combined businesses or product lines. Transactions such as acquisitions have resulted, and may in the
future result, in unexpected significant costs and expenses. In the future, we may be required to record charges to earnings during
the period if we determine there is an impairment of goodwill or intangible assets, up to the full amount of the value of the assets,
or, in the case of strategic investments and alliances, consolidate results, including losses, of third parties or write down investment
values or loans and convertible notes related to the strategic investment. In addition, acquisitions and strategic investments and
alliances may require us to integrate and collaborate with a different company culture, management team and business infrastructure.
Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors,
including introducing new products and meeting revenue targets as expected, the retention of key employees and the retention of
key customers.
The integration of acquired businesses is likely to result in our systems and internal controls becoming increasingly complex
and more difficult to manage. Any difficulties in the assimilation of acquired businesses into our control system could harm our
operating results or cause us to fail to meet our financial reporting obligations.
A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities
and employees to the purchaser, identify and separate the intellectual property to be divested from the intellectual property that
we wish to keep and reduce fixed costs previously associated with the divested assets or business. In addition, if customers of the
divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to
the extent that these customers also purchase other Agilent products. In exiting a business, we may still retain liabilities associated
with the support and warranty of those businesses. All of these efforts require varying levels of management resources, which
may divert our attention from other business operations. If we do not realize the expected benefits or synergies of such transactions,
our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results,
which could lead to a loss of investor confidence in our financial statements and have an adverse effect on our stock price.
Effective internal controls are necessary for us to provide reliable and accurate financial statements and to effectively prevent
fraud. We devote significant resources and time to comply with the internal control over financial reporting requirements of the
Sarbanes Oxley Act of 2002 and continue to enhance our controls. In our Annual Report on Form 10-K for our fiscal year ended
October 31, 2015, management concluded that, because of a material weakness in our internal control over financial reporting
related to the accounting for income taxes, our disclosure controls and procedures were not effective as of October 31, 2015. We
remediated the material weakness for income tax as of October 31, 2016. However, we cannot be certain that we will be able to
18
prevent future significant deficiencies or material weaknesses. Inadequate internal controls could cause investors to lose confidence
in our reported financial information, which could have a negative effect on investor confidence in our financial statements, the
trading price of our stock and our access to capital.
Integrating Dako A/S may be more difficult, costly or time consuming than expected and our business and financial
condition may be materially impaired.
We may not achieve the desired benefits from our acquisition and integration of Dako. In addition, the operation of Dako
within Agilent may be a difficult, costly and time-consuming process that involves a number of risks, including, but not limited
to:
•
•
•
•
•
•
•
our response to significant competitive pressure;
difficulties in meeting new product timelines;
the ability to grow in emerging markets;
increased exposure to certain governmental regulations and compliance requirements;
increased costs to address certain governmental regulations and compliance issues, such as the U.S. Food and Drug
Administration (“FDA”) warning letter received in August 2013 which has now been lifted by the FDA;
increased costs and use of resources; and
difficulties in the assimilation of different corporate cultures, practices and sales and distribution methodologies,
as well as in the assimilation and retention of geographically dispersed, decentralized operations and personnel.
Even if we are able to successfully operate Dako within Agilent, we may not be able to realize the revenue and other synergies
and growth that we anticipated from the acquisition in the time frame that we expected, and the costs of achieving these benefits
may be higher than what we expected. As a result, the Dako acquisition and integration may not contribute to our earnings as
expected, we may not achieve our operating margin targets when expected, or at all, and we may not achieve the other anticipated
strategic and financial benefits of this transaction.
Our customers and we are subject to various governmental regulations, compliance with or changes in such regulations
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 customers and we are subject to various significant international, federal, state and local regulations, including but not
limited to regulations in the areas of health and safety, packaging, product content, employment, labor and immigration, import/
export controls, trade restrictions and anti-competition. 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
any violations of these regulations. Any failure by us to comply with applicable government regulations could also result in the
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. We develop, configure and market our products to meet
customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products,
force us to modify our products to comply with new regulations or increase our costs of producing these products. If demand for
our products is adversely affected or our costs increase, our business would suffer.
Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards
Organization, as well as regulation by other agencies such as the FDA. We also must comply with work safety rules. If we fail to
adequately address any of these regulations, our businesses could be harmed.
We are subject to extensive regulation by the FDA and certain similar foreign regulatory agencies, and failure to comply
with such regulations could harm our reputation, business, financial condition and results of operations.
A number of our products are subject to regulation by the FDA and certain similar foreign regulatory agencies. In addition,
a number of our products may in the future be subject to regulation by the FDA and certain similar foreign regulatory agencies.
These regulations govern a wide variety of product-related activities, from quality management, design and development to
labeling, manufacturing, promotion, sales and distribution. If we or any of our suppliers or distributors fail to comply with FDA
and other applicable regulatory requirements or are perceived to potentially have failed to comply, we may face, among other
things, warning letters, adverse publicity affecting both us and our customers; investigations or notices of non-compliance, fines,
injunctions, and civil penalties; import or export restrictions; partial suspensions or total shutdown of production facilities or the
imposition of operating restrictions; increased difficulty in obtaining required FDA clearances or approvals or foreign equivalents;
seizures or recalls of our products or those of our customers; or the inability to sell our products. Any such FDA or other regulatory
19
agency actions could disrupt our business and operations, lead to significant remedial costs and have a material adverse impact
on our financial position and results of operations.
Some of our products are subject to particularly complex regulations such as regulations of toxic substances and failure
to comply with such regulations could harm our business.
Some of our products and related consumables are used in conjunction with chemicals whose manufacture, processing,
distribution and notification requirements are regulated by the U.S. Environmental Protection Agency (“EPA”) under the Toxic
Substances Control Act, and by regulatory bodies in other countries under similar laws. The Toxic Substances Control Act
regulations govern, among other similar things, the testing, manufacture, processing and distribution of chemicals, the testing of
regulated chemicals for their effects on human health and safety and import and export of chemicals. The Toxic Substances Control
Act prohibits persons from manufacturing any chemical in the United States that has not been reviewed by EPA for its effect on
health and safety, and placed on an EPA inventory of chemical substances. We must ensure conformance of the manufacturing,
processing, distribution of and notification about these chemicals to these laws and adapt to regulatory requirements in all applicable
countries as these requirements change. If we fail to comply with the notification, record-keeping and other requirements in the
manufacture or distribution of our products, then we could be subject to civil penalties, criminal prosecution and, in some cases,
prohibition from distributing or marketing our products until the products or component substances are brought into compliance.
Our business may suffer if we fail to comply with government contracting laws and regulations.
We derive a portion of our revenue from direct and indirect sales to U.S., state, local, and foreign governments and their
respective agencies. Such contracts are subject to various procurement laws and regulations, and contract provisions relating to
their formation, administration and performance. Failure to comply with these laws, regulations or provisions in our government
contracts could result in the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits,
suspension of payments, or suspension from future government contracting. If our government contracts are terminated, if we
are suspended from government work, or if our ability to compete for new contracts is adversely affected, our business could
suffer.
Our retirement and post retirement pension plans are subject to financial market risks that could adversely affect our
future results of operations and cash flows.
We have significant retirement and post retirement pension plan assets and obligations. The performance of the financial
markets and interest rates impact our plan expenses and funding obligations. Significant decreases in market interest rates, decreases
in the fair value of plan assets and investment losses on plan assets will increase our funding obligations, and adversely impact
our results of operations and cash flows.
The impact of consolidation and acquisitions of competitors is difficult to predict and may harm our business.
The life sciences industry is intensely competitive and has been subject to increasing consolidation. Consolidation in our
industries could result in existing competitors increasing their market share through business combinations and result in stronger
competitors, which could have a material adverse effect on our business, financial condition and results of operations. We may
not be able to compete successfully in increasingly consolidated industries and cannot predict with certainty how industry
consolidation will affect our competitors or us.
If we are unable to successfully manage the consolidation and streamlining of our manufacturing operations, we may
not achieve desired efficiencies and our ability to deliver products to our customers could be disrupted.
Although we utilize manufacturing facilities throughout the world, we have been consolidating, and may continue to
consolidate, our manufacturing operations to certain of our plants to achieve efficiencies and gross margin improvements.
Additionally, we typically consolidate the production of products from our acquisitions into our supply chain and manufacturing
processes, which are technically complex and require expertise to operate. If we are unable to establish processes to efficiently
and effectively produce high quality products in the consolidated locations, we may not achieve the anticipated synergies and
production may be disrupted, which could adversely affect our business and operating results.
Our operating results may suffer if our manufacturing capacity does not match the demand for our products.
Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market
conditions, when demand does not meet our expectations, our manufacturing capacity may exceed our production requirements.
If, during a general market upturn or an upturn in one of our segments, we cannot increase our manufacturing capacity to meet
20
product demand, we may not be able to fulfill orders in a timely manner which could lead to order cancellations, contract breaches
or indemnification obligations. This inability could materially and adversely limit our ability to improve our results. By contrast,
if during an economic downturn we had excess manufacturing capacity, then our fixed costs associated with excess manufacturing
capacity would adversely affect our income, margins, and operating results.
Dependence on contract manufacturing and outsourcing other portions of our supply chain, including logistics and third-
party package delivery services, may adversely affect our ability to bring products to market and damage our reputation.
Dependence on outsourced information technology and other administrative functions may impair our ability to operate
effectively.
As part of our efforts to streamline operations and to cut costs, we outsource aspects of our manufacturing processes and
other functions and continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform
their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation
could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements,
which may preclude us from fulfilling our customers' orders on a timely basis. The ability of these manufacturers to perform is
largely outside of our control. If one or more of the third-party package delivery providers experiences a significant disruption in
services or institutes a significant price increase, we may have to seek alternative providers, our costs could increase and the
delivery of our products could be prevented or delayed. Additionally, changing or replacing our contract manufacturers, logistics
providers or other outsourcers could cause disruptions or delays. In addition, we outsource significant portions of our information
technology ("IT") and other administrative functions. Since IT is critical to our operations, any failure to perform on the part of
our IT providers could impair our ability to operate effectively. In addition to the risks outlined above, problems with manufacturing
or IT outsourcing could result in lower revenue and unexecuted efficiencies, and impact our results of operations and our stock
price. Much of our outsourcing takes place in developing countries and, as a result, may be subject to geopolitical uncertainty.
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, and environmental contamination caused by ongoing
operations could subject us to substantial liabilities in the future.
Certain properties transferred to Keysight Technologies, Inc. (“Keysight”) as part of the separation are undergoing
remediation by HP Inc. and Hewlett-Packard Enterprise (formerly Hewlett-Packard Company) (together "HP") for subsurface
contaminations that were known at the time of our separation from HP. HP has agreed to retain the liability for this subsurface
contamination, perform the required remediation and indemnify Keysight with respect to claims arising out of that contamination.
HP will have access to those Keysight properties to perform remediation. While HP has agreed to minimize interference with on-
site operations at those properties, remediation activities and subsurface contamination may require Keysight to incur unreimbursed
costs and could harm on-site operations and the future use and value of the properties. We cannot be sure that Keysight will not
seek additional reimbursement from us for that interference or unreimbursed costs. We cannot be sure that HP will continue to
fulfill its indemnification or remediation obligations, in which case Keysight may seek indemnification from us. In addition, the
determination of the existence and cost of any additional contamination caused by us prior to the separation could involve costly
and time-consuming negotiations and litigation.
Other than those properties currently undergoing remediation by HP, we have agreed to indemnify HP, with respect to any
liability associated with contamination from past operations, and Keysight, with respect to any liability associated with
contamination prior to the separation, at, respectively, properties transferred from HP to us and properties transferred by us to
Keysight. While we are not aware of any material liabilities associated with any potential 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.
Our current and historical manufacturing processes involve, or have involved, the use of substances regulated under various
international, federal, state and local laws governing the environment. As a result, we may become subject to liabilities for
environmental contamination, and these liabilities may be substantial. While we have divested substantially all of our semiconductor
related businesses to Avago Technologies Ltd. and Advantest Corporation and regardless of indemnification arrangements with
those parties, we may still become subject to liabilities for historical environmental contamination related to those businesses.
Although our policy is to apply strict standards for environmental protection at our sites inside and outside the United States, even
if the sites outside the United States are not subject to regulations imposed by foreign governments, we may not be aware of all
conditions that could subject us to liability.
As part of our acquisition of Varian, Inc. (“Varian”) we assumed the liabilities of Varian, including Varian's costs and potential
liabilities for environmental matters. One such cost is our obligation, along with the obligation of Varian Semiconductor Equipment
Associates, Inc. ("VSEA") to each indemnify Varian Medical Systems, Inc. (“VMS”) for certain costs relating to (a) environmental
21
investigation, monitoring and/or remediation activities at certain facilities previously operated by Varian Associates, Inc. ("VAI")
and third-party claims made in connection with environmental conditions at those facilities, and (b) EPA or third-party claims
alleging that VAI or VMS is a potentially responsible party under the Comprehensive Environmental Response Compensation
and Liability Act of 1980, as amended, in connection with certain sites to which VAI allegedly shipped manufacturing waste for
recycling, treatment or disposal. Although any ultimate liability arising from environmental-related matters could result in
significant expenditures that, if aggregated and assumed to occur within a single fiscal year, could be material to our financial
statements, the likelihood of such occurrence is considered unlikely. Based on information currently available and our best
assessment of the ultimate amount and timing of environmental-related events, management believes that the costs of
environmental-related matters are unlikely to have a material adverse effect on our financial condition or results of operations.
Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and
increase the cost of certain metals used in manufacturing our products.
We are subject to the rules of the Securities and Exchange Commission (“SEC”) which require disclosures by public
companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products
manufactured or contracted to be manufactured. The rule, which requires an annual disclosure report to be filed with the SEC by
May 31st of each year, requires companies to perform due diligence, disclose and report whether or not such minerals originate
from the Democratic Republic of Congo or an adjoining country. There are costs associated with complying with these disclosure
requirements, including for diligence in regards to the sources of any conflict minerals used in our products, in addition to the cost
of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. In
addition, our ongoing implementation of these rules could adversely affect the sourcing, supply, and pricing of materials used in
our products. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used
in the manufacture of our products, including tin, tantalum, gold and tungsten. The number of suppliers who provide conflict-free
minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements,
such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as
costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our
supply chain is complex and we use contract manufacturers for some of our products, we may not be able to sufficiently verify
the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm
our reputation. We may also encounter challenges to satisfy those customers who require that all of the components of our products
be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
Third parties may claim that we are infringing their intellectual property and we could suffer significant litigation or
licensing expenses or be prevented from selling products or services.
From time to time, third parties may claim that one or more of our products or services infringe their intellectual property
rights. We analyze and take action in response to such claims on a case by case basis. Any dispute or litigation regarding patents
or other intellectual property could be costly and time-consuming due to the complexity of our technology and the uncertainty of
intellectual property litigation and could divert our management and key personnel from our business operations. A claim of
intellectual property infringement could force us to enter into a costly or restrictive license agreement, which might not be available
under acceptable terms or at all, could require us to redesign our products, which would be costly and time-consuming, and/or
could subject us to significant damages or to an injunction against the development and sale of certain of our products or services.
Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim
of intellectual property infringement. In certain of our businesses we rely on third party intellectual property licenses and we
cannot ensure that these licenses will continue to be available to us in the future on favorable terms or at all.
Third parties may infringe our intellectual property and we may suffer competitive injury or expend significant resources
enforcing our rights.
Our success depends in large part on our proprietary technology, including technology we obtained through acquisitions.
We rely on various intellectual property rights, including patents, copyrights, trademarks and trade secrets, as well as confidentiality
provisions and licensing arrangements, to establish our proprietary rights. If we do not enforce our intellectual property rights
successfully our competitive position may suffer which could harm our operating results.
Our pending patent applications, and our pending copyright and trademark registration applications, may not be allowed
or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents, copyrights,
trademarks and other intellectual property rights may not provide us a significant competitive advantage.
We may need to spend significant resources monitoring our intellectual property rights and we may or may not be able to
detect infringement by third parties. Our competitive position may be harmed if we cannot detect infringement and enforce our
22
intellectual property rights quickly or at all. In some circumstances, we may choose to not pursue enforcement because an infringer
has a dominant intellectual property position or for other business reasons. In addition, competitors might avoid infringement by
designing around our intellectual property rights or by developing non-infringing competing technologies. Intellectual property
rights and our ability to enforce them may be unavailable or limited in some countries which could make it easier for competitors
to capture market share and could result in lost revenues. Furthermore, some of our intellectual property is licensed to others which
allow them to compete with us using that intellectual property.
Changes in tax laws, unfavorable resolution of tax examinations, or exposure to additional income tax liabilities could
have a material adverse effect on our results of operations, financial condition and liquidity.
We are subject to income taxes in both the U.S. and various foreign jurisdictions. Governments in the jurisdictions in which
we operate implement changes to tax laws and regulations from time to time. Any changes in corporate income tax laws relating
to transfer pricing or repatriation of capital, any changes in the interpretation of existing tax laws and regulations, or any
implementation of tax laws relating to proposals to curb base erosion and profit shifting or proposals for fundamental U.S. and
foreign corporate tax reform, could lead to increases in overall tax liability, which could materially impact our effective tax rate
and have a significant adverse impact on our results of operations. We are also subject to ongoing tax examinations of our tax
returns by the U.S. Internal Revenue Service and other tax authorities in various jurisdictions. We regularly assess the likelihood
of adverse outcomes resulting from ongoing tax examinations to determine the adequacy of our provision for income taxes. These
assessments can require a high degree of judgment and estimation. Intercompany transactions associated with the sale of inventory,
services, intellectual property and cost share arrangements are complex and affect our tax liabilities. The calculation of our tax
liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in multiple jurisdictions. There
can be no assurance that the outcomes from ongoing tax examinations will not have an adverse effect on our operating results and
financial condition. A difference in the ultimate resolution of tax uncertainties from what is currently estimated could have an
adverse effect on our operating results and financial condition.
If tax incentives change or cease to be in effect, our income taxes could increase significantly.
Agilent benefits from tax incentives extended to its foreign subsidiaries to encourage investment or employment. Several
jurisdictions have granted Agilent tax incentives which require renewal at various times in the future. The incentives are conditioned
on achieving various thresholds of investments and employment, or specific types of income. Agilent's taxes could increase if the
incentives are not renewed upon expiration. If Agilent cannot or does not wish to satisfy all or parts of the tax incentive conditions,
we may lose the related tax incentive and could be required to refund tax incentives previously realized. As a result, our effective
tax rate could be higher than it would have been had we maintained the benefits of the tax incentives.
We have substantial cash requirements in the United States while most of our cash is generated outside of the United
States. The failure to maintain a level of cash sufficient to address our cash requirements in the United States could adversely
affect our financial condition and results of operations.
Although the cash generated in the United States from our operations should cover our normal operating requirements and
debt service requirements, a substantial amount of additional cash is required for special purposes such as the maturity of our debt
obligations, our stock repurchase program, our declared dividends and acquisitions of third parties. Our business operating results,
financial condition, and strategic initiatives could be adversely impacted if we were unable to address our U.S. cash requirements
through the efficient and timely repatriations of overseas cash or other sources of cash obtained at an acceptable cost.
We have outstanding debt and may incur other debt in the future, which could adversely affect our financial condition,
liquidity and results of operations.
We currently have outstanding an aggregate principal amount of $1.9 billion in senior unsecured notes. We also are party
to a five-year unsecured revolving credit facility which expires in September 2019. On June 9, 2015, we increased the commitments
under the existing credit facility by $300 million so that the aggregate commitments under the facility now total $700 million and
retained a provision that allows us to further increase commitments to the credit facility by $300 million in the aggregate, subject
to certain conditions. As of October 31, 2016, we had no borrowings outstanding under the facility. We may borrow additional
amounts in the future and use the proceeds from any future borrowing for general corporate purposes, other future acquisitions,
expansion of our business or repurchases of our outstanding shares of common stock.
Our incurrence of this debt, and increases in our aggregate levels of debt, may adversely affect our operating results and
financial condition by, among other things:
23
•
•
•
increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and
industry conditions;
requiring the dedication of an increased portion of our expected cash flows from operations to service our
indebtedness, thereby reducing the amount of expected cash flows available for other purposes, including capital
expenditures, acquisitions, stock repurchases and dividends; and
limiting our flexibility in planning for, or reacting to, changes in our business and our industry.
Our current revolving credit facility imposes restrictions on us, including restrictions on our ability to create liens on our
assets and the ability of our subsidiaries to incur indebtedness, and requires us to maintain compliance with specified financial
ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, the indenture governing
our senior notes contains covenants that may adversely affect our ability to incur certain liens or engage in certain types of sale
and leaseback transactions. If we breach any of the covenants and do not obtain a waiver from the lenders, then, subject to applicable
cure periods, our outstanding indebtedness could be declared immediately due and payable.
If we suffer a loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously
harmed.
Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural
or man-made disasters. In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake due to
their locations. Our production facilities, headquarters and Agilent Technologies Laboratories in California, and our production
facilities in Japan, are all located in areas with above-average seismic activity. 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. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our
business and operating results could be adversely affected. In addition, since we have consolidated our manufacturing facilities,
we are more likely to experience an interruption to our operations in the event of a catastrophe in any one location. Although we
carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions
or potential losses arising from earthquakes or terrorism. Also, our third party insurance coverage will vary from time to time in
both type and amount depending on availability, cost and our decisions with respect to risk retention. Economic conditions and
uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain third party insurance.
If our third party insurance coverage is adversely affected, or to the extent we have elected to self-insure, we may be at a greater
risk that our operations will be harmed by a catastrophic loss.
If we experience a significant disruption in, or breach in security of, our information technology systems, or if we fail to
implement new systems and software successfully, our business could be adversely affected.
We rely on several centralized information technology systems throughout our company to provide products and services,
keep financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. Our
information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures,
computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events.
Our information technology systems also may experience interruptions, delays or cessations of service or produce errors in
connection with system integration, software upgrades or system migration work that takes place from time to time. If we were
to experience a prolonged system disruption in the information technology systems that involve our interactions with customers
or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our
business. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized
disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result
in our suffering significant financial or reputational damage.
Adverse conditions in the global banking industry and credit markets may adversely impact the value of our cash
investments or impair our liquidity.
As of October 31, 2016, we had cash and cash equivalents of approximately $2,289 million invested or held in a mix of
money market funds, time deposit accounts and bank demand deposit accounts. Disruptions in the financial markets may, in some
cases, result in an inability to access assets such as money market funds that traditionally have been viewed as highly liquid. Any
failure of our counterparty financial institutions or funds in which we have invested may adversely impact our cash and cash
equivalent positions and, in turn, our results and financial condition.
24
We could incur significant liability if the distribution of Keysight common stock to our shareholders is determined to be
a taxable transaction.
We have received an opinion from outside tax counsel to the effect that the separation and distribution of Keysight qualifies
as a transaction that is described in Sections 355(a) and 368(a)(1)(D) of the Internal Revenue Code. The opinion relies on certain
facts, assumptions, representations and undertakings from Keysight and us regarding the past and future conduct of the companies’
respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not
satisfied, our shareholders and we may not be able to rely on the opinion of tax counsel and could be subject to significant tax
liabilities. Notwithstanding the opinion of tax counsel, we have received, the IRS could determine on audit that the separation
is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated
or if it disagrees with the conclusions in the opinion. If the separation is determined to be taxable for U.S. federal income tax
purposes, our shareholders that are subject to U.S. federal income tax and we could incur significant U.S. federal income tax
liabilities.
We may be exposed to claims and liabilities as a result of the separation with Keysight.
We entered into a separation and distribution agreement and various other agreements with Keysight to govern the separation
and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations
and could lead to disputes between us. The indemnity rights we have against Keysight under the agreements may not be sufficient
to protect us. In addition, our indemnity obligations to Keysight may be significant and these risks could negatively affect our
financial condition.
We cannot assure you that we will continue to pay dividends on our common stock.
Since the first quarter of fiscal year 2012, we have paid a quarterly dividend on our common stock. The timing, declaration,
amount and payment of any future dividends fall within the discretion of our Board of Directors and will depend on many factors,
including our available cash, estimated cash needs, earnings, financial condition, operating results, capital requirements, as well
as limitations in our contractual agreements, applicable law, regulatory constraints, industry practice and other business
considerations that our Board of Directors considers relevant. A change in our dividend program could have an adverse effect on
the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of October 31, 2016 we owned or leased a total of approximately 5.6 million square feet of space worldwide. Of that,
we owned approximately 4.1 million square feet and leased the remaining 1.5 million square feet. Our sales and support facilities
occupied a total of approximately 0.7 million square feet. Our manufacturing plants, R&D facilities and warehouse and
administrative facilities occupied approximately 4.9 million square feet. All of our businesses share sales offices throughout the
world.
Information about each of our businesses appears below:
Life Sciences & Applied Markets Group. Our life sciences and applied markets business has manufacturing and R&D
facilities in Australia, China, Germany, Italy, Malaysia, Singapore, United Kingdom and the United States.
Diagnostics and Genomics Group. Our diagnostics and genomics business has manufacturing and R&D facilities in
Denmark, Germany, Malaysia and the U.S.
Agilent CrossLab Group. Our Agilent CrossLab business has manufacturing and R&D facilities in Australia, China,
Germany, Japan, Netherlands, United Kingdom and the United States.
Item 3. Legal Proceedings
We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, intellectual property,
commercial and employment matters, which arise in the ordinary course of business. There are no matters pending that we currently
25
believe are probable or reasonably possible of having a material impact to our business, consolidated financial condition, results
of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange with the ticker symbol “A”. The following table sets forth
the high and low sale prices and the dividend declarations per quarter for the 2015 and 2016 fiscal years as reported in the
consolidated transaction reporting system for the New York Stock Exchange:
Fiscal 2015
First Quarter (ended January 31, 2015)
Second Quarter (ended April 30, 2015)
Third Quarter (ended July 31, 2015)
Fourth Quarter (ended October 31, 2015)
Fiscal 2016
First Quarter (ended January 31, 2016)
Second Quarter (ended April 30, 2016)
Third Quarter (ended July 31, 2016)
Fourth Quarter (ended October 31, 2016)
High
Low
Dividends
$
$
$
$
$
$
$
$
42.99
43.59
42.93
41.35
High
42.48
42.00
48.18
48.63
$
$
$
$
$
$
$
$
37.68
37.71
38.48
33.12
Low
36.01
34.15
40.39
43.11
$
$
$
$
$
$
$
$
0.10
0.10
0.10
0.10
Dividends
0.115
0.115
0.115
0.115
As of December 1, 2016, there were 24,949 common stockholders of record.
During fiscal 2016, we issued four quarterly dividends of $0.115 per share. All decisions regarding the declaration and
payment of dividends are at the discretion of our Board of Directors and will be evaluated regularly in light of our financial
condition, earnings, growth prospects, funding requirements, applicable law, and any other factors that our Board deems relevant.
The information required by this item with respect to equity compensation plans is included under the caption Equity Compensation
Plans in our proxy statement for the annual meeting of stockholders to be held March 15, 2017, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
26
STOCK PRICE PERFORMANCE GRAPH
The graph below shows the cumulative total stockholder return on our common stock with the cumulative total
return of the S&P 500 Index; our Current Peer Group Index (a) and our Old Peer Group Index (b) assuming an initial
investment of $100 on October 31, 2011 and the reinvestment of all dividends. We have selected Danaher Corporation
to replace the entire S&P Industrials Sector as we believe Danaher more closely matches our company characteristics
than the majority of the companies included in the S&P Industrials Sector, which was previously included in the Old
Peer Group Index. Agilent’s stock price performance shown in the following graph is not indicative of future stock
price performance. The data for this performance graph was compiled for us by Standard and Poor’s.
Company Name / Index
Agilent Technologies
S&P 500
New Peer Group
Old Peer Group
Base
Period
10/31/11
100
100
100
100
INDEXED RETURNS
Years Ending
10/31/12
97.81
115.21
120.61
118.15
10/31/13
139.39
146.52
160.47
159.32
10/31/14
153.23
171.82
200.11
193.66
10/31/15
145.42
180.75
210.61
201.90
10/31/16
169.58
188.90
205.57
203.76
(a) Our New Peer Group Index includes all companies in the S&P 500 Healthcare Sector, Materials Sector and Danaher. In July, Danaher
was moved from the S&P Industrial Sector to the S&P Healthcare Sector.
(b) Our Old Peer Group Index includes all companies in the S&P 500 Healthcare Sector, Materials Sector and Industrials Sector.
(c) On November 1, 2014, we completed the spin-off of our electronic measurement business into an independent publicly traded company
called Keysight Technologies, Inc. The cumulative returns of our common stock have been adjusted to reflect the spin-off.
27
ISSUER PURCHASES OF EQUITY SECURITIES
The table below summarizes information about the Company’s purchases, based on trade date; of its equity securities
registered pursuant to Section 12 of the Exchange Act during the quarterly period ended October 31, 2016. The total number of
shares of common stock purchased by the Company during the fiscal year ended October 31, 2016 is 10,829,981 shares.
Period
Aug. 1, 2016 through
Aug. 31, 2016
Sep. 1, 2016 through
Sep. 30, 2016
Oct. 1, 2016 through
Oct. 31, 2016
Total
Total Number of
Shares of Common
Stock Purchased(1)
Weighted Average
Price Paid per Share of
Common Stock(2)
Total
Number of
Shares of Common
Stock Purchased as
Part of Publicly
Announced Plans or
Programs(1)
Maximum
Approximate Dollar
Value of Shares of
Common Stock that
May Yet Be
Purchased Under the
Plans or Programs
(in millions)(1)
—
447,978
710,874
1,158,852
$
$
—
45.25
44.83
45.00
— $
447,978
710,874
1,158,852
$
$
850
830
798
(1)
On May 28, 2015, we announced that our board of directors had approved a new share repurchase program (the "2015
repurchase program"). The 2015 repurchase program authorizes the purchase of up to $1.14 billion of our common stock
through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a
specific number of shares and may be suspended or discontinued at any time. All such shares and related costs, except
for 150,000 shares purchased in October 2016 that had not settled as of October 31, 2016, are held as treasury stock and
accounted for using the cost method.
(2)
The weighted average price paid per share of common stock does not include the cost of commissions.
28
Item 6. Selected Financial Data
SELECTED FINANCIAL DATA
(Unaudited)
Consolidated Statement of Operations Data:
Net revenue
Income from continuing operations before taxes
Income from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income
Net income per share — basic:
Income from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income per share - basic
Net income per share — diluted:
Income from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income per share - diluted
Weighted average shares used in computing basic net
income per share
Weighted average shares used in computing diluted net
income per share
Years Ended October 31,
2016
2015
2014
2013
2012
(in millions, except per share data)
$
$
$
$
$
$
$
$
$
4,202
544
462
$
$
$
— $
$
$
$
$
$
462
1.42
—
1.42
1.40
—
1.40
326
329
4,038
480
$
$
438
$
(37) $
$
401
$
$
$
$
1.32
(0.12)
1.20
1.31
(0.11)
1.20
333
335
$
$
$
$
$
$
$
$
$
4,048
229
232
317
549
0.70
0.95
1.65
0.69
0.93
1.62
333
338
$
$
$
$
$
$
$
$
$
3,894
293
225
509
734
0.66
1.49
2.15
0.65
1.48
2.13
341
345
(1)
3,543
237
353
775
1,128
1.01
2.23
3.24
1.00
2.20
3.20
348
353
Cash dividends declared per common share
$
0.460
$
0.400
0.528
$
0.460
$
0.300
October 31,
2016
2015
2014
2013
2012
(in millions)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments
Working capital
Total assets
Long-term debt
Stockholders' equity
$
$
$
$
$
2,289
2,690
7,802
1,912
4,243
$
$
$
$
$
2,003
2,710
7,479
1,655
4,167
$
$
$
$
$
(2)
2,218
3,817
10,815
1,663
5,301
$
$
$
$
$
(2)
2,675
3,392
10,608
2,699
5,297
(1)(2)
2,351
2,775
10,439
2,112
5,183
$
$
$
$
$
(1) Consolidated financial data includes Dako, acquired on June 21, 2012 and a non-recurring tax benefit relating to the
reversal of U.S. valuation allowance of $280 million.
(2) The above consolidated balance sheet includes Keysight which is presented as a discontinued operation until October 31,
2014.
29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation,
statements regarding trends, seasonality and growth in, and drivers of, the markets we sell into, our strategic direction, our future
effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, lease and site service income from Keysight,
the impact of foreign currency movements on our performance, our hedging programs, indemnification, new product and service
introductions, the ability of our products to meet market needs, adoption of our products, changes to our manufacturing processes,
the use of contract manufacturers and out sourcing and third-party package delivery services, source and supply of materials used
in our products, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity
position, our ability to generate cash from operations, growth in our businesses, our investments, including in research and
development, the potential impact of adopting new accounting pronouncements, our financial results, our operating margin, our
sales, our purchase commitments, our capital expenditures, our contributions to our pension plans and other defined benefit plans,
our strategic initiatives, our cost-control activities and other cost saving initiatives, uncertainties relating to Food and Drug
Administration ("FDA") and other regulatory approvals, the integration of our acquisitions and other transactions, impairment of
goodwill and other intangible assets, write-down of investment values or loans and convertible notes, our stock repurchase program,
our declared dividends, and the existence of economic instability, that involve risks and uncertainties. Our actual results could
differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed
in Part I Item 1A and elsewhere in this Form 10-K.
Overview and Executive Summary
Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader
in life sciences, diagnostics and applied chemical markets, providing application focused solutions that includes instruments,
software, services and consumables for the entire laboratory workflow.
In November 2015, we completed the acquisition of Seahorse Bioscience ("Seahorse"), a leader in providing instruments
and assay kits for measuring cell metabolism and bioenergetics for $242 million in cash. Seahorse's technology enables researchers
to better understand cell health, function and signaling, and how the cell may be impacted by the introduction of a specific drug,
by providing real-time kinetics to unlock essential cellular bioenergetics data. The financial results of Seahorse have been included
within Agilent's consolidated financial statements from November 1, 2015.
On March 2, 2016, Agilent made a preferred stock investment in Lasergen for $80 million. Agilent’s initial ownership
stake was 48 percent and we have also joined the board of Lasergen and signed a collaboration agreement. We have the option to
acquire all of the remaining shares of Lasergen until March 2, 2018, for additional consideration of $105 million. Lasergen is a
Variable Interest Entity (“VIE”), however, we do not consolidate the entity in our financial statements because we do not have the
power to direct the activities of the VIE that most significantly impact the VIE's economic performance nor are we the primary
beneficiary. Because of the nature of the preferred stock of Lasergen that we own, we account for this investment under the cost
method.
On August 1, 2016 we completed the acquisition of substantially all of the assets of iLab Solutions LLC ("iLab"), a cloud-
based solutions provider for core laboratory management. iLab's offerings enables customers to easily and accurately book time
in shared facilities, to bill and invoice for projects, to manage studies, to generate reports and business intelligence, and to schedule
instrument reservations across multiple projects. The purchase price was $26 million in cash. The financial results of iLab have
been included within Agilent's consolidated financial statements from August 1, 2016.
Agilent's net revenue of $4,202 million in 2016 increased 4 percent when compared to 2015. Foreign currency movements
for 2016 had an unfavorable impact of approximately 2 percentage points compared to 2015. Agilent's net revenue of $4,038
million was flat in 2015 when compared to 2014.
The life sciences and applied markets business brings together Agilent's analytical laboratory instrumentation and
informatics. Revenue increased 1 percent in 2016 when compared to 2015. Foreign currency movements had an unfavorable
impact of approximately 2 percentage points in 2016 when compared to 2015. For the year ended October 31, 2016 and excluding
the impact of foreign currency movements, acquisitions and the NMR business our performance within the life sciences market
continued to show strong revenue growth from the pharmaceutical and biotechnology markets. Within the applied markets, and
excluding the impact of foreign currency movements and the NMR business, there was strong growth in both the environmental
and food markets, but revenue from sales to other applied markets was weak with a decline in revenue from sales to the chemical
and energy markets. Revenue decreased 2 percent in 2015 when compared to 2014. For the year ended October 31, 2015 and
30
excluding the impact of currency movements and the NMR business, our performance within the life sciences business showed
consistent revenue growth from sales to the pharmaceutical and biotechnology market partially offset by a decrease in the revenue
generated from sales to the life sciences research market. Within applied markets and excluding the impact of currency movements
and the NMR business, there was weakness in the chemical and energy markets in the year ended October 31, 2015 when compared
to the prior year.
The diagnostics and genomics business includes genomics, nucleic acid contract manufacturing and the pathology,
companion diagnostics and reagent partnership businesses. Revenue increased 7 percent in 2016 when compared to 2015. Foreign
currency movements had an unfavorable impact of approximately 1 percentage points in 2016 when compared to 2015. Excluding
the impact of foreign currency movements and acquisitions, growth in revenue from sales to the diagnostics and clinical markets
continued to be strong, led by our companion diagnostics and genomics businesses in the year ended October 31, 2016 when
compared to the prior year. Revenue was flat in 2015 when compared to 2014. Excluding foreign currency movements, our growth
in revenue from sales to the diagnostics and clinical markets was strong in the year ended October 31, 2015 when compared to
the prior year.
The Agilent CrossLab business combines our analytical laboratory services and consumables business. Revenue increased
7 percent in 2016 when compared to 2015. Foreign currency movements had an unfavorable impact of approximately 2 percentage
points in 2016 when compared to 2015. Excluding the impact of foreign currency movements and acquisitions, there was growth
in sales to all key markets. The pharmaceutical and biotechnology markets led all the markets in revenue and revenue growth
along with very strong revenue growth from the food markets. In addition, we saw moderate growth from the environmental
market and modest revenue growth from the chemical and energy markets. Revenue increased 2 percent in 2015 when compared
to 2014. Excluding the impact of foreign currency movements there was growth in sales to all key end markets, in particular, the
pharmaceutical and biotechnology market in the year ended October 31, 2015 when compared to the prior year. Within the applied
markets revenue in chemical and energy end markets were slower but still reported growth when adjusted for currency movements.
Net income from continuing operations was $462 million in 2016 compared to net income from continuing operations of
$438 million and $232 million in 2015 and 2014, respectively. As of October 31, 2016 and 2015 we had cash and cash equivalents
balances of $2,289 million and $2,003 million, respectively.
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The existing
program is designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive
programs to target maintaining a weighted average share count of approximately 335 million diluted shares. For the years ended
October 31, 2016, 2015 and 2014 we repurchased 2.4 million shares for $98 million, 6 million shares for $267 million and 4
million shares for $200 million, respectively. All such shares and related costs are held as treasury stock and accounted for using
the cost method.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program (the "2015
repurchase program"). The 2015 share repurchase program authorizes the purchase of up to $1.14 billion of our common stock
through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a specific
number of shares and may be suspended or discontinued at any time. During the year ended October 31, 2016, upon the completion
of our previous repurchase program, we repurchased approximately 8.3 million shares for $336 million under this authorization.
All such shares and related costs are held as treasury stock and accounted for using the cost method.
For the years ended October 31, 2016, 2015 and 2014 cash dividends of $150 million, $133 million and $176 million were
paid on the company's outstanding common stock, respectively. On November 16, 2016, we declared a quarterly dividend of
$0.132 per share of common stock, or approximately $43 million which will be paid on January 25, 2017 to shareholders of record
as of the close of business on January 3, 2017. The timing and amounts of any future dividends are subject to determination and
approval by our board of directors.
Looking forward, we expect to continue to focus on the growth of the operating margin in our businesses by simplifying
our operations, differentiating product solutions and improving our customer's experience. We anticipate returning a significant
proportion of our cash flow to shareholders through our dividend and share repurchase programs. End market growth outlook in
today's uncertain political and economic environment is unpredictable and challenging. However, we expect continued strength
in the pharmaceutical markets and solid growth in the food and environmental markets but we remain uncertain about the growth
in the chemical and energy markets. The unfavorable effects of changes in foreign currency exchange rates has decreased revenue
by approximately 2 percentage points for the year ended October 31, 2016. Costs and expenses, incurred in local currency, were
subject to the favorable effects due to changes in foreign currency exchange rates reducing our overall net exposure. The impact
of foreign currency exchange rates movements can be positive or negative in any period and is calculated by applying the prior
period foreign currency exchange rates to the current year period. We anticipate that changes in foreign currency exchange rates
31
will continue to have an unfavorable impact on our performance for the near future.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires
management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and
accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be
reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact
the company in the future, actual results may be different from the estimates. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. Our critical accounting policies are those that affect our financial
statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue
recognition, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, valuation of
goodwill and purchased intangible assets and accounting for income taxes.
Revenue recognition. We enter into agreements to sell products (hardware or software), services, and other arrangements
(multiple element arrangements) that include combinations of products and services. Revenue from product sales, net of trade
discounts and allowances, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the
price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. Revenue is reduced for estimated product returns, when appropriate. For sales that include
customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. For products that include
installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery,
and recognition of installation revenue occurs when the installation is complete. Otherwise, neither the product nor the installation
revenue is recognized until the installation is complete. Revenue from services is deferred and recognized over the contractual
period or as services are rendered and accepted by the customer. We allocate revenue to each element in our multiple-element
arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price
hierarchy. The selling price for a deliverable is based on our vendor specific objective evidence (VSOE) if available, third-party
evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue from
the sale of software products that are not required to deliver the tangible product's essential functionality are accounted for under
software revenue recognition rules. Revenue allocated to each element is then recognized when the basic revenue recognition
criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an
arrangement includes multiple elements.
We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for
products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold
separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in
standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the
solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing
necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service
were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple
factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives
and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify
or develop new pricing practices and strategies in the future. As these pricing strategies evolve changes may occur in ESP. The
aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements, which
may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for
the arrangement.
Inventory valuation. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for
estimated excess and obsolete inventory based upon estimates about future demand and actual usage. Such estimates are difficult
to make under most economic conditions. The excess balance determined by this analysis becomes the basis for our excess inventory
charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with
manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than those projected by
management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory
previously written down may be sold to customers, resulting in lower cost of sales and higher income from operations than expected
in that period. In the fourth quarter of 2014, Agilent announced it is exiting the NMR business, and as a result, recorded an excess
inventory charge of $30 million. For the year ended October 31, 2015 and 2016 additional excess inventory charges were recorded
in respect of the exiting of the NMR business of $4 million and $2 million, respectively.
32
Share-based compensation. We account for share-based awards in accordance with the authoritative guidance. Under the
authoritative guidance, share-based compensation expense is primarily based on estimated grant date fair value and is recognized
on a straight line basis. The fair value of share-based awards for employee stock option awards was estimated using the Black-
Scholes option pricing model. No stock options were granted in 2016. Shares granted under the Long-Term Performance Program
based on Total Shareholders Return ("LTPP-TSR") were valued using the Monte Carlo simulation model. The estimated fair value
of restricted stock unit awards and LTPP based on Operating Margin (“LTPP-OM”) is determined based on the market price of
Agilent's common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (OM) reflects
the cost of awards that are probable to vest at the end of the performance period. The Employee Stock Purchase Plan ("ESPP")
allows eligible employees to purchase shares of our common stock at 85 percent of the fair market value at the purchase date. All
awards granted in 2016 to our senior management employees have a one year post-vest holding restriction and the value of these
awards are adjusted for this.
Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex
assumptions, including the option's expected life and the price volatility of the underlying stock. No options were granted in 2016.
Due to the separation of Keysight on November 1, 2014, expected volatility for grants of options in 2015 was based on a 5.5 year
average historical stock price volatility of a group of our peer companies. We believe our historical volatility prior to the separation
of Keysight is no longer relevant. In developing our estimated life of our employee stock options of 5.8 years for 2014, we
considered the historical option exercise behavior of our executive employees who were granted the majority of the options in the
annual grants, which we believed was representative of future behavior. See Note 4, "Share-based Compensation," to the
consolidated financial statements for more information. For the grants awarded under the 2009 stock plan after November 1, 2010,
we increased the period available to retirement eligible employees to exercise their options from three years at retirement date to
the full contractual term of ten years.
The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates
we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.
In the third quarter of fiscal year 2016, the company elected to early adopt new guidance that changes the accounting for certain
aspects of share-based payments to employees. For additional details related to the new guidance see Note 2, "New Accounting
Pronouncements."
Retirement and post-retirement benefit plan assumptions. Retirement and post-retirement benefit plan costs are a
significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore
are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees'
average expected future service to Agilent based on the terms of the plans and investment and funding decisions. To estimate the
impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions
using actuarial concepts within the framework of accounting principles generally accepted in the U.S. Two critical assumptions
are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary
increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates,
and portfolio composition. We evaluate these assumptions at least annually.
The discount rate is used to determine the present value of future benefit payments at the measurement date - October 31
for both U.S. and non-U.S. plans. For 2015 and 2016, the U.S. discount rates were based on the results of matching expected plan
benefit payments with cash flows from a hypothetically constructed bond portfolio. In 2016, discount rates for the U.S. Plans
decreased 75 basis points from the previous year. For 2016 and 2015, the discount rate for non-U.S. plans was generally based on
published rates for high quality corporate bonds and in 2016, decreased 60 basis points to 110 basis points from the previous year.
If we changed our discount rate by 1 percent, the impact would be less than $1 million on U.S. pension expense and $16 million
on non-U.S. pension expense. Lower discount rates increase present values of the pension benefit obligation and subsequent year
pension expense; higher discount rates decrease present values of the pension benefit obligation and subsequent year pension
expense.
The company uses alternate methods of amortization as allowed by the authoritative guidance which amortizes the actuarial
gains and losses on a consistent basis for the years presented. For U.S. Plans, gains and losses are amortized over the average
future lifetime of participants using the corridor method. For most Non-U.S. Plans and U.S. Post-Retirement Benefit Plans, gains
and losses are amortized using a separate layer for each year's gains and losses. The expected long-term return on plan assets is
estimated using current and expected asset allocations as well as historical and expected returns. Plan assets are valued at fair
value. If we changed our estimated return on assets by 1 percent, the impact would be $4 million on U.S. pension expense and
$7 million on non-U.S. pension expense. For 2016, actual return on assets was below expectations which, along with contributions
during the year, increased next year’s pension cost as well as resulting in a degradation of the funded status at year end. The net
33
periodic pension and post-retirement benefit costs recorded in continuing operations were $3 million in 2016, $26 million in 2015
and $15 million in 2014. The year ended October 31, 2016, included a $16 million gain on curtailment and settlement.
Goodwill and Purchased Intangible Assets. Under the authoritative guidance we have the option to perform a qualitative
assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to
first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of
its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less
than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less
than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or
industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key
personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on
either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting
unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test
on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary)
measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting
unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment.
We aggregate components of an operating segment that have similar economic characteristics into our reporting units.
In fiscal year 2016, we assessed goodwill impairment for our three reporting units which consisted of three segments: life
sciences and applied markets, diagnostics and genomics and Agilent CrossLab. We performed a qualitative test for goodwill
impairment of the three reporting units, as of September 30, 2016. Based on the results of our qualitative testing, we believe that
it is more-likely-than-not that the fair value of these reporting units are greater than their respective carrying values. Each quarter
we review the events and circumstances to determine if goodwill impairment is indicated. There was no impairment of goodwill
during the years ended October 31, 2016, 2015 and 2014.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and
customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the
economic benefits are consumed or used up or a straight-line method ranging from 6 months to 15 years. In-process research and
development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment
thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized
over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible
asset to Agilent's consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative
approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill
and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs
used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e.
greater than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative
assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed
a qualitative test for impairment of indefinite-lived intangible assets as of September 30, 2016. Based on the results of our qualitative
testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their
respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived
intangible asset is indicated. In the years ended October 31, 2016, 2015 and 2014, we recorded an impairment of $4 million, $3
million and $4 million, respectively, due to the cancellation of certain IPR&D projects. In addition, in the year ended October 31,
2014, we also recorded $12 million of impairment of other intangibles due to the exit of our NMR business.
Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the
calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense
for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes
to these estimates may result in an increase or decrease to our tax provision in a subsequent period.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in
part. When it is more-likely-than-not that all or some portion of specific deferred tax assets such as net operating losses or foreign
tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets
34
that cannot be realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when
assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating
results, the existence of losses in recent years and our forecast of future taxable income. In the fourth quarter of fiscal 2012 we
released the valuation allowance for the majority of our U.S. deferred tax assets. At October 31, 2016, we continue to recognize
a valuation allowance for certain U.S. and U.S state and foreign deferred tax assets. We intend to maintain a valuation allowance
in these jurisdictions until sufficient positive evidence exists to support its reversal.
We have not provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of
our foreign subsidiaries because we intend to reinvest such earnings indefinitely. Should we decide to remit this income to the
U.S. in a future period, our provision for income taxes will increase materially in that period.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations
in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a
recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue
to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income
taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate
of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may
differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income
tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and
the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being
recognized in the period when we determine the liabilities are no longer necessary. We include interest and penalties related to
unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.
As a part of our accounting for business combinations, intangible assets are recognized at fair values and goodwill is
measured as the excess of consideration transferred over the net estimated fair values of assets acquired. Impairment charges
associated with goodwill are generally not tax deductible and will result in an increased effective income tax rate in the period
that any impairment is recorded. Amortization expenses associated with acquired intangible assets are generally not tax deductible
and therefore deferred tax liabilities have been recorded for non-deductible amortization expenses as a part of the accounting for
business combinations.
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the consolidated financial statements for a description of new accounting
pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange
rates as a result of our global operating and financing activities. The unfavorable effects of changes in foreign currency exchange
rates has decreased revenue by approximately 2 percentage points for the year ended October 31, 2016 and 6 percentage points
for the year ended October 31, 2015. Costs and expenses, incurred in local currency, were subject to the favorable effects due to
changes in foreign currency exchange rates for the years ended October 31, 2016 and 2015, reducing our overall net exposure.
The impact of foreign currency exchange rates movements can be positive or negative in any period and is calculated by applying
the prior period foreign currency exchange rates to the current year period. We hedge revenues, expenses and balance sheet
exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do
experience some fluctuations within individual lines of the consolidated statement of operations and balance sheet because our
hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and
liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling twelve-
month period). Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay
for all, or portions, of an acquisition price in foreign currencies, Agilent may enter into foreign exchange contracts to reduce the
risk that currency movements will impact the U.S. dollar cost of the transaction.
35
Results from Operations(cid:3)
Net Revenue
Net revenue:
Products
Services and other
Total net revenue
% of total net revenue:
Products
Services and other
Total
Years Ended October 31,
2016
2015
2014
2016 over 2015
% Change
2015 over 2014%
Change
(in millions)
$
$
$
3,227
975
4,202
$
$
$
3,146
892
4,038
$
$
$
3,185
863
4,048
3%
9%
4%
(1)%
4%
—
Years Ended October 31,
2016
2015
2014
2016 over 2015
Ppts Change
2015 over 2014
Ppts Change
77%
23%
100%
78%
22%
100%
79%
21%
100%
(1) ppt
1 ppt
(1) ppt
1 ppt
Agilent's net revenue of $4,202 million in October 31, 2016 increased 4 percent when compared to 2015. Foreign currency
movements for 2016 had an unfavorable impact of approximately 2 percentage points compared to 2015. Agilent's net revenue of
$4,038 million was flat in 2015 when compared to 2014.
Services and other revenue includes revenue generated from servicing our installed base of products, warranty extensions
and consulting including companion diagnostics. Services and other revenue increased 9 percent in 2016 as compared to 2015.
The service and other revenue growth is impacted by a portion of the revenue being driven by the current and previously installed
product base. Service and other revenue increased due to increased service contract repairs, compliance services and preventative
maintenance, and strong companion diagnostics revenue. Services and other revenue increased 4 percent in 2015 as compared to
2014.
Net Revenue By Segment
Net revenue by segment:
Life sciences and applied markets
Diagnostics and genomics
Agilent CrossLab
Total net revenue
Years Ended October 31,
2016
2015
2014
2016 over 2015
% Change
2015 over 2014%
Change
(in millions)
$
$
$
$
2,073
709
1,420
4,202
$
$
$
$
2,046
662
1,330
4,038
$
$
$
$
2,078
663
1,307
4,048
1%
7%
7%
4%
(2)%
—
2%
—
The life sciences and applied markets business brings together Agilent's analytical laboratory instrumentation and
informatics. Revenue increased 1 percent in 2016 when compared to 2015. Foreign currency movements had an unfavorable
impact of approximately 2 percentage points in 2016 when compared to 2015. For the year ended October 31, 2016 and excluding
the impact of foreign currency movements, acquisitions and the NMR business our performance within the life sciences market
continued to show strong revenue growth from the pharmaceutical and biotechnology markets. Within the applied markets, and
excluding the impact of foreign currency movements and the NMR business, there was strong growth in both the environmental
and food markets, but revenue from sales to other applied markets was weak with a decline in revenue from sales to the chemical
and energy markets. Revenue decreased 2 percent in 2015 when compared to 2014. For the year ended October 31, 2015 and
excluding the impact of currency movements and the NMR business, our performance within the life sciences business showed
consistent revenue growth from sales to the pharmaceutical and biotechnology market partially offset by a decrease in the revenue
generated from sales to the life sciences research market. Within applied markets and excluding the impact of currency movements
and the NMR business, there was weakness in the chemical and energy markets in the year ended October 31, 2015 when compared
to the prior year.
36
The diagnostics and genomics business includes genomics, nucleic acid contract manufacturing and the pathology,
companion diagnostics and reagent partnership businesses. Revenue increased 7 percent in 2016 when compared to 2015. Foreign
currency movements had an unfavorable impact of approximately 1 percentage points in 2016 when compared to 2015. Excluding
the impact of foreign currency movements and acquisitions, growth in revenue from sales to the diagnostics and clinical research
markets continued to be strong, led by our companion diagnostics and genomics businesses in the year ended October 31, 2016
when compared to the prior year. Revenue was flat in 2015 when compared to 2014. Excluding foreign currency movements, our
growth in revenue from sales to the diagnostics and clinical markets was strong in the year ended October 31, 2015 when compared
to the prior year.
The Agilent CrossLab business combines our analytical laboratory services and consumables business. Revenue increased
7 percent in 2016 when compared to 2015. Foreign currency movements had an unfavorable impact of approximately 2 percentage
points in 2016 when compared to 2015. Excluding the impact of foreign currency movements and acquisitions, there was growth
in sales to all key markets. The phamaceutical and biotechnology markets led all the markets in revenue and revenue growth along
with very strong revenue growth from the food markets. In addition, we saw moderate growth from the environmental market and
modest revenue growth from the chemical and energy markets. Revenue increased 2 percent in 2015 when compared to 2014.
Excluding the impact of foreign currency movements there was growth in sales to all key end markets, in particular, the
pharmaceutical and biotechnology market in the year ended October 31, 2015 when compared to the prior year. Within the applied
markets revenue in chemical and energy end markets were slower but still reported growth when adjusted for currency movements.
Costs and Expenses
Gross margin on products
Gross margin on services and other
Total gross margin
Operating margin
(in millions)
Research and development
Selling, general and administrative
Years Ended October 31,
2016
2015
2014
54.6%
44.5%
52.3%
14.6%
52.5%
43.8%
50.5%
12.9%
50.8%
41.6%
48.8%
10.4%
2016 over 2015
Change
2 ppts
1 ppt
2 ppts
2 ppts
2015 over 2014
Change
2 ppts
2 ppts
2 ppts
3 ppts
$
$
329
1,253
$
$
330
1,189
$
$
358
1,199
—
5%
(8)%
(1)%
Total gross margin for the year ended October 31, 2016 increased 2 percentage points when compared to last year. Increases
in total gross margins for the year ended October 31, 2016 were as a result of the exit of the NMR business, several margin
improvement initiatives, lower logistics costs, lower costs to address the now lifted FDA warning letter offset by increased wages
and variable pay. Total gross margins for the year ended October 31, 2015 increased 2 percentage points when compared the prior
year. Increases in total gross margins for the year ended October 31, 2015 were the result of lower intangible asset amortization,
favorable product mix and improved manufacturing efficiencies partially offset by the impact of unfavorable currency movements
and wage increases.
Total operating margin increased 2 percentage points for the year ended October 31, 2016, when compared to last year.
Operating margins increased due to improvements in gross margin and the impact of an employee pension curtailment gain offset
by the increased acquisition and integrations costs, the impairment charge for investment-related loans and increased wages and
variable pay. Total operating margins increased 3 percentage points for the year ended October 31, 2015, when compared to last
year. Operating margins improved due to increased gross margins and reduced expenses on lower revenue compared to last year.
Gross inventory charges, included in continuing operations, were $20 million in 2016, $30 million in 2015 and $46 million
in 2014. Sales of previously written down inventory, included in continuing operations, were $9 million in 2016, $13 million in
2015 and $8 million in 2014.
Our research and development efforts focus on potential new products and product improvements covering a wide variety
of technologies, none of which is individually significant to our operations. Our research seeks to improve on various technical
competencies in software, systems and solutions, life sciences and diagnostics. In each of these research fields, we conduct research
that is focused on specific product development for release in the short-term as well as other research that is intended to be the
foundation for future products over a longer time-horizon. Most of our product development research is designed to improve
products already in production, focus on major new product releases, and develop new product segments for the future. Due to
37
the breadth of research and development projects across all of our businesses, there are a number of drivers of this expense. We
remain committed to invest significantly in research and development and have focused our development efforts on key strategic
opportunities to align our business with available markets and position ourselves to capture market share.
Research and development expenses was relatively flat for the year ended October 31, 2016 when compared with last year.
Research and development expenditures increased by a $4 million in-process research and development (IPR&D) impairment
charge mostly offset by the impact of an employee pension curtailment gain. Research and development expenses decreased 8
percent for the year ended October 31, 2015 when compared with last year. R&D expenditure decreased due to the impact of
foreign currency movements, savings from the exit from the NMR business and transformation initiatives, offset by wage increases.
Selling, general and administrative expenses increased 5 percent in 2016 compared to 2015. Selling, general and
administrative expenses increased due to acquisition and integration costs related to recently acquired businesses, higher wages
and variable pay and an impairment charge related to equity method investment loans offset by the impact of an employee pension
curtailment gain. Selling, general and administrative expenses decreased 1 percent in 2015 compared to 2014. There were increases
in expenditure mostly due to the impact of wage increases, higher commissions and costs associated with business improvement
and transformation initiatives more than offset by favorable foreign currency movements and the decline in NMR expenses due
to the exiting of that business together with a decrease in pre separation expenses related to the separation of Keysight.
Interest expense for the years ended October 31, 2016, 2015 and 2014 was $72 million, $66 million and $110 million,
respectively, and relates to the interest charged on our senior notes and the amortization of the deferred loss recorded upon
termination of the forward starting interest rate swap contracts offset by the amortization of deferred gains recorded upon termination
of interest rate swap contracts. The decrease in interest expense in 2015 compared with 2014 is due to debt redemptions as part
of the debt repositioning as a result of the separation of the Keysight business.
At October 31, 2016, our headcount was approximately 12,500 compared to 11,800 in 2015.
Other income (expense), net
For the year ended October 31, 2016 other income (expense), net includes an $18 million expense related to the impairment
of an investment and $12 million of income in respect of the provision of certain site service costs to, and lease income from,
Keysight. The costs associated with these services are reported within income from operations. Agilent expects to receive lease
income and site service income from Keysight over the next 3-4 years of approximately $12 million per year. For the year ended
October 31, 2015, other income (expense), net included $25 million of income in respect of the provision of certain IT and site
service costs to, and lease income from, Keysight. For the year ended October 31, 2014 other income (expense) net, included a
net loss on the early redemption of senior notes of $89 million.
Income Taxes
Years Ended October 31,
2016
2015
(in millions)
2014
Provision (benefit) for income taxes
$
82
$
42
$
(3)
For 2016, the company’s effective tax rate from continuing operations was 15.1 percent. The income tax expense from
continuing operations was $82 million. The income tax provision from continuing operations for the year ended October 31, 2016
included net discrete tax expense of $17 million. The net discrete tax expense for the year ended October 31, 2016, included $5
million of tax benefit for the extension of the U.S. research and development tax credit attributable to the company's prior fiscal
year, $6 million of tax expense related to the curtailment gain recognized with respect to the U.S. retirement plan and Supplemental
Benefits Plan, $18 million of tax expense related to the establishment of a valuation allowance on an equity method impairment
that would generate a capital loss when realized, and a net $2 million of other discrete tax benefit. Included in the net $2 million
discrete tax benefit are $9 million of out-of-period correcting tax expense entries recorded in the second and fourth quarters of
the fiscal year of 2016 associated with German return-to-provision corrections. These are offset by an $11 million out-of-period
tax benefit associated with an adjustment to the deferred tax liability for unremitted foreign earnings. The out-of-period corrections
were determined to be immaterial to the previously issued and current period financial statements.
For 2015, the company's effective tax rate from continuing operations was 8.7 percent. The income tax expense from
continuing operations was $42 million. The income tax benefit for the year ended October 31, 2015 included a net discrete benefit
38
of $55 million primarily due to the settlement of an Internal Revenue Service ("IRS") audit in the U.S. and the recognition of tax
expense related to the repatriation of dividends.
For 2014, the company’s effective tax rate from continuing operations was (1.3) percent. The income tax benefit from
continuing operations was $3 million. The income tax benefit for the year ended October 31, 2014 included a net discrete benefit
of $33 million primarily due to the settlement of an Internal Revenue Service (“IRS”) audit in the U.S. and the recognition of tax
expense related to the repatriation of dividends.
Agilent enjoys tax holidays in several different jurisdictions, most significantly in Singapore. The tax holidays provide
lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific
types of income in those jurisdictions. The tax holidays are due for renewal between 2018 and 2023. As a result of the incentives,
the impact of the tax holidays decreased income taxes by $86 million, $65 million, and $27 million in 2016, 2015, and 2014,
respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $0.26, $0.19, and $0.08 in 2016,
2015 and 2014, respectively.
In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions,
we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional
taxes and interest will be due. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further
charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the
reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer
necessary. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the
consolidated statements of operations.
On November 1, 2014, Agilent transferred deferred tax assets of $237 million, deferred tax liabilities of $37 million, current
income tax payable of $40 million, and other long-term liabilities related to uncertain tax positions totaling $8 million to Keysight
as part of its separation from Agilent. A current prepaid income tax asset of $19 million and long-term prepaid income tax asset
of $3 million related to sales of intercompany assets was also transferred to Keysight upon separation from Agilent. In addition,
for the year ended October 31, 2015, a $6 million return to provision adjustment for Keysight associated with bonus depreciation
was recognized through retained earnings.
In the U.S., tax years remain open back to the year 2012 for federal income tax purposes and the year 2000 for significant
states. On September 22, 2015, we reached an agreement with the Internal Revenue Service ("IRS") for the tax years 2008 through
2011. During the first quarter of 2016, we made a payment of approximately $9 million of tax plus interest as part of closing the
exam. In 2015, we reclassified a portion of other long-term liabilities to other accrued liabilities related to uncertain tax positions
of continuing operations that we expected to pay within the next twelve months. This amount was partially offset by a prepaid tax
account of approximately $3 million that the IRS allowed as an offset to the $12 million in incremental taxes. The settlement
resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $119 million, offset by a
tax liability on foreign distributions of approximately $99 million principally related to the repatriation of foreign earnings.
On January 29, 2014, we reached an agreement with the IRS for the tax years 2006 through 2007. The settlement resulted
in the recognition, within the continuing operations, of previously unrecognized tax benefits of $111 million, offset by a tax liability
on foreign distributions of approximately $75 million principally related to the repatriation of foreign earnings.
In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year
2003. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized
tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be
partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of years
and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range
of possible changes to the balance of our unrecognized tax benefits.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-
based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court
on December 1, 2015. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations
to include stock-based compensation. The IRS notified the U.S. Court of Appeals for the Ninth Circuit on February 19, 2016 of
its intent to appeal the Tax Court's decision in the case. We concluded that no adjustment to our consolidated financial statements
is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
39
Segment Overview
Through October 31, 2016, we have three business segments comprised of the life sciences and applied markets business,
diagnostics and genomics business and the Agilent CrossLab business.
Life Sciences and Applied Markets
Our life sciences and applied markets business provides application-focused solutions that include instruments and software
that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well
as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Key product
categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS")
systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems;
inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave
plasma-atomic emission spectrometry (“MP-AES”) instruments; inductively coupled plasma optical emission spectrometry ("ICP-
OES") instruments; cell analysis plate based assays; laboratory software and informatics systems; laboratory automation and
robotic systems; dissolution testing; vacuum pumps and measurement technologies.
Net Revenue
Years Ended October 31,
2016
2015
2014
2016 over 2015
Change
2015 over 2014
Change
(in millions)
Net revenue
$
2,073
$
2,046
$
2,078
1%
(2)%
Life science and applied markets business revenue in 2016 increased 1 percent compared to 2015. Foreign currency
movements for 2016 had an unfavorable impact of 2 percentage points on revenue growth when compared to the same period last
year. Geographically, revenue declined 6 percent in the Americas with a 1 percentage point unfavorable currency impact. Revenue
declined 8 percent in Europe with a 4 percentage point unfavorable currency impact. Revenue grew 7 percent in Japan with an 8
percentage point favorable currency impact. Revenue grew 14 percent in Asia Pacific excluding Japan with a 1 percentage point
unfavorable currency impact. Strong growth in China led the geographic portfolio during 2016, and helped offset softness in the
Americas and Europe. Liquid chromatography products revenue continued solid growth on strength in the pharmaceutical market.
Revenue from mass spectrometry had instances of strength, particularly in China, which were offset by continued declines in
revenue in the chemical and energy markets as well as diagnostic and clinical market declines in the Americas. Life science and
applied markets business revenue in 2015 decreased 2 percent compared to 2014. During 2015 we exited the research products
business, which reduced overall life sciences and applied markets growth by 2 percentage points. Product revenue results were
otherwise solid across the rest of the product portfolio. Strength in the Americas and Europe pharmaceutical business were offset
by softness in applied markets and life science research.
End market performance reflected mixed growth across markets in 2016. Pharmaceutical market growth continued to be
robust in 2016 driven by continuing technology refresh programs. The growth led the way for life sciences and diagnostics markets,
which were offset somewhat by lower diagnostic and clinical sales, notably in the US related to a slowdown in pain management
related sales. Food and environmental markets, driven by strong sales in China, were areas of good growth in an otherwise weak
applied market sector. Chemical and energy markets continued their declines throughout 2016 as oil prices remain low. Markets
were also mixed for 2015 with pharmaceutical growth offset by delayed capital spending in life science research markets, and
chemical and energy weakness from low oil prices.
Looking forward, we are optimistic about our growth opportunities in the life sciences and applied markets as our broad
portfolio of products and solutions are well suited to address customer needs. We expect strong sales funnels given a number of
significant new product introductions in the next few quarters as we continue to invest in expanding and improving our applications
and solutions portfolio. We remain concerned about short term prospects in chemical and energy markets, but are confident in
our product portfolio to address customer needs when the market does recover.
40
Gross Margin and Operating Margin
The following table shows the life sciences and applied markets business' margins, expenses and income from operations
for 2016 versus 2015, and 2015 versus 2014.
Total gross margin
Operating margin
(in millions)
Research and development
Selling, general and administrative
Income from operations
Years Ended October 31,
2016
2015
2014
58.6%
20.7%
56.2%
18.6%
55.8%
17.7%
2016 over 2015
Change
2 ppts
2015 over 2014
Change
—
2 ppts
1 ppt
$
$
$
195
590
429
$
$
$
192
576
380
$
$
$
215
576
369
2%
2%
13%
(10)%
—
3%
Gross margin increased 2 percentage points in 2016 compared to 2015. The exit of our research products division contributed
1 percentage point to gross margin improvement with the rest a combination of reduced warranty costs and improved efficiencies
in logistics offset by wage increases and variable pay. Gross margins were flat in 2015 compared to 2014. Increases for wages
and materials were largely offset by improvement in operational efficiencies.
Research and development expenses increased 2 percent in 2016 when compared to 2015. Acquisitions roughly offset
savings from the research products division exit, with growth coming from wage increases, variable pay and targeted investments.
Research and development expenses decreased 10 percent in 2015 when compared to 2014. Excluding NMR, 2015 research and
development expenses were down 4 percent from 2014 impacted by our transformation initiatives.
Selling, general and administrative expenses increased 2 percent in 2016 compared to 2015. Acquisitions roughly offset
savings from the research products division exit, with growth coming from wage increases and variable pay. Selling, general and
administrative expenses were flat in 2015 compared to 2014. Excluding NMR, selling, general and administrative expenses grew
3 percent primarily due to dis-synergies in infrastructure costs from the separation of Keysight.
Operating margin increased 2 percentage points in 2016 compared to 2015. The exit of our research products division
contributed 2 percentage point to operating margin improvement, with gross margin improvements from lower warranty and
logistics costs making up the difference. Operating margins increased by 1 percentage point in 2015 compared to 2014. Expenses
declined more than revenue to help with the improvement.
Income from Operations
Income from operations in 2016 increased by $49 million or 13 percent compared to 2015 on a revenue increase of $27
million. The exit of our research products division contributed roughly 40 percent of the improvement with revenue growth and
improved gross margins making up the difference. Income from operations in 2015 increased by $11 million or 3 percent compared
to 2014 on a revenue decrease of $32 million.
Diagnostics and Genomics
Our diagnostics and genomics business includes genomics, nucleic acid contract manufacturing and the pathology, companion
diagnostics and reagent partnership businesses.
Our diagnostics and genomics business is comprised of five areas of activity providing solutions that include reagents,
instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate
samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping,
gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling,
as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software.
Second, our nucleic acid solutions business provides equipment and expertise focused on production of synthesized
oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as active pharmaceutical
ingredients ("API") in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Next, our pathology
solutions business is focused on product offerings to cancer diagnostics and anatomic pathology workflows. The broad portfolio
of offerings includes immunohistochemistry (“IHC”), in situ hybridization (“ISH”), hematoxylin and eosin (“H&E”) staining and
41
special staining. We also collaborate with a number of major pharmaceutical companies to develop new potential
pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from
a specific targeted therapy. Finally, the reagent partnership business is a provider of reagents used for turbidimetry and flow
cytometry.
Net Revenue
Years Ended October 31,
2016
2015
2014
2016 over 2015
Change
2015 over 2014
Change
(in millions)
Net revenue
$
709
$
662
$
663
7%
—
Diagnostics and genomics business revenue in 2016 increased 7 percent compared to 2015. Foreign currency movements
for 2016 had an unfavorable currency impact of 1 percentage point on revenue growth when compared to the same period last
year. Geographically, revenue grew 11 percent in the Americas with no currency impact. Revenue grew 1 percent in Europe with
a 4 percentage point unfavorable currency impact. Revenue grew 6 percent in Japan with an 8 percentage point favorable currency
impact. Revenue grew 17 percent in Asia Pacific excluding Japan with a 2 percentage point unfavorable currency impact. The
performance in Americas and Europe were assisted by positive growth in sales in genomics (particularly target enrichment and
arrays), strength in pathology business, continued demand in the nucleic acid solutions and good momentum in the companion
diagnostic business. Growth in Asia Pacific excluding Japan reflected strong growth in China. Diagnostics and genomics business
revenue in 2015 was flat compared to 2014, significantly impacted by currency.
The 7 percent revenue growth was due to positive growth from all businesses. This was led by continued growth momentum
in the next generation sequencing (target enrichment portfolio) solution offering in the research and clinical research markets and
an increase in the CGH products portfolio and good revenue performance in companion diagnostics business working with our
pharmaceutical partners. Nucleic acid business saw continued market demand in the nucleic acid solutions business related to
therapeutic oligo programs. The pathology business saw steady growth due to continued growth in our Omnis instrument placements
and steady growth in the reagent revenues including traction in our PD-L1 assays. The end markets in diagnostics and clinical
research remain strong and growing driven by an aging population and lifestyle. The positive local currency revenue growth in
2015 was also driven by demand in the nucleic acid solutions, good revenue performance in pathology and companion diagnostics
businesses as well as next generation sequencing solution offering within the genomics business.
Looking forward, we are optimistic about our growth opportunities in the diagnostics markets and continue to invest in
expanding and improving our applications and solutions portfolio. We remain positive about our growth in these markets, as
adoption of our SureSelect and HaloPlex sequencing target enrichment solutions continue, and Omnis instruments and reagents,
PD-L1 assays and SureFISH gain traction with our customers in clinical oncology applications. Market demand in the nucleic
acid solutions business related to therapeutic oligo programs continues to be strong. Our nucleic acid business is expanding into
a new site to accommodate future production needs. We will continue to invest in research and development, and seek to expand
our position in developing countries and emerging markets.
42
Gross Margin and Operating Margin
The following table shows the diagnostics and genomics business's margins, expenses and income from operations for 2016
versus 2015, and 2015 versus 2014.
Total gross margin
Operating margin
(in millions)
Research and development
Selling, general and administrative
Income from operations
Years Ended October 31,
2016
2015
2014
54.6%
16.0%
54.4%
13.3%
56.4%
14.0%
2016 over 2015
Change
—
2015 over 2014
Change
(2) ppts
3 ppts
(1) ppt
$
$
$
83
190
114
$
$
$
78
195
88
$
$
$
86
195
93
6%
(2)%
29%
(10)%
—
(5)%
Gross margin was flat in 2016 when compared to 2015. Favorable gross margins due to higher volumes and lower inventory
charges were fully offset by unfavorable currency movements and wage increases. Gross margins decreased by 2 percentage points
in 2015 compared to 2014. Gross margins reflected unfavorable currency movement impact, change in business mix, higher
inventory charges, and wage increases.
Research and development expenses increased 6 percent in 2016 when compared to 2015 however, remained flat as a
percentage of revenue. This reflected increase in wages and benefits and increased spending around the development of clinical
applications and solutions were partially offset by favorable currency movements. Research and development expenses decreased
10 percent in 2015 when compared to 2014; however, remained flat as a percentage of revenue. The decline was mainly due to
favorable currency movements and business improvement initiatives partially offset by wage increases.
Selling, general and administrative expenses decreased 2 percent in 2016 when compared to 2015, reflecting favorable
currency movements, reduced expenses due to business improvement initiatives partially offset by wages and variable pay increases.
Selling, general and administrative expenses were flat in 2015 compared to 2014, favorable currency movements, and business
improvement initiatives and were offset by higher allocated infrastructure expenses following the Keysight separation and wage
increases.
Operating margin increased 3 percentage points in 2016 when compared to 2015. The increase was due to higher volumes,
lower inventory charges, better selling expenses partially offset by wage and benefits increases. Operating margins decreased by
1 percentage point in 2015 compared to 2014. The reduction was due to lower gross margins due to higher inventory charges and
wage increases.
Income from Operations
Income from operations in 2016 increased by $26 million or 29 percent when compared to 2015 on a revenue increase of
$47 million. The increase was due to higher volumes and reduced selling and general administration expenses. Income from
operations in 2015 decreased by $5 million or 5 percent compared to 2014 on a revenue decrease of $1 million. The reduction
was due to lower gross margins.
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed
to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning Agilent can serve and supply customers
regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping
to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products,
custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and
compliance support, as well as asset management and consultative services that help increase customer productivity. Custom
service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments
fully operational and compliant with the respective industry requirements.
43
Net Revenue
Years Ended October 31,
2016
2015
2014
2016 over 2015
Change
2015 over 2014
Change
(in millions)
Total net revenue
$
1,420
$
1,330
$
1,307
7%
2%
Agilent CrossLab business revenue in 2016 increased 7 percent when compared to 2015. Foreign currency movements for
2016 had an unfavorable impact of 2 percentage points when compared to 2015. Revenue growth in 2016 was led by increases
in enterprise service contracts, LC small molecule columns, remarketed instruments, and bio-columns. Geographically, revenue
grew 6 percent in the Americas with a 2 percentage point unfavorable currency impact. Revenue grew 3 percent in Europe with
a 4 percentage point unfavorable currency impact. Revenue declined 4 percent in Japan with a 7 percentage point favorable currency
impact due to macroeconomic conditions. Revenue grew 16 percent in Asia Pacific excluding Japan with a 4 percentage point
unfavorable currency impact due to continued strength in China. Agilent CrossLab business revenue in 2015 increased 2 percent
compared to 2014. Revenue growth in 2015 was led by strength in the overall aftermarket service agreement business, the
remarketed instrument business, and our chemistries portfolio of LC columns and sample preparation products.
Agilent CrossLab business saw positive revenue growth in all the key end markets after accounting for the unfavorable
currency movements in 2016. Revenue growth was led by the pharmaceutical and biotechnology market, as well as the food
market. Revenue growth was slowest in the forensics market and the life science research market, but neither represented a large
share of revenue in the Agilent CrossLab business. Agilent CrossLab business saw positive revenue growth in all the key end
markets after accounting for the unfavorable currency impact in 2015 compared to 2014. Growth was led by the pharmaceutical
and biotechnology markets. Revenue in chemical and emergy end markets were slower but still reported growth, adjusted for
currency movements.
Looking forward, we expect continued strength in the pharmaceutical and biotechnology markets to drive growth in the
near term. From a geographical stand point, we remain optimistic on the market growth and market penetration opportunities in
China. Other factors for near term revenue growth will rely on upcoming product launches from our consumables pipeline, as
well as on our investment in our laboratory enterprise offerings.
Gross Margin and Operating Margin
The following table shows the Agilent CrossLab business's margins, expenses and income from operations for 2016 versus
2015 and 2015 versus 2014.
Total gross margin
Operating margin
(in millions)
Research and development
Selling, general and administrative
Income from operations
Years Ended October 31,
2016
2015
2014
49.4%
22.3%
49.6%
22.5%
48.5%
23.0%
2016 over 2015
Change
—
—
2015 over 2014
Change
1 ppt
(1) ppt
$
$
$
46
339
316
$
$
$
46
315
299
$
$
$
45
287
301
—
7%
6%
3%
10%
(1)%
Gross margin was flat in 2016 when compared to 2015, due to the higher sales volume and several margin improvement
initiatives helping to offset the higher wages, unfavorable currency movements and a less favorable currency hedging results.
Gross margin increased by 1 percentage point in 2015 compared to 2014, primarily due to the favorable currency hedging gains
recognized in 2015, which were partially offset by higher logistic costs.
Research and development expenses was flat in 2016 when compared to 2015, due to wage increases being offset by
moderate favorable currency movements. Research and development expenses increased 3 percent in 2015 when compared to
2014, due to higher project expenses and wage increases.
Selling, general and administrative expenses increased 7 percent in 2016 when compared to 2015, primarily due to higher
orders driving higher field selling costs, wage increases and larger investments into marketing and the sales channel. Selling,
44
general and administrative expenses increased 10 percent in 2015 compared to 2014, due to the increase in allocated infrastructure
costs following our separation of Keysight and wage increases.
Operating margin was flat in 2016 when compared to 2015, due to the higher sales volume helping to offset the higher
wages, unfavorable currency movements less favorable currency hedging results, and increased selling, general and administrative
expenses. Operating margin decreased by 1 percentage point in 2015 when compared to 2014, due to the increase in allocated
infrastructure costs following our separation of Keysight, which were partially offset by the favorable currency hedging gains
recognized in 2015.
Income from Operations
Income from operations in 2016 increased by $17 million or 6 percent when compared to 2015 on a revenue increase of
$90 million, representing an incremental operating margin of 19 percent. This increase was driven primarily by volume offset by
currency and higher selling, general and administrative expenses. Income from operations in 2015 decreased by $2 million or
1 percent compared to 2014 on a revenue increase of $23 million, representing an operating margin decrement. This decrease was
primarily due to the favorable volume increase being offset by the increase in allocated infrastructure costs following our separation
of Keysight.
Financial Condition
Liquidity and Capital Resources
Our financial position as of October 31, 2016 consisted of cash and cash equivalents of $2,289 million as compared to
$2,003 million as of October 31, 2015.
As of October 31, 2016, approximately $2,181 million of our cash and cash equivalents is held outside of the U.S. in our
foreign subsidiaries. Most of the amounts held outside of the U.S. could be repatriated to the U.S. but, under current law, would
be subject to U.S. federal and state income taxes, less applicable foreign tax credits. Agilent has accrued for U.S. federal and state
tax liabilities on the earnings of its foreign subsidiaries except when the earnings are considered indefinitely reinvested outside
of the U.S. Repatriation could result in additional material U.S. federal and state income tax payments in future years. We utilize
a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed.
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit
lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the
following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual
obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $793 million in 2016 as compared to $512 million provided in 2015 and $731
million provided in 2014. For the year ended October 31, 2014 net cash provided by operating activities included the cash provided
by Keysight operating activities. We paid approximately $67 million of net taxes in 2016, as compared to $129 million in net taxes
in 2015 and net taxes of $131 million in 2014. Income taxes, including those paid for the Keysight business, were paid by Agilent
for the year ended October 31, 2014. The decrease in taxes paid for the year ended October 31, 2016 was primarily due to no taxes
paid related to the separation and to a lesser extent due to some refund of taxes. Cash paid for income taxes for the year ended
October 31, 2015 included tax payments related to the separation. Operating cash flows in 2014 were impacted by pre-separation
costs and separation related taxes, the redemption of senior notes including payments related to accrued interest and the timing
of the purchase of shares under the employee stock purchase plan. For the years ended October 31, 2016, 2015 and 2014 other
assets and liabilities provided cash of $10 million and used cash of $249 million and $26 million, respectively. The increase in
the usage of cash for the year ended October 31, 2015 in other assets and liabilities was largely the result of contributions to defined
benefit plans, changes in interest and restructuring accruals, income tax liabilities and transaction tax assets and liabilities.
In 2016, the change in accounts receivable used cash of $33 million, $24 million in 2015, and $119 million in 2014. For
the year ended October 31, 2014 the change in accounts receivable included $25 million of cash used by Keysight. Days' sales
outstanding as of October 31, were 51 days in 2016, 53 days in 2015 and 49 days in 2014. The change in accounts payable used
cash of $15 million in 2016, used cash of $26 million in 2015 and provided cash of $50 million in 2014. For the year ended October
31, 2014 the change in accounts payable included $32 million of cash provided by Keysight. Cash used in inventory was $7 million
in 2016, in $24 million in 2015 and $99 million in 2014. For the years ended October 31, 2014 the change in inventory included
$31 million of cash used by Keysight. Inventory days on-hand decreased to 92 days in 2016 compared to 97 days in 2015 and
45
106 days in 2014.
We contributed zero, $15 million and $30 million to our U.S. defined benefit plans in 2016, 2015 and 2014, respectively.
For the year ended October 31, 2014 we contributed $15 million to our U.S. defined benefit plans on behalf of Keysight. We
contributed $24 million, $25 million and $72 million to our non-U.S. defined benefit plans in 2016, 2015 and 2014, respectively.
For the year ended October 31, 2014 we contributed $41 million to our non-U.S. defined benefit plans on behalf of Keysight. We
contributed less than $1 million in both 2016 and 2015 and $1 million in 2014 to our U.S. post-retirement benefit plans. Our non-
U.S. defined benefit plans are generally funded ratably throughout the year. Total contributions in 2016 were $24 million or 40(cid:3)
percent less than 2015. Our annual contributions are highly dependent on the relative performance of our assets versus our projected
liabilities, among other factors. We expect to contribute approximately $26 million to our U.S. and $20 million non-U.S. defined
benefit plans and nothing to our U.S. post-retirement benefit plans during 2017.
Net Cash Used in Investing Activities
Net cash used in investing activities in 2016 was $238 million and in 2015 was $400 million as compared to net cash used
of $230 million in 2014. For the year ended October 31, 2014 cash used in investing activities included $82 million of cash used
by Keysight.
Investments in property, plant and equipment were $139 million in 2016, $98 million in 2015 and $205 million in 2014.
For the year ended October 31, 2014 investments in plant and equipment included $70 million related to Keysight. Proceeds from
sale of property, plant and equipment were zero in 2016, $12 million in 2015 and $14 million in 2014. In 2016 we invested $261
million in acquisitions of businesses and intangible assets, net of cash acquired compared to $74 million in 2015 and $13 million(cid:3)
in 2014. In 2016 we made a payment of $80 million for the purchase of a cost method investment in Lasergen compared to zero(cid:3)
outlay in 2015 and 2014. We made a loan to our equity method investment of $3 million in 2016 and zero in both 2015 and 2014.
Change in restricted cash and cash equivalents was $245 million inflow in 2016, $240 million outflow in 2015 (both changes
related to our Seahorse Biosciences acquisition) and $4 million in 2014, respectively.
Net Cash Used in Financing Activities
Net cash used in financing activities in 2016 was $268 million compared to $1,089 million in 2015 and $117 million in
2014, respectively. The increase in cash used in 2015 when compared to 2014 was largely due to the net cash transferred to
Keysight.
Treasury stock repurchases
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The existing
program is designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive
programs to target maintaining a weighted average share count of approximately 335 million diluted shares. For the years ended
October 31, 2016, 2015 and 2014 we repurchased 2.4 million shares for $98 million, 6 million shares for $267 million and 4
million shares for $200 million, respectively. All such shares and related costs are held as treasury stock and accounted for using
the cost method.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program (the "2015
repurchase program"). The 2015 share repurchase program authorizes the purchase of up to $1.14 billion of our common stock
through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a specific
number of shares and may be suspended or discontinued at any time. During the year ended October 31, 2016, upon the completion
of our previous repurchase program, we repurchased approximately 8.3 million shares for $336 million under this authorization.
All such shares and related costs are held as treasury stock and accounted for using the cost method. As of October 31, 2016, we
had remaining authorization to repurchase up to $804 million of our common stock under this program.
Dividends
For the years ended October 31, 2016, 2015 and 2014 cash dividends of $150 million, $133 million and $176 million were
paid on the company's outstanding common stock, respectively. On November 16, 2016, we declared a quarterly dividend of
$0.132 per share of common stock, or approximately $43 million which will be paid on January 25, 2017 to shareholders of record
as of the close of business on January 3, 2017. The timing and amounts of any future dividends are subject to determination and
approval by our board of directors.
46
Credit Facility
On September 15, 2014, Agilent entered into a credit agreement with a financial institution which provides for a $400
million five-year unsecured credit facility that will expire on September 15, 2019. On June 9, 2015, the commitments under the
existing credit facility were increased by $300 million so that the aggregate commitments under the facility now total $700 million.
For the year ended October 31, 2016, we borrowed $255 million and repaid $255 million by October 31, 2016. As of October 31,
2016, the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit
facility during the years ended October 31, 2016 and 2015. As of December 20, 2016, the company had borrowings of $65 million(cid:3)
outstanding under this credit facility and may borrow more during fiscal year 2017.
Long-term debt
In October 2007, the company issued an aggregate principal amount of $600 million in senior notes ("2017 senior notes").
The 2017 senior notes were issued at 99.60% of their principal amount. The notes will mature on November 1, 2017, and bear
interest at a fixed rate of 6.50% per annum. The interest is payable semi-annually on May 1st and November 1st of each year and
payments commenced on May 1, 2008.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented
the notional amount of $400 million. The asset value, including interest receivable, upon termination was approximately $43
million and the amount to be amortized at October 31, 2016 was $1 million. The gain is being deferred and amortized to interest
expense over the remaining life of the 2017 senior notes.
In July 2010, the company issued an aggregate principal amount of $500 million in senior notes ("2020 senior notes"). The
2020 senior notes were issued at 99.54% of their principal amount. The notes will mature on July 15, 2020, and bear interest at a
fixed rate of 5.00% per annum. The interest is payable semi-annually on January 15th and July 15th of each year, payments
commenced on January 15, 2011.
On August 9, 2011, we terminated our interest rate swap contracts related to our 2020 senior notes that represented the
notional amount of $500 million. The asset value, including interest receivable, upon termination for these contracts was
approximately $34 million and the amount to be amortized at October 31, 2016 was $15 million. The gain is being deferred and
amortized to interest expense over the remaining life of the 2020 senior notes.
In September 2012, the company issued an aggregate principal amount of $400 million in senior notes ("2022 senior notes").
The 2022 senior notes were issued at 99.80% of their principal amount. The notes will mature on October 1, 2022, and bear interest
at a fixed rate of 3.20% per annum. The interest is payable semi-annually on April 1st and October 1st of each year, payments
commenced on April 1, 2013.
In June 2013, the company issued aggregate principal amount of $600 million in senior notes ("2023 senior notes"). The
2023 senior notes were issued at 99.544% of their principal amount. The notes will mature on July 15, 2023 and bear interest at
a fixed rate of 3.875% per annum. The interest is payable semi-annually on January 15th and July 15th of each year and payments
will commence January 15, 2014.
On September 15, 2016, the company issued aggregate principal amount of $300 million in senior notes ("2026 senior
notes"). The 2026 senior notes were issued at 99.624%% of their principal amount. The notes will mature on September 22, 2026(cid:3)
and bear interest at a fixed rate of 3.050% per annum. The interest is payable semi-annually on March 22nd and September 22nd
of each year and payments will commence March 22, 2017.
In 2016, we paid approximately $37 million, of our mortgage debt, secured on buildings in Denmark, to a Danish financial
institution. The gain recognized upon early payment was not material. No balance exists on this debt as of October 31. 2016.
47
Off Balance Sheet Arrangements and Other
We have contractual commitments for non-cancelable operating leases. See Note 15, "Commitments and Contingencies",
to our consolidated financial statements for further information on our non-cancelable operating leases.
Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some
of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many
locations throughout the world. Local government regulations may restrict our ability to move cash balances to meet cash needs
under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and
conduct operations throughout our global organization.
Contractual Commitments
Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results,
accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of
contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.
The following table summarizes our total contractual obligations at October 31, 2016 for Agilent operations and excludes
amounts recorded in our consolidated balance sheet (in millions):
Operating leases
Commitments to contract manufacturers and
suppliers
Other purchase commitments
Retirement plans
Total
$
$
Less than one
year
38
359
62
45
504
One to three years
60
$
Three to five years More than five years
26
$
22
$
3
—
—
63
$
—
—
—
22
$
—
—
—
26
$
Operating leases. Commitments under operating leases relate primarily to leasehold property, see Note 15, "Commitments
and Contingencies".
Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and use
several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue
purchase orders with estimates of our requirements several months ahead of the delivery dates. The above amounts represent the
commitments under the open purchase orders with our suppliers that have not yet been received. However, our agreements with
these suppliers usually provide us the option to cancel, reschedule, and adjust our requirements based on our business needs prior
to firm orders being placed. We expect to fulfill most of our purchase commitments for inventory within one year.
In addition to the above mentioned commitments to contract manufacturers and suppliers, in the past we recorded a liability
for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent
with our policy relating to excess inventory. As of October 31, 2016, the liability for our firm, non-cancelable and unconditional
purchase commitments was less than $1 million compared to $5 million, as of October 31, 2015 and $10 million as of October 31,
2014. These amounts are included in other accrued liabilities in our consolidated balance sheet.
Other purchase commitments. We have categorized "other purchase commitments" related to contracts with professional
services suppliers. Typically, we can cancel contracts without penalties. For those contracts that are not cancelable without penalties,
we are disclosing the termination fees and costs or commitments for continued spending that we are obligated to pay to a supplier
under each contact's termination period before such contract can be cancelled. Our contractual obligations with these suppliers
under "other purchase commitments" were approximately $62 million within the next year.
Retirement Plans. Commitments under the retirement plans relate to expected contributions to be made to our U.S. and
non-U.S. defined benefit plans and to our post-retirement medical plans for the next year only. Contributions after next year are
impractical to estimate.
We had no material off-balance sheet arrangements as of October 31, 2016 or October 31, 2015.
48
On Balance Sheet Arrangements
The following table summarizes our total contractual obligations at October 31, 2016 related to our long-term debt and
interest expense (in millions):
Senior notes
Interest expense
Total
Less than one
year
$
$
One to three years
100
144
244
— $
77
77
$
Three to five years More than five years
1,300
$
106
1,406
500
116
616
$
$
$
Other long-term liabilities include $190 million and $227 million of liabilities for uncertain tax positions as of October 31,
2016 and October 31, 2015, respectively. We are unable to accurately predict when these amounts will be realized or released.
However, it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve
months due to either the expiration of a statute of limitations or a tax audit settlement.
49
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and assets
and liabilities denominated in currencies other than the functional currency of our subsidiaries. We hedge future cash flows
denominated in currencies other than the functional currency using sales forecasts up to twelve months in advance. Our exposure
to exchange rate risks is managed on an enterprise-wide basis. This strategy utilizes derivative financial instruments, including
option and forward contracts, to hedge certain foreign currency exposures with the intent of offsetting gains and losses that occur
on the underlying exposures with gains and losses on the derivative contracts hedging them. We do not currently and do not intend
to utilize derivative financial instruments for speculative trading purposes.To the extent that we are required to pay for all, or
portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency
movements will impact the cost of the transaction.
Our operations generate non-functional currency cash flows such as revenues, third party vendor payments and inter-
company payments. In anticipation of these foreign currency cash flows and in view of volatility of the currency market, we enter
into such foreign exchange contracts as are described above to manage our currency risk. Approximately 54 percent of our revenue
in 2016, 57 percent of our revenue in 2015 and 61 percent of our revenues in 2014 were generated in U.S. dollars.The unfavorable
effects of changes in foreign currency exchange rates, principally as a result of the strength of the U.S. dollar, has decreased revenue
by approximately 2 percentage points in the year ended October 31, 2016. The impact of foreign currency movements is calculated
by applying the prior period foreign currency exchange rates to the current year period.
We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in foreign exchange rates to the
hedging contracts and the underlying exposures described above. As of October 31, 2016 and 2015, the analysis indicated that
these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations,
statement of comprehensive income or cash flows.
We are also exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed
rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued
long-term debt in U.S. dollars or foreign currencies at fixed interest rates based on the market conditions at the time of financing.
We believe that the fair value of our fixed rate debt changes when the underlying market rates of interest change, and we may use
interest rate swaps to modify such market risk.
We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in interest rates relating to the
underlying fair value of our fixed rate debt. As of October 31, 2016 and 2015, the sensitivity analyses indicated that a hypothetical
10 percent adverse movement in interest rates would result in an immaterial impact to the fair value of our fixed interest rate debt.
50
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Operations for each of the three years in the period ended October 31, 2016
Consolidated Statement of Comprehensive Income for each of the three years in the period ended October 31,
2016
Consolidated Balance Sheet at October 31, 2016 and 2015
Consolidated Statement of Cash Flows for each of the three years in the period ended October 31, 2016
Consolidated Statement of Equity for each of the three years in the period ended October 31, 2016
Notes to Consolidated Financial Statements
Quarterly Summary (unaudited)
Page
52
53
54
55
56
57
58
104
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Agilent Technologies,
Inc. and its subsidiaries at October 31, 2016 and October 31, 2015, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 2016 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of October 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement
schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits
of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
deferred income taxes and share-based payments in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
December 20, 2016
52
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Net revenue:
Products
Services and other
Total net revenue
Costs and expenses:
Cost of products
Cost of services and other
Total costs
Research and development
Selling, general and administrative
Total costs and expenses
Income from operations
Interest income
Interest expense
Other income (expense), net
Income from continuing operations before taxes
Provision (benefit) for income taxes
Income from continuing operations
Income (loss) from discontinued operations, net of tax expense (benefit) of
$0, $(2) and $100
Net income
Net income per share - basic:
Income from continuing operations
Income (loss) from discontinued operations
Net income per share - basic
Net income per share - diluted:
Income from continuing operations
Income (loss) from discontinued operations
Net income per share - diluted
Weighted average shares used in computing net income per share:
Basic
Diluted
Years Ended October 31,
2016
2015
2014
(in millions, except per
share data)
$
3,227
$
3,146
$
975
4,202
1,464
541
2,005
329
1,253
3,587
615
11
(72)
(10)
544
82
462
892
4,038
1,496
501
1,997
330
1,189
3,516
522
7
(66)
17
480
42
438
$
$
$
$
$
$
— $
462
$
(37) $
$
401
$
$
$
$
1.42
—
1.42
1.40
—
1.40
326
329
1.32
(0.12)
1.20
1.31
(0.11)
1.20
$
$
$
$
333
335
3,185
863
4,048
1,568
504
2,072
358
1,199
3,629
419
9
(110)
(89)
229
(3)
232
317
549
0.70
0.95
1.65
0.69
0.93
1.62
333
338
Cash dividends declared per common share
$
0.460
$
0.400
$
0.528
The accompanying notes are an integral part of these consolidated financial statements.
53
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
Net income
Other comprehensive income (loss):
Unrealized gain on investments, net of tax expense of $0, $0 and $1
Amounts reclassified into earnings related to investments, net of tax of $0, $0 and $0
Gain (loss) on derivative instruments, net of tax expense (benefit) of $(4), $3 and $5
Amounts reclassified into earnings related to derivative instruments, net of tax expense
(benefit) of $0, $(6) and $0
Foreign currency translation, net of tax expense (benefit) of $3, $(24) and $(8)
Net defined benefit pension cost and post retirement plan costs:
Change in actuarial net loss, net of tax benefit of $(42), $(17), and $(65)
Change in net prior service benefit, net of tax benefit of $(8), $(6), and $(16)
Other comprehensive loss
Total comprehensive income
Years Ended October 31,
2016
2015
2014
$
462
$
401
$
549
—
—
(6)
3
(8)
(86)
(15)
(112)
350
$
$
—
—
8
(12)
(336)
(38)
(11)
(389)
12
$
11
(1)
8
1
(269)
(143)
(32)
(425)
124
The accompanying notes are an integral part of these condensed consolidated financial statements.
54
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
Current assets:
Cash and cash equivalents
Short-term restricted cash and cash equivalents
Accounts receivable, net
Inventory
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Long-term investments
Other assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Employee compensation and benefits
Deferred revenue
Other accrued liabilities
Total current liabilities
Long-term debt
Retirement and post-retirement benefits
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Total equity:
Stockholders' equity:
Preferred stock; $0.01 par value; 125 million shares authorized; none issued and
outstanding
Common stock; $0.01 par value; 2 billion shares authorized; 614 million shares at
October 31, 2016 and 611 million shares at October 31, 2015 issued
Treasury stock at cost; 290 million shares at October 31, 2016 and 279 million shares at
October 31, 2015
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders' equity
Non-controlling interest
Total equity
Total liabilities and equity
October 31,
2016
2015
(in millions, except
par value and
share data)
$
$
$
2,289
—
631
533
182
3,635
639
2,517
408
135
468
7,802
257
235
269
184
945
1,912
360
339
3,556
—
6
(10,508)
9,159
6,089
(503)
4,243
3
4,246
7,802
$
2,003
242
606
541
294
3,686
604
2,366
445
86
292
7,479
279
221
258
218
976
1,655
264
414
3,309
—
6
(10,074)
9,045
5,581
(391)
4,167
3
4,170
7,479
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
55
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Accelerated amortization of interest rate swap gain (due to early redemption of debt)
Share-based compensation
Deferred taxes
Excess and obsolete inventory and inventory related charges
Non-cash restructuring and asset impairment charges
Impairment of equity method investment and loans
Net gain on sale of investments
Net (gain) loss on sale of assets and divestitures
Other
Changes in assets and liabilities:
Accounts receivable, net
Inventory
Accounts payable
Employee compensation and benefits
Interest rate swap payments
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Investments in property, plant and equipment
Proceeds from the sale of property, plant and equipment
Proceeds from the sale of investment securities
Proceeds from divestitures
Payment to acquire cost method investment
Payment to acquire equity method investment
Payment in exchange for convertible note
Loan to equity method investment
Change in restricted cash, cash equivalents and investments, net
Acquisitions of businesses and intangible assets, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock under employee stock plans
Payment of taxes related to net share settlement of equity awards
Treasury stock repurchases
Payment of dividends
Issuance of senior notes
Debt issuance costs
Repayment of senior notes
Proceeds from debts and credit facility
Repayment of debts and credit facility
Net transfer of cash and cash equivalents to Keysight
Net cash used in financing activities
Effect of exchange rate movements
Net increase (decrease) in cash and cash equivalents
Change in cash and cash equivalents within current assets of discontinued operations
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information:
Income tax payments, net
Interest payments
Years Ended October 31,
2016
2015
(As Adjusted)
2014
(As Adjusted)
(in millions)
$
462
$
401
$
549
246
—
58
3
20
4
25
(1)
(1)
17
(33)
(7)
(15)
15
(10)
10
793
(139)
—
1
—
(80)
—
(1)
(3)
245
(261)
(238)
62
(6)
(434)
(150)
299
(2)
—
255
(292)
—
(268)
(1)
286
—
2,003
2,289
67
73
$
$
$
253
—
54
70
30
3
—
—
3
13
(24)
(24)
(26)
8
—
(249)
512
(98)
12
—
3
—
(1)
(2)
—
(240)
(74)
(400)
58
(13)
(267)
(133)
—
—
—
—
—
(734)
(1,089)
(48)
(1,025)
810
2,218
2,003
129
71
$
$
$
$
$
$
384
(22)
96
(192)
79
23
—
(1)
(10)
10
(119)
(99)
50
9
—
(26)
731
(205)
14
1
2
—
(25)
—
—
(4)
(13)
(230)
188
(19)
(200)
(176)
1,099
(9)
(1,000)
87
(87)
—
(117)
(31)
353
—
2,675
3,028
131
142
The accompanying notes are an integral part of these consolidated financial statements.
56
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF EQUITY
Common Stock
Treasury Stock
Number
of
Shares
Par
Value
Additional
Paid-in
Capital
Number
of
Shares
Treasury
Stock at
Cost
Retained
Earnings
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Stockholders'
Equity
Non-
Controlling
Interests
Total
Equity
Balance as of October 31, 2013
601,629
$
6
$
8,711
(in millions, except number of shares in thousands)
$
6,096
(269,330) $ (9,607) $
91
$
5,297
$
3
$
5,300
Components of comprehensive income, net of tax:
Net income
Other comprehensive loss
Total comprehensive income
Cash dividends declared ($0.528 per common share)
Share-based awards issued
Repurchase of common stock
Adjustment to cumulative excess tax benefits realized from share
based awards issued
Tax benefits from share-based awards issued
Share-based compensation
Balance as of October 31, 2014
Components of comprehensive income, net of tax:
Net income
Other comprehensive loss
Total comprehensive income
Cash dividends declared ($0.40 per common share)
Distribution of Keysight
Share-based awards issued
Tax benefits from share-based awards issued
Repurchase of common stock
Share-based compensation
Balance as of October 31, 2015
Adjustment due to adoption of ASU 2016-09
Components of comprehensive income, net of tax:
Net income
Other comprehensive loss
Total comprehensive income
Cash dividends declared ($0.46 per common share)
Share-based awards issued
Repurchase of common stock
Share-based compensation
Balance as of October 31, 2016
—
—
—
6,261
—
—
—
—
607,890
—
—
—
—
2,964
—
—
—
610,854
—
—
—
—
2,682
—
—
613,536
$
$
$
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
—
6
—
—
—
—
—
—
—
6
$
$
$
—
—
—
170
—
(11)
1
96
8,967
—
—
—
(28)
44
8
—
54
9,045
—
—
—
—
56
—
58
9,159
—
—
—
—
(3,594)
—
—
—
—
—
—
—
(200)
—
—
—
(272,924) $ (9,807) $
—
—
—
—
—
—
(6,471)
—
—
—
—
—
—
—
(267)
—
(279,395) $ (10,074) $
—
—
—
—
—
(10,680)
—
—
—
—
—
—
(434)
—
(290,075) $ (10,508) $
549
—
(176)
—
—
—
—
6,469
401
—
(133)
(1,156)
—
—
—
—
5,581
196
462
—
(150)
—
—
—
6,089
$
$
$
—
(425)
—
—
—
—
—
—
(334) $
—
(389)
—
332
—
—
—
—
(391) $
—
—
(112)
—
—
—
—
(503) $
549
(425)
124
(176)
170
(200)
(11)
1
96
5,301
401
(389)
12
(133)
(852)
44
8
(267)
54
4,167
196
462
(112)
350
(150)
56
(434)
58
4,243
$
$
$
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
3
$
$
$
549
(425)
124
(176)
170
(200)
(11)
1
96
5,304
401
(389)
12
(133)
(852)
44
8
(267)
54
4,170
196
462
(112)
350
(150)
56
(434)
58
4,246
The accompanying notes are an integral part of these consolidated financial statements.
57
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a
global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that includes
instruments, software, services and consumables for the entire laboratory workflow.
Keysight Separation. On November 1, 2014, we completed the distribution of 100% of the outstanding common shares of
Keysight Technologies, Inc. ("Keysight") to Agilent stockholders who received one share of Keysight common stock for every
two shares of Agilent held as of the close of business on the record date, October 22, 2014. The historical results of operations and
the financial position of Keysight are included in the consolidated financial statements of Agilent and are reported as discontinued
operations within this Form 10-K.
Exit of Nuclear Magnetic Resonance Business. During the fourth quarter of fiscal year 2014, we made the decision to cease
the manufacture and sale of our nuclear magnetic resonance (“NMR”) product line within our life sciences and applied markets
segment. In connection with the exit from this business, we recorded approximately $6 million and $68 million in restructuring
and other related costs in 2015 and 2014, respectively. The exit of the NMR business was completed in fiscal year 2016.
Basis of presentation. The accompanying financial data has been prepared by us pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission ("SEC") and is in conformity with U.S. generally accepted accounting principles
("GAAP"). Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of consolidation. The consolidated financial statements include the accounts of the company and our wholly-
and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes.
Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these
estimates are based on management's best knowledge of current events and actions that may impact the company in the future,
actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements
materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, valuation
of goodwill and purchased intangible assets, inventory valuation, share-based compensation, retirement and post-retirement plan
assumptions and accounting for income taxes.
Revenue recognition. We enter into agreements to sell products (hardware and/or software), services and other
arrangements (multiple element arrangements) that include combinations of products and services.
We recognize revenue, net of trade discounts and allowances, provided that (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Delivery is
considered to have occurred when title and risk of loss have transferred to the customer for products, or when the service has been
provided. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. At the time of
the transaction, we evaluate the creditworthiness of our customers to determine the appropriate timing of revenue recognition.
Provisions for discounts, warranties, returns, extended payment terms, and other adjustments are provided for in the period the
related sales are recorded.
Product revenue. Our product revenue is generated predominantly from the sales of various types of analytical
instrumentation. Product revenue, including sales to resellers and distributors, is reduced for estimated returns when appropriate.
For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon
achievement of performance milestones, revenue is recognized after the acceptance criteria have been met. For products that
include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon
delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise, neither the product nor
the installation revenue is recognized until the installation is complete.
Where software is licensed separately, revenue is recognized when the software is delivered and has been transferred to the
customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs.
58
We also evaluate whether collection of the receivable is probable, the fee is fixed or determinable and whether any other
undelivered elements of the arrangement exist on which a portion of the total fee would be allocated based on vendor-specific
objective evidence.
Service revenue. Revenue from services includes extended warranty, customer and software support including, Software
as a Service (SaaS) due to recent acquisitions, consulting including companion diagnostics and training and education. Service
revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. For
example, customer support contracts are recognized ratably over the contractual period, while training revenue is recognized as
the training is provided to the customer. In addition, the four revenue recognition criteria described above must be met before
service revenue is recognized.
Revenue recognition for arrangements with multiple deliverables. Our multiple-element arrangements are generally
comprised of a combination of measurement instruments, installation or other start-up services, and/or software and/or support or
services. Hardware and software elements are typically delivered at the same time and revenue is recognized upon delivery once
title and risk of loss pass to the customer. Delivery of installation, start-up services and other services varies based on the complexity
of the equipment, staffing levels in a geographic location and customer preferences, and can range from a few days to a few months.
Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer.
Revenue from the sale of software products that are not required to deliver the tangible product's essential functionality are accounted
for under software revenue recognition rules which require vendor specific objective evidence (VSOE) of fair value to allocate
revenue in a multiple element arrangement. Our arrangements generally do not include any provisions for cancellation, termination,
or refunds that would significantly impact recognized revenue.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of
accounting if the delivered item or items have value to the customer on a standalone basis and for an arrangement that includes a
general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable
and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative
selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a
deliverable is based on VSOE if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP)
if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition
criteria for that element have been met.
We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for
products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold
separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in
standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the
solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing
necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service
were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple
factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives
and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify
or develop new pricing practices and strategies in the future. As these pricing strategies evolve changes may occur in ESP. The
aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements, which
may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for
the arrangement.
For sales arrangements that include equipment lease along with other products or services, revenue is allocated to the
different elements based on the Revenue Recognition for Multiple Element Arrangements. Each of these contracts is evaluated
as a lease arrangement, either as an operating lease or a capital (sales-type) lease using lease classification guidance.
Deferred revenue. Deferred revenue represents the amount that is allocated to undelivered elements in multiple element
arrangements. We limit the revenue recognized to the amount that is not contingent on the future delivery of products or services
or meeting other specified performance conditions.
Accounts receivable, net. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such
accounts receivable has been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable
credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging
of such receivables, among other factors. The allowance for doubtful accounts as of October 31, 2016 and 2015 was not material.
59
We do not have any off-balance-sheet credit exposure related to our customers. Accounts receivable are also recorded net of product
returns.
Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue, and the
associated expense is recorded in cost of products for all periods presented.
Inventory. Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not
in excess of market value. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for
estimated excess and obsolete inventory based on estimates about future demand. The excess balance determined by this analysis
becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts,
managing product rollovers and working with manufacturing to maximize recovery of excess inventory.
Goodwill and purchased intangible assets. Under the authoritative guidance we have the option to perform a qualitative
assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to
first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of
its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less
than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less
than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or
industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key
personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on
either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting
unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test
on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary)
measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting
unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment.
We aggregate components of an operating segment that have similar economic characteristics into our reporting units.
In fiscal year 2016, we assessed goodwill impairment for our three reporting units which consisted of three segments: life
sciences and applied markets, diagnostics and genomics and Agilent CrossLab. We performed a qualitative test for goodwill
impairment of the three reporting units, as of September 30, 2016. Based on the results of our qualitative testing, we believe that
it is more-likely-than-not- that the fair value of these reporting units are greater than their respective carrying values. Each quarter
we review the events and circumstances to determine if goodwill impairment is indicated. There was no impairment of goodwill
during the years ended October 31, 2016, 2015 and 2014.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and
customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the
economic benefits are consumed or used up or a straight-line method ranging from 6 months to 15 years. In-process research and
development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment
thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized
over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible
asset to Agilent's consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative
approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill
and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs
used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e. greater
than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative
assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed
a qualitative test for impairment of indefinite-lived intangible assets as of September 30, 2016. Based on the results of our qualitative
testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their
respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived
intangible asset is indicated. Based on triggering events in the years ended October 31, 2016, 2015 and 2014, we recorded an
impairment of $4 million, $3 million and $4 million, respectively due to the cancellation of certain IPR&D projects. In addition,
60
in the year ended October 31, 2014, we also recorded $12 million of impairment of other intangibles due to the exit of our NMR
business.
Share-based compensation. For the years ended 2016, 2015 and 2014, we accounted for share-based awards made to our
employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under
our Employee Stock Purchase Plan ("ESPP") and performance share awards under Agilent Technologies, Inc. Long-Term
Performance Program ("LTPP") using the estimated grant date fair value method of accounting. Under the fair value method, we
recorded compensation expense, in continuing operations, for all share-based awards of $60 million in 2016, $55 million in 2015(cid:3)
and $59 million in 2014. For the stock option grants in 2015 and long term performance plan grants in 2016 and 2015 we used a
volatility measure derived from a selection of our peer companies. In prior periods, we used Agilent stock historical volatility.
We currently consider this method to not be reflective of our future volatility due to the separation of Keysight. See Note 4, "Share-
based compensation" for additional information.
Retirement and post-retirement plans. Substantially all of our employees are covered under various defined benefit and/
or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S.
employees. Assumptions used to determine the benefit obligations and the expense for these plans are derived annually. See
Note 13, “Retirement plans and post-retirement pension plans” for additional information.
Taxes on income. Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities
are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities
and their reported amounts. See Note 5, "Income Taxes" for more information.
Warranty. Our standard warranty terms typically extend for one year from the date of delivery. We accrue for standard
warranty costs based on historical trends in warranty charges as a percentage of net product revenue. The accrual is reviewed
regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within
cost of products at the time products are sold. See Note 14, "Guarantees".
Advertising. Advertising costs are generally expensed as incurred and amounted to $30 million in 2016, $25 million in
2015 and $31 million in 2014.
Research and development. Costs related to research, design and development of our products are charged to research
and development expense as they are incurred.
Sales taxes. Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue.
Net income per share. Basic net income per share is computed by dividing net income - the numerator - by the weighted
average number of common shares outstanding - the denominator - during the period excluding the dilutive effect of stock options
and other employee stock plans. Diluted net income per share gives effect to all potential common shares outstanding during the
period unless the effect is anti-dilutive. The dilutive effect of share-based awards is reflected in diluted net income per share by
application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the
dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the
employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be
used to repurchase hypothetical shares. See Note 6, "Net Income Per Share".
Cash, cash equivalents and short term investments. We classify investments as cash equivalents if their original or remaining
maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.
As of October 31, 2016, approximately $2,181 million of our cash and cash equivalents is held outside of the U.S. in our
foreign subsidiaries. Under current tax laws, the cash could be repatriated to the U.S. but most of it would be subject to U.S. federal
and state income taxes, less applicable foreign tax credits. Our cash and cash equivalents mainly consist of short term deposits
held at major global financial institutions, institutional money market funds, and similar short duration instruments with original
maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and institutional money
market funds in which we invest our funds.
We classify investments as short-term investments if their original maturities are greater than three months and their remaining
maturities are one year or less. Currently, we have no short-term investments.
61
Variable interest entities. We make a determination upon entering into an arrangement whether an entity in which we have
made an investment is considered a Variable Interest Entity (“VIE”). The company evaluates its investments in privately held
companies on an ongoing basis. We have determined that as of October 31, 2016 there were no VIE’s required to be consolidated
in the company’s consolidated financial statements because we do not have a controlling financial interest in any of the VIE’s that
we have invested in nor are we the primary beneficiary. We account for these investments under either the equity or cost method,
depending on the circumstances. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment
process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in
governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have
become VIEs, based on changes in facts and circumstances including changes in contractual arrangements and capital structure.
During 2016, we wrote down an equity method investment to its fair value of zero, resulting in an impairment charge of $18
million. In addition, we recorded an impairment of $7 million of uncollectible loans related to this equity method investment. As
of October 31, 2016, the carrying value of our investments in VIE’s was $80 million with a maximum exposure of $80 million.
The investments are included on the long term investments line of the consolidated balance sheet.
During the year ended October 31, 2016, Agilent made a preferred stock investment in Lasergen for $80 million. Agilent’s
initial ownership stake was 48 percent and we have also joined the board of Lasergen and signed a collaboration agreement. We
have the option to acquire all of the remaining shares of Lasergen until March 2, 2018, for additional consideration of $105 million.
Lasergen is a VIE, however, we do not consolidate the entity in our financial statements because we do not have the power to
direct the activities of the VIE that most significantly impact the VIE's economic performance. Because of the nature of the
preferred stock of Lasergen that we own, we account for this investment under the cost method. As of October 31, 2016, both the
carrying value and maximum exposure of the Lasergen investment was $80 million. The maximum exposure is equal to the
carrying value because we do not have future funding commitments.
Fair value of financial instruments. The carrying values of certain of our financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value
because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those
securities when available. For those long-term equity investments accounted for under the cost or equity method, their carrying
value approximates their estimated fair value. Equity method investments are reported at the amount of the company’s initial
investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. The fair value of
our long-term debt, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value
hierarchy, exceeds the carrying value by approximately $96 million and $30 million as of October 31, 2016 and 2015, respectively.
The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets.
These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are
observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
See also Note 11, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Concentration of credit risk. Financial instruments that potentially subject Agilent to significant concentration of credit
risk include money market fund investments, time deposits and demand deposit balances. These investments are categorized as
cash and cash equivalents. In addition, Agilent has credit risk from derivative financial instruments used in hedging activities and
accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial
institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis.
Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer
base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring
credit over a certain amount and we sell the majority of our products through our direct sales force. Credit risk is mitigated through
collateral such as letter of credit, bank guarantees or payment terms like cash in advance. No single customer accounted for more
than 10 percent of combined accounts receivable as of October 31, 2016, or 2015.
Derivative instruments. Agilent is exposed to global foreign currency exchange rate and interest rate risks in the normal
course of business. We enter into foreign exchange hedging contracts, primarily forward contracts and purchased options and, in
the past, interest rate swaps to manage financial exposures resulting from changes in foreign currency exchange rates and interest
rates. In the vast majority of cases, these contracts are designated at inception as hedges of the related foreign currency or interest
exposures. Foreign currency exposures include committed and anticipated revenue and expense transactions and assets and
liabilities that are denominated in currencies other than the functional currency of the subsidiary. Interest rate exposures are
associated with the company's fixed-rate debt. For option contracts, we exclude time value from the measurement of effectiveness.
To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent
in the amount and duration of the hedged exposures and comply with established risk management policies; foreign exchange
hedging contracts generally mature within twelve months and interest rate swaps, if any, mature at the same time as the maturity
62
of the debt. In order to manage foreign currency exposures in a few limited jurisdictions we may enter into foreign exchange
contracts that do not qualify for hedge accounting. In such circumstances, the local foreign currency exposure is offset by contracts
owned by the parent company. We do not use derivative financial instruments for speculative trading purposes.
All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and
qualify as a fair value hedge, changes in value of the derivative are recognized in the consolidated statement of operations in the
current period, along with the offsetting gain or loss on the hedged item attributable to the hedged risk. For derivative instruments
that are designated and qualify as a cash flow hedges, changes in the value of the effective portion of the derivative instrument is
recognized in comprehensive income (loss), a component of stockholders' equity. Amounts associated with cash flow hedges are
reclassified and recognized in income when either the forecasted transaction occurs or it becomes probable the forecasted transaction
will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at their fair value and changes
in the fair values are recorded in the income statement in the current period. Derivative instruments are subject to master netting
arrangements and are disclosed gross in the balance sheet. Changes in the fair value of the ineffective portion of derivative
instruments are recognized in earnings in the current period. Ineffectiveness in 2016, 2015 and 2014 was not material. Cash flows
from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged
or economically hedged item, primarily in operating activities.
Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Additions,
improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets
are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger,
and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated
over the lesser of their useful lives or the remaining term of the lease and machinery and equipment over three to ten years. We
use the straight-line method to depreciate assets.
Leases. We lease buildings, machinery and equipment under operating leases for original terms ranging generally from
one year to twenty years. Certain leases contain renewal options for periods up to six years. In addition, we lease equipment to
customers in connection with our diagnostics business using both capital and operating leases. As of October 31, 2016 and 2015(cid:3)
our diagnostics and genomics segment has approximately $15 million and $11 million, respectively, of lease receivables related
to capital leases and approximately $23 million and $31 million, respectively, of net assets for operating leases. We depreciate
the assets related to the operating leases over their estimated useful lives.
Capitalized software. We capitalize certain internal and external costs incurred to acquire or create internal use software.
Capitalized software is included in property, plant and equipment and is depreciated over three to five years once development is
complete.
Impairment of long-lived assets. We continually monitor events and changes in circumstances that could indicate carrying
amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances
occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered
through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount
of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Employee compensation and benefits. Amounts owed to employees, such as accrued salary, bonuses and vacation benefits
are accounted for within employee compensation and benefits. The total amount of accrued vacation benefit was $92 million and
$86 million as of October 31, 2016, and 2015, respectively.
Foreign currency translation. We translate and remeasure balance sheet and income statement items into U.S. dollars.
For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S.
dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates
which approximate to average exchange rates in effect during each period. Resulting translation adjustments are reported as a
separate component of accumulated other comprehensive income (loss) in stockholders' equity.
For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are
remeasured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts which are remeasured
at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates which approximate average
exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in consolidated
net income. Net gains or losses resulting from foreign currency transactions, including hedging gains and losses, are reported in
other income (expense), net and was $5 million loss for fiscal year 2016, $9 million loss for 2015 and $4 million loss for 2014,
respectively.
63
2.(cid:3) NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17 Balance Sheet Classification
of Deferred Taxes, to simplify accounting for deferred taxes. Beginning on November 1, 2017 and including the interim periods
following that date, we will be required to present all deferred tax balances as non-current. Existing GAAP guidance requires us
to record deferred tax balances as either current or non-current in accordance with the classification of the underlying attributes.
Early adoption of this guidance is permitted and may be applied either prospectively or retrospectively to all periods presented. We
adopted this guidance at the end of the period ended April 30, 2016 prospectively and therefore, the October 31, 2016 consolidated
balance sheet reflects the new disclosure requirements but prior periods have not been adjusted.
In March 2016, the FASB issued ASU 2016-09 Improvements to Employee Share-Based Payment Accounting, that changes
the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax
deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess
tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard
also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting,
clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on
our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The amendments
also remove the requirement to delay the recognition of an excess tax benefit until it reduces current taxes payable. Under the new
guidance the benefit will be recorded when it arises with a cumulative effect adjustment to opening retained earnings for previously
unrecognized benefits. The new guidance is effective for us beginning November 1, 2017. We elected to early adopt the new
guidance in the third quarter of fiscal year 2016, on a retrospective basis.
The impact of adoption was the recognition of tax shortfalls of $2 million in our provision for income taxes for fiscal year
2016. Additional amendments to the accounting for income taxes was the recognition of the windfall tax benefits as a cumulative
effect adjustment to opening retained earnings of $196 million together with an increase in deferred tax assets included in other
assets of $98 million, an increase in additional paid in capital of $4 million, a reduction in other accrued liabilities of $1 million(cid:3)
and a decrease of $99 million in other long term liabilities. There was no impact from minimum statutory withholding tax
requirements to retained earnings as of November 1, 2015. We have elected to continue to estimate forfeitures expected to occur
to determine the amount of compensation cost to be recognized in each period. The adoption of the new guidance did not have a
significant impact on the calculation of diluted weighted average shares.
We elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for
withheld shares retrospectively to all periods presented. The presentation requirements for cash flows impacted our previously
reported consolidated statement of cash flows for fiscal years 2015 and 2014 as follows:
Year Ended
October 31, 2015
Year Ended
October 31, 2014
As
Reported
As
Adjusted
As
Reported
As
Adjusted
(in millions)
Consolidated Statement of Cash Flows:
Net cash provided by operating activities
Net cash used in financing activities
New Accounting Pronouncements Not Yet Adopted
491
$
$
$
$ (1,068) $ (1,089) $
512
711
$
(97) $
731
(117)
In April 2014, the FASB issued amendments to the guidance on discontinued operations. The guidance changes the criteria
for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing
a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on
the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business,
or a major equity method investment. Additionally, the new guidance requires expanded disclosures about discontinued operations
that will provide financial statement users with more information about the assets, liabilities, income, expenses of discontinued
operations and of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for
64
discontinued operations reporting. The new guidance is effective for Agilent prospectively for all disposals (or classifications as
held for sale) of components of an entity that occur after November 1, 2016.
The disposal of Keysight meets the definition of a discontinued operation under both the existing and amended accounting
guidance. The historical results of operations and the financial position of Keysight are included in the consolidated financial
statements of Agilent and are reported as discontinued operations within this Form 10-K.
In May 2014, the FASB issued amendments to the accounting guidance related to revenue recognition, Topic 606, Revenue
from contracts with customers. The objective of the amendments was to significantly enhance comparability and clarify principles
of revenue recognition practices across entities, industries, jurisdictions and capital markets. In July 2015, the FASB amended the
effective date. In March 2016, the FASB clarified the implementation guidance on principal versus agent considerations. In April
2016, the FASB clarified certain aspects of identifying performance obligations and licensing implementation guidance. In May
2016, the FASB provided additional guidance related to disclosure of remaining performance obligations, as well as other
amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected
from customers. The amendments are effective for us beginning fiscal 2019. Early adoption is permitted for us beginning November
1, 2017. The company expects to adopt this guidance on November 1, 2018. We are currently in the assessment phase to determine
the adoption method and are evaluating the impact of these amendments on our consolidated financial statements and disclosures.
In April 2015, the FASB issued amendments to simplify the presentation of debt issuance costs. The amendments require
that debt issuance costs related to a recognized debt liability to presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs
remain unchanged. The amendments are effective for us beginning November 1, 2016, and for interim periods within that year.
We do not expect the impact of adopting the amendments to be material on our consolidated financial statements and disclosures.
In September 2015, the FASB issued guidance intended to simplify accounting for adjustments to provisional amounts
recorded in connection with business combinations. Beginning in November 1, 2017 and in the interim periods from November
1, 2018, adjustments will be recorded in the period that they are determined rather than applied retrospectively via revision to the
period of acquisition and each period thereafter. We do not expect this guidance to have a material impact on our consolidated
financial statements and disclosures.
In January 2016, the FASB issued amendments to address certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. The standard requires entities to measure equity investments that do not result in consolidation
and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The provisions
under this amendment are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption
is not permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements and disclosures.
In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with
existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee
primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and
lease liabilities on the balance sheet. The new guidance is effective for us beginning November 1, 2020, and for interim periods
within that year. Early adoption is permitted and we will be required to adopt using a modified retrospective approach. We are
evaluating the timing of adoption and the impact of this guidance on our consolidated financial statements and disclosures.
In March 2016, the FASB issued amendments to simplify the transition to the equity method of accounting. The amendments
require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the
investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for
equity method accounting. The amendments are effective for us beginning November 1, 2017, and for interim periods within that
year. We currently do not expect material impact of this amendment on our consolidated financial statements and disclosures.
In August 2016, the FASB issued amendments to address eight specific cash flow issues with the objective of reducing the
existing diversity in practice. The amendments are effective for us beginning November 1, 2018, and for interim periods within
that year. Early adoption is permitted. If we decide to early adopt the amendments, we will be required to adopt all of the
amendments in the same period. We are evaluating the timing of our adoption and the impact of the amendments on our consolidated
statement of cash flows and disclosures.
In October 2016, the FASB issued amendments to improve the accounting for the income tax consequences of intra-entity
transfers of assets other than inventory. The amendments are effective for us beginning November 1, 2018, and for interim periods
within that year. Early adoption is permitted and should be applied on a modified retrospective basis through a cumulative-effect
65
adjustment directly to retained earnings as of the beginning of the period of adoption. We are evaluating the timing of our adoption
and the impact of the amendments on our consolidated financial statements and disclosures.
In November 2016, the FASB issued amendments to require amounts generally described as restricted cash and restricted
cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. The amendments are effective for us beginning November 1, 2018, and for interim
periods within that year. Early adoption is permitted. We are evaluating the timing of our adoption and the impact of the amendments
on our consolidated statement of cash flows and disclosures.
Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not
require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon
adoption.
3. DISCONTINUED OPERATIONS
On September 19, 2013, Agilent announced its intention to separate its electronic measurement business, Keysight, which
was previously a separate reportable segment, into a stand-alone publicly traded company. Keysight was incorporated in Delaware
as a wholly-owned subsidiary of Agilent on December 6, 2013. On November 1, 2014, we completed the distribution of 100%
of the outstanding common stock of Keysight to Agilent stockholders, who received one share of Keysight common stock for
every two shares of Agilent common stock held as of the close of business on the record date, October 22, 2014. The separation
agreement ensured that Keysight had approximately $700 million of total cash and cash equivalents immediately following
distribution. For the year ended October 31, 2015, we transferred a total amount of cash and cash equivalents of $734 million to
Keysight.
The historical results of operations and statement of financial position of Keysight have been presented as discontinued
operations in the consolidated financial statements and prior periods have been restated. Discontinued operations include results
of Keysight's business except for certain allocated corporate overhead costs and certain costs associated with transition services
provided by Agilent to Keysight. Discontinued operations also includes other costs incurred by Agilent to separate Keysight. These
costs include transaction charges, advisory and consulting fees and information system expenses.
The following table summarizes results from discontinued operations of Keysight included in the consolidated statement
of operations:
Net revenue
Costs and expenses
Operating income (loss)
Other income (expense), net
Income (loss) from discontinued operations before tax
Provision (benefit) for income taxes
Net income (loss) from discontinued operations
Years Ended October 31,
2015
2014
$
(in millions)
— $
39
(39)
—
(39)
(2)
$
(37)
$
2,933
2,521
412
5
417
100
317
Net income (loss) from discontinued operations includes transaction, information systems and other costs to effect the
separation of $39 million and $178 million for the years ended October 31, 2015 and 2014, respectively. In the year ended October
31, 2015 only those costs incurred to effect the separation have been included. No income or expense has been recorded for the
Keysight business after separation from Agilent on November 1, 2014.
In addition, $332 million of accumulated other comprehensive loss, net of income taxes, primarily related to pension and
other post-retirement benefits plans and currency translation was also transferred to Keysight together with $28 million of additional
paid in capital related to share based compensation windfall tax benefits. The removal of Keysight net assets and equity related
adjustments is presented as a reduction in Agilent's retained earnings and represents a non cash financing activity excluding cash
66
transferred. See Note 5 “Income Taxes” for tax implications and adjustments due to the distribution and Note 4 “Share Based
Compensation” for changes to share based compensation awards as a result of the distribution of Keysight.
Under the terms of the Transition Services Agreement, we agreed to provide administrative, site services, information
technology systems and various other corporate and support services to Keysight over the period of 12-18 months after the separation
on a cost or cost-plus basis. The most significant component of the service income is the provision of IT services that was completed
by the end of the second quarter of 2015. In total we recorded income for all services provided to Keysight of approximately $12
million in fiscal year 2015. In addition, Agilent expects to receive lease income together with site service income from Keysight
over the next 3-4 years of approximately $12 million per year. In the year ended October 31, 2016 and 2015 other income (expense),
net includes $12 million and $25 million of income in respect of the provision of services to, and lease income from Keysight.
4.
SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the
measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors
including employee stock option awards, restricted stock units, employee stock purchases made under our ESPP and performance
share awards granted to selected members of our senior management under the LTPP based on estimated fair values.
Description of Share-Based Plans
Employee stock purchase plan. Effective November 1, 2000, we adopted the ESPP. The ESPP allows eligible employees
to contribute up to ten percent of their base compensation to purchase shares of our common stock at 85 percent of the closing
market price at purchase date. Shares authorized for issuance in connection with the ESPP are subject to an automatic annual
increase of the lesser of one percent of the outstanding shares of common stock of Agilent on November 1, or an amount determined
by the Compensation Committee of our Board of Directors. Under the terms of the ESPP, in no event shall the number of shares
issued under the ESPP exceed 75 million shares.
Under our ESPP, employees purchased 696,178 shares for $23 million in 2016, 346,472 shares for $12 million in 2015 and
1,604,406 shares for $73 million in 2014. As of October 31, 2016, the number of shares of common stock authorized and available
for issuance under our ESPP was 45,168,192.
Incentive compensation plans. On November 19, 2008 and March 11, 2009, the Compensation Committee of Board of
Directors and the stockholders, respectively, approved the Agilent Technologies, Inc. 2009 Stock Plan (the "2009 Stock Plan") to
replace the Company's 1999 Stock Plan and 1999 Stock Non-Employee Director Stock Plan and subsequently reserved 25 million
shares of Company common stock that may be issued under the 2009 Plan, plus any shares forfeited or cancelled under the 1999
Stock Plan. The 2009 Stock Plan provides for the grant of awards in the form of stock options, stock appreciation rights ("SARs"),
restricted stock, restricted stock units ("RSUs"), performance shares and performance units with performance-based conditions
on vesting or exercisability, and cash awards. The 2009 Plan has a term of ten years. As of October 31, 2016, 10,316,082 shares
were available for future awards under the 2009 Stock Plan.
Stock options granted under the 2009 Stock Plans 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 and generally have a maximum contractual term of ten years. The exercise price for stock options is generally
not less than 100 percent of the fair market value of our common stock on the date the stock award is granted. No options were
granted during the year ended October 31, 2016.
Effective November 1, 2003, the Compensation Committee of the Board of Directors approved the LTPP, which is a
performance stock award program administered under the 2009 Stock Plan, for the company's executive officers and other key
employees. Participants in this program are entitled to receive unrestricted shares of the company's stock after the end of a three-
year period, if specified performance targets are met. Certain LTPP awards are generally designed to meet the criteria of a
performance award with the performance metrics and peer group comparison based on the Total Stockholders’ Return (“TSR”)
set at the beginning of the performance period. Effective November 1, 2015, the Compensation Committee of the Board of Directors
approved another type of performance stock award, for the company's executive officers and other key employees. Participants
in this program are also entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified
performance targets based on Operating Margin (“OM”) over the three-year period are met. All LTPP awards granted after
November 1, 2015, are subject to a one-year post-vest holding period.
67
Based on the performance metrics the final LTPP award may vary from zero to 200 percent of the target award. The maximum
contractual term for awards under the LTPP program is three years and the maximum award value cannot exceed 300 percent of
the grant date target value. We consider the dilutive impact of these programs in our diluted net income per share calculation only
to the extent that the performance conditions are expected to be met.
We also issue restricted stock units under our share-based plans. The estimated fair value of the restricted stock unit awards
granted under the Stock Plans is determined based on the market price of Agilent's common stock on the date of grant adjusted
for expected dividend yield. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a
period of four years from the date of grant.
In connection with the separation of Keysight Technologies on November 1, 2014 and in accordance with the Employee
Matters Agreement we made certain adjustments to the exercise price and number of our share-based compensation awards with
the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable and non-exercisable stock options
converted to those of the entity where the employee is working post-separation. Restricted stock units awards and long-term
performance plan grants were adjusted to provide holders restricted stock units and long-term performance plan grants in the
company that employs such employee following the separation. These adjustments to our stock-based compensation awards did
not have a material impact on compensation expense.
Impact of Share-based Compensation Awards
We have recognized compensation expense based on the estimated grant date fair value method under the authoritative
guidance. For all share-based awards we have recognized compensation expense using a straight-line amortization method. As
the guidance requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated
share-based compensation has been reduced for estimated forfeitures.
The impact on our results for share-based compensation was as follows:
Cost of products and services
Research and development
Selling, general and administrative
Share-based compensation expense in continuing operations
Share-based compensation expense in discontinued operations
Total share-based compensation expense
Years Ended October 31,
2016
2015
2014
$
$
(in millions)
11
$
5
39
55
—
55
$
$
$
14
6
40
60
—
60
13
7
39
59
39
98
At October 31, 2016 and 2015 there was no share-based compensation capitalized within inventory. The weighted average
grant date fair value of options, granted in 2015 and 2014 was $10.58 and $18.73 per share, respectively. No stock options were
granted in 2016.
Included in the 2016, 2015 and 2014 expense is incremental expense for acceleration of share-based compensation related
to the announced workforce reduction plan of zero, $2 million and $1 million, respectively. Upon termination of the employees
impacted by workforce reduction, the non-vested Agilent awards held by these employees immediately vests. Employees have a
period of up to three months in which to exercise the Agilent options before such options are cancelled.
Valuation Assumptions
For all periods presented, the fair value of share based awards for employee stock option awards was estimated using the
Black-Scholes option pricing model. For all periods presented, shares granted under the LTPP (TSR) were valued using a Monte
Carlo simulation. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the fair market
value at the purchase date.
The estimated fair value of restricted stock unit awards and LTPP (OM) was determined based on the market price of
Agilent's common stock on the date of grant adjusted for expected dividend yield and as appropriate, a discount related to the one-
year post vesting. The compensation cost for LTPP (OM) reflects the cost of awards that are probable to vest at the end of the
performance period.
68
The following assumptions were used to estimate the fair value of employee stock options and LTPP grants.
Stock Option Plans:
Weighted average risk-free interest rate
Dividend yield
Weighted average volatility
Expected life
LTPP:
Volatility of Agilent shares
Volatility of selected peer-company shares
Price-wise correlation with selected peers
Years Ended October 31,
2016
2015
2014
—
—
—
—
24%
14%-50%
35%
1.75%
1%
28%
5.5 years
25%
12%-57%
37%
1.69%
1%
39%
5.8 years
36%
13%-57%
47%
Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex
assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to the separation of Keysight
on November 1, 2014, expected volatility for grants of options in 2015 was based on a 5.5 year average historical stock price
volatility of a group of our peer companies. For the volatility of our 2016 and 2015 LTPP (TSR) grants, we used the 3-year
average historical stock price volatility of a group of our peer companies. We believe our historical volatility prior to the separation
of Keysight is no longer relevant to use. For the grants of options and LTPP (TSR) prior to November 1, 2014, the expected stock
price volatility assumption was determined using the historical volatility of Agilent’s stock over the most recent historical period
equivalent to the expected life of the stock options and LTPP (TSR).
All LTPP awards granted in 2016 to our senior management employees have a one-year post-vest holding restriction. The
estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model. The model calculates the
potential lost value if the employee were able to sell the shares during the lack of marketability period, instead of being required
to hold the shares. The model used the 3-year average historical stock price volatility of a group of our peer companies and an
expected dividend yield to compute the discount. The grants made during 2016 have a discount of 5.5 percent while computing
the fair value.
69
Share-based Payment Award Activity
Employee Stock Options
The following table summarizes employee stock option award activity of our employees and directors for 2016.
Options
Outstanding
Weighted
Average
Exercise Price
Outstanding at October 31, 2015
Granted
Exercised
Cancelled/Forfeited/Expired
Outstanding at October 31, 2016
Forfeited and expired options from total cancellations in 2016 were as follows:
(in thousands)
5,712
$
— $
(1,547) $
(59) $
$
4,106
31
—
25
33
33
Forfeited
Expired
Total Options Cancelled during 2016
Options
Cancelled
(in thousands)
31
28
59
$
$
$
Weighted
Average
Exercise Price
38
28
33
The options outstanding and exercisable for equity share-based payment awards at October 31, 2016 were as follows:
Range of
Exercise Prices
Number
Outstanding
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
Number
Exercisable
Options Exercisable
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Aggregate
Intrinsic
Value
$0 - 25
$25.01 - 30
$30.01 - 40
$40.01 - over
(in thousands)
(in years)
(in thousands)
(in thousands)
(in years)
(in thousands)
361
1,633
898
1,214
4,106
2.4
5.0
7.1
8.0
6.1
$
$
$
$
$
18
26
39
41
33
$
$
9,268
28,095
3,995
3,259
44,617
361
1,324
439
302
2,426
2.4
4.7
7.1
8.0
5.2
$
$
$
$
$
18
26
39
41
29
$
$
9,268
22,741
1,957
815
34,781
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the company's closing
stock price of $43.57 at October 31, 2016, which would have been received by award holders had all award holders exercised
their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable at October 31, 2016
was approximately 2.4 million.
70
The following table summarizes the aggregate intrinsic value of options exercised and the fair value of options granted in
2016, 2015 and 2014:
Options exercised in fiscal 2014
Black-Scholes per share value of options granted during fiscal 2014
Options exercised in fiscal 2015
Black-Scholes per share value of options granted during fiscal 2015
Options exercised in fiscal 2016
Black-Scholes per share value of options granted during fiscal 2016
Aggregate
Intrinsic Value
(in thousands)
98,075
$
$
$
33,258
26,913
$
$
$
Weighted
Average
Exercise
Price
Per Share Value
Using
Black-Scholes
Model
30
24
25
$
$
$
19
11
—
As of October 31, 2016, the unrecognized share-based compensation costs for outstanding stock option awards, net of
expected forfeitures, was approximately $2 million which is expected to be amortized over a weighted average period of 1.7 years.
The amount of cash received from the exercise of share-based awards granted was $62 million in 2016, $58 million in 2015 and
$188 million in 2014. See Note 5, "Income Taxes" for the tax impact on share-based award exercises.
Non-vested Awards
The following table summarizes non-vested award activity in 2016 primarily for our LTPP and restricted stock unit awards.
Non-vested at October 31, 2015
Granted
Vested
Forfeited
Change in LTPP shares in the year due to not meeting performance conditions
Non-vested at October 31, 2016
Shares
(in thousands)
$
2,417
1,732
$
(607) $
(94) $
(386) $
$
3,062
Weighted
Average
Grant Price
36
40
35
39
28
40
As of October 31, 2016, the unrecognized share-based compensation costs for non-vested restricted stock awards, net of
expected forfeitures, was approximately $45 million which is expected to be amortized over a weighted average period of 2.5 years.
The total fair value of restricted stock awards vested was $21 million for 2016, $31 million for 2015 and $54 million for 2014.
In the third quarter of fiscal year 2016, the company elected to early adopt new guidance that changes the accounting for
certain aspects of share-based payments to employees. For additional details related to the new guidance see Note 2, "New
Accounting Pronouncements."
71
5.
INCOME TAXES
The domestic and foreign components of income from continuing operations before taxes are:
U.S. operations
Non-U.S. operations
Total income from continuing operations before taxes
The provision (benefit) for income taxes is comprised of:
U.S. federal taxes:
Current
Deferred
Non-U.S. taxes:
Current
Deferred
State taxes, net of federal benefit:
Current
Deferred
Total provision (benefit)
Years Ended October 31,
2016
2015
(in millions)
2014
27
517
544
$
$
77
403
480
$
$
(72)
301
229
Years Ended October 31,
2016
2015
(in millions)
2014
(1) $
19
77
(14)
3
(2)
82
$
(91) $
97
62
(27)
1
—
42
$
17
(80)
176
(111)
—
(5)
(3)
$
$
$
$
The income tax provision (benefit) does not reflect potential future tax savings resulting from excess deductions associated
with our various share-based award plans.
The significant components of deferred tax assets and deferred tax liabilities included on the consolidated balance sheet
are:
October 31,
2016
2015
Deferred
Tax Assets
Deferred Tax
Liabilities
Deferred
Tax Assets
Deferred Tax
Liabilities
Inventory
Intangibles
Property, plant and equipment
Warranty reserves
Pension benefits and retiree medical benefits
Employee benefits, other than retirement
Net operating loss, capital loss, and credit carryforwards
Unremitted earnings of foreign subsidiaries
Share-based compensation
Deferred revenue
Other
Subtotal
Tax valuation allowance
Total deferred tax assets or deferred tax liabilities
$
$
13
—
16
14
136
28
293
—
41
42
12
595
(129)
466
$
$
(in millions)
— $
92
—
—
—
—
—
53
—
—
—
145
—
145
$
13
—
17
11
93
26
173
—
39
41
4
417
(131)
286
$
$
—
95
—
—
—
—
—
33
—
—
—
128
—
128
The increase in 2016 as compared to 2015 for the deferred tax asset relating to pension benefits is due mainly to the tax
effect of changes in pension plans recognized in other comprehensive income (loss). The increase in net operating losses and
72
tax credits is due mainly to the early adoption of Accounting Standard Update (“ASU”) 2016-09 “Improvements to Employees
Share-Based Payment Accounting".
Agilent records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries' earnings
are considered indefinitely reinvested outside the U.S. As of October 31, 2016 the Company recognized a $53 million deferred
tax liability for the overall residual tax expected to be imposed upon the repatriation of unremitted foreign earnings that are not
considered permanently reinvested. As of October 31, 2016, the cumulative amount of undistributed earnings considered
indefinitely reinvested was $5.5 billion. No deferred tax liability has been recognized on the basis difference created by such
earnings since it is our intention to utilize those earnings in the company’s foreign operations. Because of the availability of
U.S. foreign tax credits, the determination of the unrecognized deferred tax liability on these earnings is not practicable.
In November 2015, the FASB issued guidance to simplify accounting for deferred taxes. Beginning on November 1, 2017
and including the interim periods following that date, we will be required to present all deferred tax balances as non-current. Prior
GAAP guidance required us to record deferred tax balances as either current or non-current in accordance with the classification
of the underlying attributes. Early adoption of this guidance was permitted and could be applied either prospectively or
retrospectively to all periods presented. We adopted this guidance at the end of the period ended April 30, 2016 prospectively.
Therefore, the October 31, 2016 consolidated balance sheet reflects the new disclosure requirements but prior periods have not
been adjusted.
The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows for the years
2016 and 2015:
Current deferred tax assets (included within other current assets)
Long-term deferred tax assets (included within other assets)
Current deferred tax liabilities (included within other accrued liabilities)
Long-term deferred tax liabilities (included within other long-term liabilities)
Total
October 31,
2016
2015
(in millions)
— $
386
—
(65)
321
$
84
180
(10)
(96)
158
$
$
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more
likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. As
of October 31, 2016, we continued to maintain a valuation allowance of $129 million until sufficient positive evidence exists
to support reversal. The valuation allowance is mainly related to deferred tax assets for California R&D credits, net operating
losses in the Netherlands and capital losses in the U.S. and Australia.
At October 31, 2016, we had federal net operating loss carryforwards of approximately $19 million and $142 million tax
credit carryforwards. The federal net operating losses expire in years beginning 2020 through 2034. At October 31, 2016, we
had state net operating loss carryforwards of approximately $200 million which expire in years beginning 2017 through 2033,
if not utilized. In addition, we had net state tax credit carryforwards of $36 million that do not expire. All of the federal and
some of the state net operating loss carryforwards are subject to change of ownership limitations provided by the Internal Revenue
Code and similar state provisions. At October 31, 2016, we also had foreign net operating loss carryforwards of approximately
$296 million. Of this foreign loss, $148 million will expire in years beginning 2017 through 2026, if not utilized. The remaining
$148 million has an indefinite life. Some of the foreign losses are subject to annual loss limitation rules. These annual loss
limitations in the U.S. and foreign jurisdictions may result in the expiration or reduced utilization of the net operating losses.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued amendments that change the accounting for
certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to
be recorded in the income statement when the awards vest or are settled. Under the new guidance the benefit will be recorded
when it arises with a cumulative effect adjustment to opening retained earnings for previously unrecognized benefits. The new
guidance is effective for us beginning November 1, 2017, with early adoption permitted. We elected to early adopt the new
guidance in the third quarter of fiscal year 2016, on a retrospective basis, which required us to reflect any adjustments as of
November 1, 2015, the beginning of the annual period that includes the interim period of adoption. The impact of adoption on
previously reported quarterly results was the recognition of tax shortfalls of $2 million in our provision for income taxes for the
first quarter of fiscal year 2016. Additional amendments to the accounting for income taxes on previously reported quarterly
results was the recognition of the windfall tax benefits as a cumulative effect adjustment to opening retained earnings of $196
million together with an increase in deferred tax assets included in other assets of $98 million, an increase in additional paid in
73
capital of $4 million, a reduction in other accrued liabilities of $1 million and a decrease of $99 million in other long term
liabilities. See Note 2 "New Accounting Pronouncements" for additional information.
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
Profit before tax times statutory rate
State income taxes, net of federal benefit
Non-U.S. income taxed at different rates
Change in unrecognized U.S. tax benefits
Repatriation of foreign earnings
Valuation allowances
Adjustments to earnings of foreign subsidiaries
Adjustment to income taxes payable
Other, net
Provision (benefit) for income taxes
Effective tax rate
Years Ended October 31,
2016
2015
2014
$
$
(in millions)
167
(8)
(72)
(116)
68
(2)
—
—
5
42
8.7%
$
$
190
2
(68)
(27)
—
18
(11)
—
(22)
82
15.1%
80
(7)
(39)
(111)
75
2
—
(6)
3
(3)
(1.3)%
$
$
Agilent enjoys tax holidays in several different jurisdictions, most significantly in Singapore. The tax holidays provide
lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific
types of income in those jurisdictions. The tax holidays are due for renewal between 2018 and 2023. As a result of the incentives,
the impact of the tax holidays decreased income taxes by $86 million, $65 million, and $27 million in 2016, 2015, and 2014,
respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $0.26, $0.19, and $0.08 in
2016, 2015 and 2014, respectively.
For 2016, the company’s effective tax rate from continuing operations was 15.1%. The income tax expense from continuing
operations was $82 million. The income tax provision from continuing operations for the year ended October 31, 2016 included
net discrete tax expense of $17 million. The net discrete tax expense for the year ended October 31, 2016 included $5 million
of tax benefit for the extension of the U.S. research and development tax credit attributable to the company's prior fiscal year,
$6 million of tax expense related to the curtailment gain recognized with respect to the U.S. retirement plan and Supplemental
Benefits Plan, $18 million of tax expense related to the establishment of a valuation allowance on an equity method impairment
that would generate a capital loss when realized, and a net $2 million of other discrete tax benefit. Included in the net $2 million
discrete tax benefit are $9 million of out-of-period correcting tax expense entries recorded in the second and fourth quarters of
fiscal year 2016 associated with German return-to-provision corrections. These are offset by an $11 million out-of-period
correcting tax benefit associated with an adjustment to the deferred tax liability for unremitted foreign earnings. The out-of-
period corrections were determined to be immaterial to the previously issued and current period financial statements.
For 2015, the company’s effective tax rate from continuing operations was 8.7 percent. The income tax expense from
continuing operations was $42 million. The income tax expense from continuing operations for the year ended October 31,
2015 included net discrete tax benefits of $55 million primarily due to the settlement of an Internal Revenue Service (“IRS)
audit in the U.S. and the recognition of tax expense related to the repatriation of dividends.
For 2014, the company's effective tax rate from continuing operations was (1.3) percent. The income tax benefit from
continuing operations was $3 million. The income tax benefit for the year ended October 31, 2014 included a net discrete benefit
of $33 million Internal Revenue Service ("IRS") audit in the U.S. and the recognition of tax expense related to the repatriation
of dividends.
74
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and
liabilities, was as follows for the years 2016 and 2015:
Current income tax assets (included within other current assets)
Long-term income tax assets (included within other assets)
Current income tax liabilities (included within other accrued liabilities)
Long-term income tax liabilities (included within other long-term liabilities)
Total
October 31,
2016
2015
$
(in millions)
83
19
(49)
(190)
(137) $
104
20
(62)
(227)
(165)
$
$
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and
regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes
the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds
will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty
in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based
on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax
uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our
estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required.
If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result
in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax
jurisdictions are as follows:
Balance, beginning of year
Additions for tax positions related to the current year
Additions for tax positions from prior years
Reductions for tax positions from prior years
Settlements with taxing authorities
Statute of limitations expirations
Balance, end of year
2016
2015
2014
(in millions)
417
$
33
3
(156)
(4)
(4)
289
$
$
$
289
31
1
(27)
—
(1)
293
512
45
11
(141)
(2)
(8)
417
$
$
As of October 31, 2016, we had $293 million of unrecognized tax benefits of which $271 million, if recognized,
would affect our effective tax rate.
We recognized a tax expense of $2 million, a tax benefit of $2 million and a tax benefit $10 million of interest and penalties
related to unrecognized tax benefits in 2016, 2015 and 2014, respectively. Interest and penalties accrued as of October 31, 2016
and 2015 were $25 million and $24 million, respectively.
On November 1, 2014, Agilent transferred deferred tax assets of $237 million, deferred tax liabilities of $37 million,
current income tax payable of $40 million, and other long-term liabilities related to uncertain tax positions totaling $8 million
to Keysight as part of its separation from Agilent. A current prepaid income tax asset of $19 million and long-term prepaid
income tax asset of $3 million related to sales of intercompany assets was also transferred to Keysight upon separation from
Agilent.
In the U.S., tax years remain open back to the year 2012 for federal income tax purposes and the year 2000 for significant
states. On September 22, 2015, we reached an agreement with the Internal Revenue Service ("IRS") for the tax years 2008
through 2011. During the first quarter of 2016, we made a payment of approximately $9 million of tax plus interest as part
of closing the exam. This amount was partially offset by a prepaid tax account of approximately $3 million that the IRS
allowed as an offset to the $12 million in incremental taxes. The settlement resulted in the recognition, within the continuing
operations, of previously unrecognized tax benefits of $119 million, offset by a tax liability on foreign distributions of
approximately $99 million principally related to the repatriation of foreign earnings.
75
On January 29, 2014 we reached an agreement with the IRS for the tax years 2006 through 2007. The settlement resulted
in the recognition, within the continuing operations, of previously unrecognized tax benefits of $111 million, offset by a tax
liability on foreign distributions of approximately $75 million principally related to the repatriation of foreign earnings.
In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year
2001. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized
tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will
be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of
years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate
the range of possible changes to the balance of our unrecognized tax benefits.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-
based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court
on December 1, 2015. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations
to include stock-based compensation. The IRS notified the U.S. Court of Appeals for the Ninth Circuit on February 19, 2016
of its intent to appeal the Tax Court's decision in the case. We concluded that no adjustment to our consolidated financial
statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
6. NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share
computations for the periods presented below.
Numerator:
Income from continuing operations
Income (loss) from discontinued operations
Net income
Denominators:
Basic weighted average shares
Potential common shares — stock options and other employee stock
plans
Diluted weighted average shares
Years Ended October 31,
2016
2015
(in millions)
2014
$
$
462
$
— $
462
326
3
329
$
438
(37) $
401
333
2
335
232
317
549
333
5
338
In connection with the separation of Keysight on November 1, 2014 and in accordance with the Employee Matters Agreement
we made certain adjustments to the exercise price and number of our share-based compensation awards. These adjustments to our
share-based awards did not have a material impact on our dilutive weighted average shares.
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock
method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money
options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising
stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase
hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect
from potentially dilutive awards. The total number of share-based awards issued in 2016, 2015 and 2014 were 3 million, 3 million
and 6 million, respectively.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation
of diluted earnings per share because their effect would be anti-dilutive. For 2016, 2015 and 2014, options to purchase 842,200,
1.2 million and 1,500 shares respectively were excluded from the calculation of diluted earnings per share. In addition, we also
exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined
exercise price and unamortized fair value collectively were greater than the average market price of our common stock because
their effect would also be anti-dilutive. For the year ended 2016, 2015 and 2014, options to purchase 229,600, 368,900 and 383,200
shares respectively were excluded from the calculation of diluted earnings per share.
76
7.
INVENTORY
October 31,
2016
2015
Finished goods
Purchased parts and fabricated assemblies
Inventory
$
$
$
(in millions)
339
194
533
$
362
179
541
Inventory-related excess and obsolescence charges, included in continuing operations, of $20 million were recorded in total
cost of products in 2016, $30 million in 2015 and $46 million in 2014, respectively. We record excess and obsolete inventory
charges for both inventory on our site as well as inventory at our contract manufacturers and suppliers where we have non-
cancellable purchase commitments.
8.
PROPERTY, PLANT AND EQUIPMENT, NET
Land
Buildings and leasehold improvements
Machinery and equipment
Software
Total property, plant and equipment
Accumulated depreciation and amortization
Property, plant and equipment, net
October 31,
2016
2015
(in millions)
$
$
53
757
420
176
1,406
(767)
639
$
$
53
705
405
171
1,334
(730)
604
There were no asset impairments in 2016 and 2015. Asset impairments other than related to our exit of the NMR business
were zero in 2014. Asset impairments in connection with the exit of the NMR business were $7 million in 2014. Depreciation
expenses were $95 million in 2016, $98 million in 2015 and $120 million in 2014.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balances at October 31, 2016, 2015 and 2014 and the movements in 2016 and 2015 for each of our reportable
segments are shown in the table below:
Goodwill as of October 31, 2014
Foreign currency translation impact
Goodwill arising from acquisitions
Goodwill as of October 31, 2015
Foreign currency translation impact
Goodwill arising from acquisitions
Goodwill as of October 31, 2016
Life Sciences
and Applied
Markets
Diagnostics
and
Genomics
Agilent
CrossLab
Total
668
(18)
—
650
3
137
790
$
$
$
(in millions)
1,345
(166)
55
1,234
(11)
—
1,223
$
$
$
494
(12)
—
482
3
19
504
$
$
$
2,507
(196)
55
2,366
(5)
156
2,517
$
$
$
As of September 30, 2016, we assessed goodwill impairment for our reporting units and no impairment of goodwill was
indicated.
77
The component parts of other intangible assets at October 31, 2016 and 2015 are shown in the table below:
As of October 31, 2015:
Purchased technology
Trademark/Tradename
Customer relationships
Total amortizable intangible assets
In-Process R&D
Total
As of October 31, 2016:
Purchased technology
Backlog
Trademark/Tradename
Customer relationships
Total amortizable intangible assets
In-Process R&D
Total
Gross
Carrying
Amount
Other Intangible Assets
Accumulated
Amortization
and Impairments
(in millions)
Net Book
Value
$
$
$
$
$
$
746
141
230
1,117
22
1,139
823
1
149
263
1,236
17
1,253
$
$
$
$
$
$
476
50
168
694
—
694
572
1
61
211
845
—
845
$
$
$
$
$
$
270
91
62
423
22
445
251
—
88
52
391
17
408
In 2016, we acquired Seahorse Bioscience, a leader in providing instruments and assay kits for measuring cell metabolism
and bioenergetics, for $242 million and iLab Solutions LLC ("iLab"), a cloud-based solutions provider for core laboratory
management for $26 million. We have not included the pro forma impact of these acquisitions since they are not material to our
current or prior period results. In 2016, we recorded additions to goodwill of $156 million and to other intangible assets of $121
million related to these acquisitions. During the year other intangible assets decreased $2 million, due to the impact of foreign
exchange translation.
In 2015, we recorded additions to goodwill of $55 million and to intangible assets of $13 million related to a single acquisition
of the company, Cartegenia. During the year other intangible assets decreased $58 million, due to the impact of foreign exchange
translation. During 2015, we also removed the gross carrying amount of $246 million and the related accumulated amortization
of fully amortized intangible assets which were no longer being used.
In addition, we recorded $4 million, $3 million and $4 million of impairments of other intangibles related to the cancellation
of in-process research and development projects during 2016, 2015 and 2014, respectively.
Amortization of intangible assets was $152 million in 2016, $156 million in 2015, and $189 million in 2014.
Future amortization expense related to existing finite-lived purchased intangible assets for the next five fiscal years and
thereafter is estimated below:
Estimated future amortization expense:
(in millions)
2017
2018
2019
2020
2021
Thereafter
$
$
$
$
$
$
112
82
58
47
35
57
78
10. INVESTMENTS
The following table summarizes the company's equity investments as of October 31, 2016 and 2015 (net book value):
Long-Term
Cost method investments
Trading securities
Equity method investments
Total
October 31,
2016
2015
(in millions)
$
$
104
31
—
135
$
$
23
35
28
86
Cost method investments consist of non-marketable equity securities and a fund and are accounted for at historical cost.
Approximately $80 million relates to our variable interest entity investment, see Note 1, "Overview and Summary of Significant
Accounting Policies". Trading securities are reported at fair value, with gains or losses resulting from changes in fair value
recognized currently in earnings. Equity method investments are reported at the amount of the company’s initial investment and
adjusted each period for the company’s share of the investee’s income or loss and dividend paid.
All of our investments, excluding trading securities, are subject to periodic impairment review. The impairment analysis
requires significant judgment to identify events or circumstances that would likely have significant adverse effect on the future
value of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including
the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee,
and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market
value. During the year ended October 31, 2016, we have identified certain events and circumstances that indicates the decline in
value of an equity method investment is other-than-temporary. As a result, we have written down the investment to its fair value
of zero, resulting in an impairment charge of approximately $18 million.
Amounts included in other income (expense), net for the appropriate share of loss on equity method investments and other
than temporary impairments were as follows:
Years Ended October 31,
2016
2015
(in millions)
2014
Equity method investments - share of losses
Equity method investments - other than temporary impairments
Total
$
$
(10) $
(18)
(28) $
(9) $
—
(9) $
(7)
—
(7)
Net unrealized gains on our trading securities portfolio were $1 million in 2016, $2 million in 2015 and $2 million in 2014.
11. FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most
advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three
levels. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 — applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
79
Level 2 — applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are
observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally
from, or corroborated by, observable market data.
Level 3 — applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or liabilities.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2016 were as follows:
Fair Value Measurement at
October 31, 2016 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in millions)
Significant
Unobservable
Inputs
(Level 3)
October 31,
2016
Assets:
Short-term
Cash equivalents (money market funds)
Derivative instruments (foreign exchange
contracts)
Long-term
Trading securities
Total assets measured at fair value
Liabilities:
Short-term
Derivative instruments (foreign exchange
contracts)
Long-term
Deferred compensation liability
Total liabilities measured at fair value
$
$
$
$
1,482
$
1,482
$
— $
9
—
31
1,522
$
31
1,513
$
8
$
31
39
$
— $
—
— $
9
—
9
$
8
$
31
39
$
—
—
—
—
—
—
—
80
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2015 were as follows:
Fair Value Measurement at
October 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(in millions)
Significant
Unobservable
Inputs
(Level 3)
October 31,
2015
Assets:
Short-term
Cash equivalents (money market funds)
Derivative instruments (foreign exchange
contracts)
Long-term
Trading securities
Total assets measured at fair value
Liabilities:
Short-term
Derivative instruments (foreign exchange
contracts)
Long-term
Deferred compensation liability
Total liabilities measured at fair value
$
$
$
$
1,411
$
1,411
$
— $
4
—
35
1,450
$
35
1,446
$
5
$
35
40
$
— $
—
— $
4
—
4
$
5
$
35
40
$
—
—
—
—
—
—
—
Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified
within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active
market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred
compensation liability is classified as level 2 because although the values are not directly based on quoted market prices, the inputs
used in the calculations are observable.
Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes
in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains
and losses, net of tax, included in stockholders' equity. Realized gains and losses from the sale of these instruments are recorded
in net income.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net
income for the years ended October 31, 2016, 2015 and 2014:
Long-lived assets held and used
Long-lived assets held for sale
Years Ended
October 31,
2016
2015
2014
$
$
(in millions)
3
4
$
$
— $
— $
23
—
Long-lived assets held and used with a carrying amount of $4 million were written down to their fair value of zero, resulting
in an impairment charge of $4 million, which was included in net income for 2016. Long-lived assets held and used with a carrying
amount of $3 million were written down to their fair value of zero, resulting in an impairment charge of $3 million, which was
included in net income for 2015. Long-lived assets held and used with a carrying amount of $23 million were written down to
their fair value of zero, resulting in an impairment charge of $23 million, which was included in net income for 2014.
81
The impairment charge in 2016 and 2015 of $4 million and $3 million, respectively, relates to IPR&D projects that were
abandoned and written down to their fair value of zero. The impairment charge in 2014 includes $19 million relating to the exit
of a business and $4 million related to various IPR&D projects that were abandoned and written down to their fair value of zero.
There were no impairments of long-lived assets held for sale in 2016, 2015 and 2014.
Fair values for the impaired long-lived assets were measured using level 2 inputs.
12. DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business.
As part of risk management strategy, we use derivative instruments, primarily forward contracts, purchased options, and interest
rate swaps, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates and interest
rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates
and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-
term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. The fair value of our fixed
rate debt changes when the underlying market rates of interest change, and, in the past, we have used interest rate swaps to change
our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from
our cash, cash equivalents and other short term investments. As of October 31, 2016, all interest rate swap contracts had either
been terminated or had expired.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that
represented the notional amount of $400 million. On October 20, 2014 we prepaid $500 million out of $600 million principal of
our 2017 senior notes and fully amortized the associated proportionate deferred gain to other income (expense). The remaining
gain to be amortized related to the $100 million of 2017 senior notes at October 31, 2016 was $1 million. On August 9, 2011, we
terminated five interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million.
The gain to be amortized at October 31, 2016 was $15 million. All deferred gains from terminated interest rate swaps are being
amortized over the remaining life of the respective senior notes.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes
in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve
months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative
guidance. The changes in the fair value of the effective portion of the derivative instrument are recognized in accumulated other
comprehensive income. Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement
of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the
hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified to other
income (expense) in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized
in other income (expense) in the consolidated statement of operations in the current period. We record the premium paid (time
value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are
excluded from the assessment of hedge effectiveness and are recognized in other income (expense) over the life of the option
contract. Ineffectiveness in 2016, 2015 and 2014 was not significant. For the years ended October 31, 2016, 2015 and 2014 gains
and losses recognized in earnings due to de-designation of cash flow hedge contracts were not significant.
In July 2012, Agilent executed treasury lock agreements for $400 million in connection with future interest payments to
be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The
treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other
comprehensive income which is being amortized to interest expense over the life of the 2022 senior notes. The remaining gain to
be amortized related to the treasury lock agreements at October 31, 2016 was $2 million.
82
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional
amount of $300 million in connection with future interest payments to be made on our 2026 senior notes issued on September 15,
2016. These derivative instruments were designated and qualified as cash flow hedges under the criteria prescribed in the
authoritative guidance. The swap arrangements were terminated on September 15, 2016 with a payment of $10 million and we
recognized this as a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over
the life of the 2026 senior notes. The remaining loss to be amortized related to the interest rate swap agreements at October 31,
2016 was $9 million.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in
currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and
do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative
are recognized in other income (expense) in the consolidated statement of operations, in the current period, along with the offsetting
foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the
terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions
which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit
risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness
of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are
dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative
instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability
positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability
position as of October 31, 2016, was $4 million. The credit-risk-related contingent features underlying these agreements had not
been triggered as of October 31, 2016.
There were 46 foreign exchange forward contracts open as of October 31, 2016 and designated as cash flow hedges. There
were 165 foreign exchange forward contracts open as of October 31, 2016 not designated as hedging instruments. The aggregated
notional amounts by currency and designation as of October 31, 2016 were as follows:
Derivatives
Designated as
Cash Flow
Hedges
Derivatives
Not
Designated
as Hedging
Instruments
Forward
Contracts
USD
Buy/(Sell)
Forward
Contracts
USD
Buy/(Sell)
Forward
Contracts
DKK
Buy/(Sell)
(in millions)
106
(2)
—
12
(3)
15
—
(6)
122
(32) $
(22)
(17)
3
—
(46)
—
(5)
(119) $
$
$
$
$
(57)
(3)
(4)
(4)
—
(4)
(49)
(14)
(135)
Currency
Euro
British Pound
Canadian Dollar
Australian Dollars
Malaysian Ringgit
Japanese Yen
American Dollar
Other
83
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance
with the authoritative guidance. The gross fair values and balance sheet location of derivative instruments held in the consolidated
balance sheet as of October 31, 2016 and 2015 were as follows:
Asset Derivatives
Liability Derivatives
Fair Values of Derivative Instruments
Balance Sheet Location
Derivatives designated as hedging
instruments:
Cash flow hedges
Foreign exchange contracts
Other current assets
Derivatives not designated as
hedging instruments:
Foreign exchange contracts
Other current assets
Total derivatives
Fair Value
October 31,
2016
October 31,
2015
(in millions)
Balance Sheet Location
Fair Value
October 31,
2016
October 31,
2015
$
$
$
$
5
5
4
9
$
$
$
$
2 Other accrued liabilities
2
2 Other accrued liabilities
4
$
$
$
$
3
3
5
8
$
$
$
$
1
1
4
5
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated
as hedging instruments in our consolidated statement of operations were as follows:
2016
2015
2014
(in millions)
Derivatives designated as hedging instruments:
Cash Flow Hedges
Loss on interest rate swaps recognized in other comprehensive income (loss)
Gain (loss) recognized in accumulated other comprehensive income (loss)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into
cost of sales
$
$
$
(9) $
(1) $
(3) $
— $
$
11
18
$
—
13
(1)
Derivatives not designated as hedging instruments:
Gain (loss) recognized in other income (expense), net within continuing operations
$
1
$
(21) $
(20)
The estimated net amount of existing gain at October 31, 2016 that is expected to be reclassified from other comprehensive
income to the cost of sales within the next twelve months is $4 million.
13. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
General. Substantially all of our employees are covered under various defined benefit and/or defined contribution
retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees.
Agilent provides U.S. employees, who meet eligibility criteria under the Agilent Technologies, Inc. Retirement Plan (the
"RP"), defined benefits which are based on an employee's base or target pay during the years of employment and on length of
service. For eligible service through October 31, 1993, the benefit payable under the Agilent Retirement Plans is reduced by any
amounts due to the eligible employee under the Agilent defined contribution Deferred Profit-Sharing Plan (the "DPSP"), which
was closed to new participants as of November 1993. Effective November 1, 2014, Agilent’s U.S. defined benefit retirement plan
is closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. As of April 30, 2016, benefits
under the RP were frozen. See Plan Amendments below.
As of October 31, 2016 and 2015, the fair value of plan assets of the DPSP was $157 million and $169 million, respectively.
Note that the projected benefit obligation for the DPSP equals the fair value of plan assets.
84
In addition to the DPSP, in the U.S., Agilent maintains a Supplemental Benefits Retirement Plan ("SBRP"), supplemental
unfunded non-qualified defined benefit plan to provide benefits that would be provided under the RP but for limitations imposed
by the Internal Revenue Code. The RP and the SBRP comprise the "U.S. Plans" in the tables below.
Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans based upon factors
such as years of service and/or employee compensation levels. Eligibility is generally determined in accordance with local statutory
requirements.
401(k) defined contribution plan. Eligible Agilent U.S. employees may participate in the Agilent Technologies, Inc. 401(cid:3)
(k)(cid:3)Plan. During the six months ended April 30, 2016, we provided matching contributions to employees up to a maximum of 6(cid:3)
percent of an employee's annual eligible compensation. Effective May 1, 2016, we provide matching contributions to employees(cid:3)
up to a maximum of 6 percent of an employee's annual eligible compensation and an additional transitional company contribution(cid:3)
for certain eligible employees equal to 3 percent, 4 percent or 5 percent of an employee's annual eligible compensation due to the(cid:3)
RP benefits being frozen. The maximum contribution to the 401(k) Plan is 50 percent of an employee's annual eligible compensation,(cid:3)
subject to regulatory limitations.
Post-retirement medical benefit plans. In addition to receiving retirement benefits, Agilent U.S. employees who meet
eligibility requirements as of their termination date may participate in the Agilent Technologies, Inc. Health Plan for Retirees.
Eligible retirees who were less than age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of service are
eligible for a fixed amount which can be utilized to pay for either sponsored plans and/or individual medicare plans. Effective
January 1, 2012, employees who were at least age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of
service are eligible for fixed dollar subsidies and stipends. Grandfathered retirees receive a fixed monthly subsidy toward pre-65
premium costs (subsidy capped at 2011 levels) and a fixed monthly stipend post-65. The subsidy amounts will not increase. In
addition, any new employee hired on or after November 1, 2014, will not be eligible to participate in the retiree medical plans
upon retiring. Current eligible employees will continue to participate in the retiree medical program in place as of November 1,
2014. Retirees will maintain the retiree medical benefits they are eligible for as of November 1, 2014. As of April 30, 2016,
benefits under this plan were changed - see Plan Amendments below.
Plan Amendments. In 2016, we made changes to our U.S. Retirement Plan and Supplemental Benefits Retirement Plan
("U.S. Plans"). Effective April 30, 2016, benefit accruals under the U.S. Plans were frozen. Any pension benefit earned in the
U.S. Plans through April 30, 2016 remained fully vested, and there were no additional benefit accruals after April 30, 2016. In
addition, active employees who have not met the eligibility requirement for the Retiree Medical Account (RMA) under the U.S.
Post Retirement Benefit Plan - 55 years old with at least 15 years of Agilent service - as of April 30, 2016 - will only be eligible
for 50 percent of the current RMA reimbursement amount upon retirement.
Due to these plan amendments, we recorded a curtailment gain of $15 million in the U.S. Plans during the year ended
October 31, 2016. In addition, we recognized a settlement gain of $1 million related to the U.S. Supplemental Benefits Retirement
Plan during the year ended October 31, 2016.
85
Components of net periodic cost. The company uses alternate methods of amortization as allowed by the authoritative
guidance which amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. Plans, gains and
losses are amortized over the average future lifetime of participants using the corridor method. For most Non-U.S. Plans and U.S.
Post-Retirement Benefit Plans, gains and losses are amortized using a separate layer for each year's gains and losses. For the years
ended October 31, 2016, 2015 and 2014, components of net periodic benefit cost and other amounts recognized in other
comprehensive income were comprised of:
Pensions
U.S. Plans
Non-U.S. Plans
U.S. Post-Retirement Benefit
Plans
2016
2015
2014
2016
2015
2014
2016
2015
2014
(in millions)
$
$
$
$
12
16
(25)
3
(3)
3
3
—
3
$
$
$
$
25
14
(27)
3
(5)
10
10
—
10
$
$
$
$
46
34
(64)
1
(12)
5
2
3
5
$
$
$
$
19
16
(44)
27
—
18
18
—
18
$
$
$
$
18
23
(42)
25
—
24
24
—
24
$
$
$
$
36
74
(118)
48
(1)
39
$
$
$
1
4
(7)
10
(10)
2
4
(8)
6
(12)
$
(2) $
(8) $
3
12
(22)
14
(35)
(28)
27
12
39
$
$
(2) $
—
(2) $
(8) $
—
(8) $
(14)
(14)
(28)
$
(16) $ — $ — $ — $ — $ — $ — $ — $ —
$
$
$
$
22
(3)
15
3
—
$
44
(3)
—
5
—
$
$
86
(1)
—
12
—
$ 149
(27)
—
—
(3)
32
(25)
—
—
10
$ 173
(48)
(2)
1
(28)
3
(10)
(7)
10
—
$
$
16
(6)
—
12
—
12
(14)
—
35
—
37
$
46
$
97
$ 119
$
17
$
96
$
(4) $
22
$
33
24
$
56
$ 102
$ 137
$
41
$ 135
$
(6) $
14
$
5
Net periodic benefit cost (benefit)
Service cost — benefits earned
during the period
Interest cost on benefit obligation
Expected return on plan assets
Amortization of net actuarial loss
Amortization of prior service benefit
Total periodic benefit cost (benefit)
Summary of total periodic benefit
cost (benefit):
Continuing operations
Discontinued operations
Total periodic benefit cost (benefit)
Curtailments and settlements
Other changes in plan assets and
benefit obligations recognized in
other comprehensive (income) loss
Net actuarial (gain) loss
Amortization of net actuarial loss
Prior service cost (benefit)
Amortization of prior service benefit
Foreign currency
Total recognized in other
comprehensive (income) loss
Total recognized in net periodic benefit
cost (benefit) and other comprehensive
(income) loss
Funded status. As of October 31, 2016 and 2015, the funded status of the defined benefit and post-retirement benefit
plans was:
86
Change in fair value of plan assets:
Fair value — beginning of year
Actual return on plan assets
Employer contributions
Participants' contributions
Benefits paid
Transfer due to Keysight separation
Currency impact
Fair value — end of year
Change in benefit obligation:
Benefit obligation — beginning of year
Service cost
Interest cost
Participants' contributions
Plan amendment
Actuarial (gain) loss
Benefits paid
Curtailments
Transfer due to Keysight separation
Currency impact
Benefit obligation — end of year
Overfunded (underfunded) status of PBO
Amounts recognized in the consolidated balance sheet
consist of:
Other assets
Employee compensation and benefits
Retirement and post-retirement benefits
Total net asset (liability)
Amounts Recognized in Accumulated Other Comprehensive
Income (loss):
Actuarial (gains) losses
Prior service costs (benefits)
Total
$
$
$
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
U.S.
Post-Retirement
Benefit Plans
2016
2015
2016
2015
2016
2015
(in millions)
837
6
15
—
(21)
(490)
—
347
$
$
778
$ 2,108
25
53
24
25
1
1
(20)
(27)
— (1,327)
(62)
(27)
778
774
$
$
$
$
$
889
25
14
—
—
23
(22)
—
(514)
—
415
(68) $
$ 2,344
900
18
19
23
16
1
1
—
—
40
130
(20)
(27)
—
—
— (1,429)
(77)
(37)
900
$
$ 1,002
(122) $
$
(228) $
$
$
$
$
$
347
13
—
—
(19)
—
—
341
$
$
$
415
12
16
—
—
41
(20)
(30)
—
—
434
$
(93) $
91
3
—
—
(6)
—
—
88
$
$
$
112
1
4
—
(7)
(1)
(6)
—
—
—
103
$
(15) $
284
2
—
—
(8)
(187)
—
91
309
2
4
—
—
11
(8)
—
(206)
—
112
(21)
$ — $ — $
(1)
(92)
(93) $
(2)
(66)
(68) $
$
1
—
(229)
(228) $
26
—
(148)
(122) $
$ — $ —
—
(21)
(21)
—
(15)
(15) $
93
—
93
$
$
73
(18)
55
$
$
375
—
375
$
$
256
—
256
$
$
41
(37)
4
$
$
49
(40)
9
In Japan, Agilent has employees' pension fund plans, which are defined benefit pension plans established under the Japanese
Welfare Pension Insurance Law (JWPIL). The plans are composed of (a) a substitutional portion based on the pay-related part of
the old-age pension benefits prescribed by JWPIL (similar to social security benefits in the United States) and (b) a corporate
portion based on a contributory defined benefit pension arrangement established at the discretion of the company. As required
by law, Agilent will disburse the substitutional portion of Agilent’s plans to the government. In December 2016, Agilent has
received approval from the Japanese government to disburse the substitutional portion of Agilent’s plans, equal to $27 million.
We anticipate that Agilent will recognize a settlement gain in the first quarter of 2017 on the payment of the substitutional portion.
87
In connection with the separation of Keysight Technologies on November 1, 2014, Agilent transferred certain liabilities
and assets of the U.S. and Non-U.S. defined benefit pension plans, and U.S. Post-Retirement Benefit Plans to similar plans created
for Keysight Technologies employees. Total transfers are as follows:
Fair value of plan assets transferred to Keysight
Benefit obligation transferred to Keysight
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
U.S. Post-Retirement
Benefit Plans
$
$
(in millions)
490
514
$
$
1,327
1,429
$
$
187
206
The amounts in accumulated other comprehensive income expected to be recognized by Agilent as components of net
expense during 2017 are as follows:
Amortization of net prior service cost (benefit)
Amortization of actuarial net loss (gain)
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
U.S. Post-Retirement
Benefit Plans
$
$
(in millions)
— $
$
3
— $
$
35
(9)
11
Investment policies and strategies as of October 31, 2016 and 2015. In the U.S., target asset allocations for our retirement
and post-retirement benefit plans are approximately 80 percent to equities and approximately 20 percent to fixed income
investments. Our DPSP target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income
investments. Approximately, 5 percent of our U.S. equity portfolio consists of limited partnerships. The general investment objective
for all our plan assets is to obtain the optimum rate of investment return on the total investment portfolio consistent with the
assumption of a reasonable level of risk. Specific investment objectives for the plans' portfolios are to: maintain and enhance the
purchasing power of the plans' assets; achieve investment returns consistent with the level of risk being taken; and earn performance
rates of return in accordance with the benchmarks adopted for each asset class. Outside the U.S., our target asset allocation is from
37 to 60 percent to equities, from 40 to 60 percent to fixed income investments, and from zero to 6 percent to real estate investments
and from zero to 7 percent to cash, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity
markets, our actual allocations of plan assets at October 31, 2016 and 2015 differ from the target allocation. Our policy is to bring
the actual allocation in line with the target allocation.
Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified
industries. Fixed income securities include a global portfolio of corporate bonds of companies from diversified industries,
government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Other investments
include a group trust consisting primarily of private equity partnerships. Portions of the cash and cash equivalent, equity, and fixed
income investments are held in commingled funds.
Fair Value. The measurement of the fair value of pension and post-retirement plan assets uses the valuation methodologies
and the inputs as described in Note 11, "Fair Value Measurements".
Cash and Cash Equivalents - Cash and cash equivalents consist of short-term investment funds. The funds also invest in
short-term domestic fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities
and quality. Cash and cash equivalents are classified as Level 1 investments except when the cash and cash equivalents are held
in commingled funds, which have a daily net value derived from quoted prices for the underlying securities in active markets;
these are classified as Level 2 investments.
Equity - Some equity securities consisting of common and preferred stock are held in commingled funds, which have daily
net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 2 investments.
Commingled funds which have quoted prices in active markets are classified as Level 1 investments.
Fixed Income - Some of the fixed income securities are held in commingled funds, which have daily net asset values derived
from the underlying securities; these are classified as Level 2 investments. Commingled funds which have quoted prices in active
markets are classified as Level 1 investments.
88
Other Investments - Other investments includes property based pooled vehicles which invest in real estate. Market net asset
values are regularly published in the financial press or on corporate websites and so these investments are classified as Level 2.
Other investments also includes partnership investments where, due to their private nature, pricing inputs are not readily observable.
Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on proprietary
appraisals, application of public market multiples to private company cash flows, utilization of market transactions that provide
valuation information for comparable companies and other methods. Holdings of limited partnerships are classified as Level 3.
The following tables present the fair value of U.S. Defined Benefit Plans assets classified under the appropriate level of
the fair value hierarchy as of October 31, 2016 and 2015.
Fair Value Measurement
at October 31, 2016 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
October 31,
2016
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
$
$
$
$
4
248
80
9
341
October 31,
2015
3
258
76
10
347
$
$
$
$
$
(in millions)
1
62
24
—
87
$
3
186
56
—
245
Fair Value Measurement
at October 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
(in millions)
1
61
22
—
84
$
2
197
54
1
254
$
$
$
$
—
—
—
9
9
Significant
Unobservable
Inputs
(Level 3)
—
—
—
9
9
For U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following
table summarizes the change in balances during 2016 and 2015 for continuing operations:
Balance, beginning of year
Realized gains/(losses)
Unrealized gains/(losses)
Purchases, sales, issuances, and settlements
Transfers in (out)
Balance, end of year
Years Ended
October 31.
2016
2015
9
—
3
(3)
—
9
$
$
14
(1)
(2)
(2)
—
9
$
$
89
The following tables present the fair value of U.S. Post-Retirement Benefit Plans assets classified under the appropriate
level of the fair value hierarchy as of October 31, 2016 and 2015.
Fair Value Measurement at
October 31, 2016 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
October 31,
2016
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
$
$
$
$
3
59
21
5
88
October 31,
2015
3
62
20
6
91
$
$
$
$
$
(in millions)
2
15
6
—
23
$
1
44
15
—
60
Fair Value Measurement
at October 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
(in millions)
2
15
6
—
23
$
1
47
14
—
62
$
$
$
$
—
—
—
5
5
Significant
Unobservable
Inputs
(Level 3)
—
—
—
6
6
For U.S. Post-Retirement Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the
following table summarizes the change in balances during 2016 and 2015 for continuing operations:
Balance, beginning of year
Realized gains/(losses)
Unrealized gains/(losses)
Purchases, sales, issuances, and settlements
Transfers in (out)
Balance, end of year
Years Ended
October 31,
2016
2015
6
—
1
(2)
—
5
$
$
8
(1)
—
(1)
—
6
$
$
90
The following tables present the fair value of non-U.S. Defined Benefit Plans assets classified under the appropriate level
of the fair value hierarchy as of October 31, 2016 and 2015:
Fair Value Measurement at
October 31, 2016 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
October 31,
2016
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
Cash and Cash Equivalents
Equity
Fixed Income
Other Investments
Total assets measured at fair value
$
$
$
$
26
422
325
1
774
October 31,
2015
3
396
379
—
778
$
$
$
$
(in millions)
18
156
9
—
183
$
$
8
266
316
1
591
Fair Value Measurement
at October 31, 2015 Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
$
(in millions)
1
172
13
—
186
$
2
224
366
—
592
$
$
$
$
—
—
—
—
—
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
For non-U.S. Defined Benefit Plans, assets measured at fair value using significant unobservable inputs (level 3), the
following table summarizes the changes in balances during 2015 for continuing operations:
Balance, beginning of year
Realized gains/(losses)
Unrealized gains/(losses)
Purchases, sales, issuances, and settlements
Transfers in (out)
Balance, end of year
Year Ended
October 31, 2015
4
1
—
(5)
—
—
$
$
91
The table below presents the combined projected benefit obligation ("PBO"), accumulated benefit obligation ("ABO") and
fair value of plan assets, grouping plans using comparisons of the PBO and ABO relative to the plan assets for continuing operations
as of October 31, 2016 or 2015.
2016
2015
Benefit
Obligation
PBO
Fair Value of
Plan Assets
Benefit
Obligation
PBO
Fair Value of
Plan Assets
(in millions)
U.S. defined benefit plans where PBO exceeds the fair value of plan
assets
U.S. defined benefit plans where fair value of plan assets exceeds PBO
Total
Non-U.S. defined benefit plans where PBO exceeds or is equal to the
fair value of plan assets
Non-U.S. defined benefit plans where fair value of plan assets exceeds
PBO
Total
U.S. defined benefit plans where ABO exceeds the fair value of plan
assets
U.S. defined benefit plans where the fair value of plan assets exceeds
ABO
Total
Non-U.S. defined benefit plans where ABO exceeds or is equal to the
fair value of plan assets
Non-U.S. defined benefit plans where fair value of plan assets exceeds
ABO
Total
$
$
$
$
$
$
$
$
434
$
341
$
415
$
—
434
970
32
1,002
ABO
$
$
$
—
341
741
33
774
$
$
$
—
415
771
129
900
$
$
$
ABO
434
$
341
$
389
$
—
—
—
434
$
341
$
389
$
737
$
542
$
732
$
226
963
$
232
774
$
127
859
$
347
—
347
623
155
778
347
—
347
623
155
778
Contributions and estimated future benefit payments. During fiscal year 2017, we expect to contribute $26 million to the
U.S. defined benefit plans, $20 million to plans outside the U.S., and zero to the Post-Retirement Medical Plans. The following
table presents expected future benefit payments for the next 10 years:
2017
2018
2019
2020
2021
2022 - 2026
U.S. Defined
Benefit Plans
Non-U.S. Defined
Benefit Plans
U.S. Post-Retirement
Benefit Plans
(in millions)
$
$
$
$
$
$
27
25
26
28
27
137
$
$
$
$
$
$
48
22
24
25
27
168
$
$
$
$
$
$
8
8
8
7
7
35
Assumptions. The assumptions used to determine the benefit obligations and expense for our defined benefit and post-
retirement benefit plans are presented in the tables below. The expected long-term return on assets below represents an estimate
of long-term returns on investment portfolios consisting of a mixture of equities, fixed income and alternative investments in
proportion to the asset allocations of each of our plans. We consider long-term rates of return, which are weighted based on the
asset classes (both historical and forecasted) in which we expect our pension and post-retirement funds to be invested. Discount
rates reflect the current rate at which pension and post-retirement obligations could be settled based on the measurement dates of
the plans - October 31. The U.S. discount rates at October 31, 2016 and 2015, were determined based on the results of matching
expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. rates were generally
92
based on published rates for high-quality corporate bonds. The range of assumptions that were used for the non-U.S. defined
benefit plans reflects the different economic environments within various countries.
Assumptions used to calculate the net periodic cost in each year were as follows:
U.S. defined benefit plans:
Discount rate
Average increase in compensation levels
Expected long-term return on assets
Non-U.S. defined benefit plans:
Discount rate
Average increase in compensation levels
Expected long-term return on assets
U.S. post-retirement benefits plans:
Discount rate
Expected long-term return on assets
Current medical cost trend rate
Ultimate medical cost trend rate
Medical cost trend rate decreases to ultimate rate in year
Assumptions used to calculate the benefit obligation were as follows:
For years ended October 31,
2016
2015
2014
4.20%
3.50%
7.50%
4.00%
3.50%
8.00%
0.77-3.76%
2.25-4.00%
4.25-6.50%
1.50-4.00%
2.50-3.25%
4.00-6.50%
4.00%
7.50%
7.00%
3.50%
2029
4.00%
8.00%
8.00%
3.50%
2028
4.00-4.50%
3.50%
8.00%
1.50-4.50%
2.50-3.25%
4.00-6.50%
4.00-4.25%
8.00%
8.00%
3.50%
2028
U.S. defined benefit plans:
Discount rate
Average increase in compensation levels
Non-U.S. defined benefit plans:
Discount rate
Average increase in compensation levels
U.S. post-retirement benefits plans:
Discount rate
Current medical cost trend rate
Ultimate medical cost trend rate
Medical cost trend rate decreases to ultimate rate in year
As of the Years Ending October 31,
2016
2015
3.75%
N/A
4.20%
3.50%
0.40-2.62%
2.00-4.25%
0.77-3.76%
2.25-4.00%
3.50%
6.00%
3.50%
2029
4.00%
7.00%
3.50%
2029
Health care trend rates do not have a significant effect on the total service and interest cost components or on the post-
retirement benefit obligation amounts reported for the U.S. Post-Retirement Benefit Plan for the year ended October 31, 2016.
14. GUARANTEES
Standard Warranty
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments.
The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty
charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other
accrued and other long-term liabilities on our consolidated balance sheet. Our standard warranty terms typically extend between
one and three years from the date of delivery, depending on the product.
93
A summary of the standard warranty accrual activity is shown in the table below. The standard warranty accrual balances
are held in other accrued and other long-term liabilities.
Balance as of October 31, 2015 and 2014
Accruals for warranties including change in estimates
Settlements made during the period
Balance as of October 31, 2016 and 2015
Accruals for warranties due within one year
Accruals for warranties due after one year
Balance as of October 31, 2016 and 2015
Indemnifications in Connection with Transactions
October 31,
2016
2015
(in millions)
31
53
(49)
35
34
1
35
$
$
$
30
53
(52)
31
29
2
31
$
$
$
In connection with various divestitures, acquisitions, spin-offs and other transactions, we have agreed to indemnify certain
parties, their affiliates and/or other related parties against certain damages and expenses that might occur in the future. These
indemnifications may cover a variety of liabilities, including, but not limited to, employee, tax, environmental, intellectual property,
litigation and other liabilities related to the business conducted prior to the date of the transaction. In our opinion, the fair value
of these indemnification obligations was not material as of October 31, 2016.
Indemnifications to Officers and Directors
Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers
of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with any proceedings arising out of their services to Agilent and such other entities, including service with respect
to employee benefit plans. In addition, we have entered into separate indemnification agreements with each director and each
board-appointed officer of Agilent which provide for indemnification of these directors and officers under similar circumstances
and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification
agreements. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers.
Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the
facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably
estimated. Historically, we have not made payments related to these obligations, and the fair value for these indemnification
obligations was not material as of October 31, 2016.
Other Indemnifications
As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard
contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment
of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as
well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we
enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale
and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities,
the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum
amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities,
additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and
the associated estimated fair value of the liability was not material as of October 31, 2016.
In connection with the sale of several of our businesses, we have agreed to indemnify the buyers of such business, their
respective affiliates and other related parties against certain damages that they might incur in the future. The continuing
indemnifications primarily cover damages relating to liabilities of the businesses that Agilent retained and did not transfer to the
buyers, as well as other specified items. In our opinion, the fair value of these indemnification obligations was not material as of
October 31, 2016.
94
15. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments: We lease certain real and personal property from unrelated third parties under non-
cancelable operating leases. Future minimum lease payments under operating leases at October 31, 2016 were $38 million for
2017, $35 million for 2018, $25 million for 2019, $14 million for 2020, $8 million for 2021 and $26 million thereafter. Future
minimum lease income under leases at October 31, 2016 was $11 million for 2017, $10 million for 2018, $9 million for 2019, and
$19 million thereafter. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation
clauses. Total rent expense was $61 million in 2016, $65 million in 2015 and $55 million in 2014.
Contingencies: We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent,
commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we
currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of
operations or cash flows.
16. SHORT-TERM DEBT
Credit Facilities
On September 15, 2014, Agilent entered into a credit agreement with a financial institution which provides for a $400
million five-year unsecured credit facility that will expire on September 15, 2019. On June 9, 2015, the commitments under the
existing credit facility were increased by $300 million so that the aggregate commitments under the facility now total $700 million.
For the year ended October 31, 2016, we borrowed $255 million and repaid $255 million by October 31, 2016. As of October 31,
2016, the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit
facility during the years ended October 31, 2016 and 2015.
As of December 20, 2016, the company had borrowings of $65 million outstanding under this credit facility and may borrow
more during fiscal year 2017.
17. LONG-TERM DEBT
Senior Notes
The following table summarizes the company's long-term senior notes and the related interest rate swaps:
October 31, 2016
October 31, 2015
Amortized
Principal
Swap
Total
Amortized
Principal
Swap
Total
100
499
400
598
299
1,896
$
(in millions)
101
514
400
598
299
$ 1,912
$
100
499
399
598
—
1,596
1
15
—
—
—
16
$
2
19
—
—
—
21
102
518
399
598
—
$ 1,617
$
2017 Senior Notes
2020 Senior Notes
2022 Senior Notes
2023 Senior Notes
2026 Senior Notes
Total
2017 Senior Notes
In October 2007, the company issued an aggregate principal amount of $600 million in senior notes ("2017 senior notes").
The 2017 senior notes were issued at 99.60% of their principal amount. The notes will mature on November 1, 2017, and bear
interest at a fixed rate of 6.50% per annum. The interest is payable semi-annually on May 1st and November 1st of each year and
payments commenced on May 1, 2008.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented
the notional amount of $400 million. The asset value, including interest receivable, upon termination was approximately $43
million and the amount to be amortized at October 31, 2016 was $1 million. The gain is being deferred and amortized to interest
expense over the remaining life of the 2017 senior notes.
95
On October 20, 2014, we settled the redemption of $500 million of the $600 million outstanding aggregate principal amount
of our 2017 senior notes due November 1, 2017 that had been called for redemption on September 19, 2014. The redemption price
of approximately $580 million included a $80 million prepayment penalty computed in accordance with the terms of the 2017
senior notes as the present value of the remaining scheduled payments of principal and unpaid interest related to $500 million(cid:3)
partial redemption. The prepayment penalty less partial amortization of previously deferred interest rate swap gain of approximately
$14 million together with $2 million of amortization of debt issuance costs and discount was disclosed in other income (expense),
net in the condensed consolidated statement of operations. We also paid accrued and unpaid interest of $15 million on the 2017
senior notes up to but not including the redemption date.
2020 Senior Notes
In July 2010, the company issued an aggregate principal amount of $500 million in senior notes ("2020 senior notes"). The
2020 senior notes were issued at 99.54% of their principal amount. The notes will mature on July 15, 2020, and bear interest at a
fixed rate of 5.00% per annum. The interest is payable semi-annually on January 15th and July 15th of each year, payments
commenced on January 15, 2011.
On August 9, 2011, we terminated our interest rate swap contracts related to our 2020 senior notes that represented the
notional amount of $500 million. The asset value, including interest receivable, upon termination for these contracts was
approximately $34 million and the amount to be amortized at October 31, 2016 was $15 million. The gain is being deferred and
amortized to interest expense over the remaining life of the 2020 senior notes.
2022 Senior Notes
In September 2012, the company issued an aggregate principal amount of $400 million in senior notes ("2022 senior notes").
The 2022 senior notes were issued at 99.80% of their principal amount. The notes will mature on October 1, 2022, and bear interest
at a fixed rate of 3.20% per annum. The interest is payable semi-annually on April 1st and October 1st of each year, payments
commenced on April 1, 2013.
2023 Senior Notes
In June 2013, the company issued aggregate principal amount of $600 million in senior notes ("2023 senior notes"). The
2023 senior notes were issued at 99.544% of their principal amount. The notes will mature on July 15, 2023 and bear interest at
a fixed rate of 3.875% per annum. The interest is payable semi-annually on January 15th and July 15th of each year and payments
will commence January 15, 2014.
2026 Senior Notes
On September 15, 2016, the company issued aggregate principal amount of $300 million in senior notes ("2026 senior
notes"). The 2026 senior notes were issued at 99.624%% of their principal amount. The notes will mature on September 22, 2026
and bear interest at a fixed rate of 3.050% per annum. The interest is payable semi-annually on March 22nd and September 22nd
of each year and payments will commence March 22, 2017.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional
amount of $300 million in connection with future interest payments to be made on our 2026 senior notes issued on September 15,
2016. The swap arrangements were terminated on September 15, 2016 with a payment of $10 million and we recognized this as
a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2026
senior notes.The remaining loss to be amortized related to the interest rate swap agreements at October 31, 2016 was $9 million.
Other debt
In 2016, we paid approximately $37 million of our mortgage debt, secured on buildings in Denmark, to a Danish financial
institution. The gain recognized upon early payment was not material. No balance exists on this debt as of October 31. 2016.
96
18. STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The program
was designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive
programs to target maintaining a weighted average share count of approximately 335 million diluted shares. For the year ended
October 31, 2016, we repurchased 2.4 million shares for $98 million, which completed the purchases under this authorization.
For the year ended October 31, 2015 we repurchased approximately 6 million shares for $267 million. For the year ended October 31,
2014 we repurchased 4 million shares for $200 million. All such shares and related costs are held as treasury stock and accounted
for using the cost method.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program (the "2015
repurchase program"). The 2015 share repurchase program authorizes the purchase of up to $1.14 billion of our common stock
through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a specific number
of shares and may be suspended or discontinued at any time. During the year ended October 31, 2016, upon the completion of
our previous repurchase program, we repurchased approximately 8.3 million shares for $336 million under this authorization. All
such shares and related costs are held as treasury stock and accounted for using the cost method. As of October 31, 2016, we had
remaining authorization to repurchase up to $804 million of our common stock under this program.
In the first quarter of 2017, we repurchased approximately 2.5 million shares for $111 million under the 2015 repurchase
program. In addition, we retired 292.5 million treasury shares at an aggregate cost of $10.6 billion, which represents all our
previously repurchased shares over the past 11 years and our November 2016 repurchases. Also the retirement resulted in a decrease
of $6.7 billion to retained earnings and a decrease of $3.9 billion to additional paid-in-capital.
Cash Dividends on Shares of Common Stock
During the year ended October 31, 2016, cash dividends of $0.46 per share, or $150 million were declared and paid on the
company's outstanding common stock. During the year ended October 31, 2015, cash dividends of $0.40 per share, or $133 million
were declared and paid on the company's outstanding common stock. During the year ended October 31, 2014, cash dividends of
$0.53 per share, or $176 million were declared and paid on the company's outstanding common stock.
On November 16, 2016, we declared a quarterly dividend of $0.132 per share of common stock, or approximately $43
million which will be paid on January 25, 2017 to shareholders of record as of the close of business on January 3, 2017. The timing
and amounts of any future dividends are subject to determination and approval by our board of directors.
Accumulated other comprehensive income (loss)
The following table summarizes the components of our accumulated other comprehensive income (loss) as of October 31,
2016 and 2015, net of tax effect:
Foreign currency translation, net of tax expense of $(5) and $(2) for 2016 and 2015,
respectively
Unrealized losses on defined benefit plans, net of tax benefit of $176 and $126 for 2016 and
2015, respectively
Unrealized gains (losses) on derivative instruments, net of tax (expense) benefit of $2 and
$(2) for 2016 and 2015, respectively
Total accumulated other comprehensive loss
$
October 31,
2016
2015
(in millions)
(197)
(305)
(1)
(503) $
(189)
(204)
2
(391)
97
Changes in accumulated other comprehensive income (loss) by component and related tax effects for the years ended
October 31, 2016 and 2015 were as follows (in millions):
Net defined benefit pension cost
and post retirement plan costs
Unrealized
gain on
investments
Foreign
currency
translation
Prior service
credits
Actuarial
Losses
Unrealized
gains (losses)
on derivatives
Total
As of October 31, 2014
Transfer to Keysight
Balance after transfer to
Keysight
$
$
17
(17)
—
$
156
(9)
147
(in millions)
255
(83)
$
172
$
(771)
444
(327)
$
9
(3)
6
(334)
332
(2)
Other comprehensive income
(loss) before reclassifications
Amounts reclassified out of
accumulated other
comprehensive income
Tax benefit
Other comprehensive loss
—
—
—
—
(360)
—
(90)
11
(439)
—
24
(336)
(17)
6
(11)
35
17
(38)
(18)
3
(4)
—
50
(389)
As of October 31, 2015
$
— $
(189)
$
161
$
(365)
$
2
$
(391)
Other comprehensive income
(loss) before reclassifications
Amounts reclassified out of
accumulated other
comprehensive income
Tax (expense) benefit
Other comprehensive loss
—
—
—
—
(5)
—
(3)
(8)
6
(171)
(10)
(180)
(29)
8
(15)
43
42
3
4
17
51
(86)
(3)
(112)
As of October 31, 2016
$
— $
(197)
$
146
$
(451)
$
(1)
$
(503)
98
Reclassifications out of accumulated other comprehensive income (loss) for the years ended October 31, 2016 and 2015
were as follows (in millions):
Details about accumulated other
Amounts Reclassified
Affected line item in
comprehensive income components
from other comprehensive
income
2016
2015
statement of operations
Unrealized gains and (losses) on derivatives
Net defined benefit pension cost and post retirement plan costs:
Actuarial net loss
Prior service benefit
(3)
(3)
—
(3)
(43)
29
(14)
4
(10)
18
18
(6)
12
Cost of products
Total before income tax
(Provision)/benefit for
income tax
Total net of income tax
(35)
17
(18)
5
(13)
Total before income tax
(Provision)/benefit for
income tax
Total net of income tax
Total reclassifications for the period
$
(13)
$
(1)
Amounts in parentheses indicate reductions to income and increases to other comprehensive income.
Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension
plans are included in the computation of net periodic cost (see Note 13 "Retirement Plans and Post Retirement Pension Plans").
19. SEGMENT INFORMATION
Description of segments. We are a global leader in life sciences, diagnostics and applied chemical markets, providing
application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. In
the first fiscal quarter of 2015, we completed the separation of our electronic measurement business. See Note 3, "Discontinued
Operations" for further information.
Agilent has three business segments comprised of the life sciences and applied markets business, diagnostics and genomics
business and the Agilent CrossLab business each of which comprises a reportable segment. The three operating segments were
determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are
regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to
assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels,
products and services and manufacturing are considered in determining the formation of these operating segments.
A description of our three reportable segments is as follows:
Our life sciences and applied markets business provides application-focused solutions that include instruments and software
that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well
as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Key product
categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS")
systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems;
inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave
plasma-atomic emission spectrometry (“MP-AES”) instruments; inductively coupled plasma optical emission spectrometry ("ICP-
99
OES") instruments; cell analysis plate based assays; laboratory software and informatics systems; laboratory automation;
dissolution testing; vacuum pumps and measurement technologies.
Our diagnostics and genomics business is comprised of five areas of activity providing solutions that include reagents,
instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate
samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping,
gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling,
as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software.
Second, our nucleic acid solutions business provides equipment and expertise focused on production of synthesized
oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as active pharmaceutical
ingredients ("API") in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Next, our pathology
solutions business is focused on product offerings to cancer diagnostics and anatomic pathology workflows. The broad portfolio
of offerings includes immunohistochemistry (“IHC”), in situ hybridization (“ISH”), hematoxylin and eosin (“H&E”) staining and
special staining. We also collaborate with a number of major pharmaceutical companies to develop new potential
pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from
a specific targeted therapy. Finally, the reagent partnership business is a provider of reagents used for turbidimetry and flow
cytometry.
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed
to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning Agilent can serve and supply customers
regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping
to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products,
custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and
compliance support, as well as asset management and consultative services that help increase customer productivity. Custom
service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments
fully operational and compliant with the respective industry requirements.
A significant portion of the segments' expenses arise from shared services and infrastructure that we have historically
provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called
corporate charges, include legal, accounting, real estate, insurance services, information technology services, treasury, other
corporate infrastructure expenses and costs of centralized research and development. Charges are allocated to the segments, and
the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided
to or benefits received by the segments. Corporate charges previously allocated to our electronic measurement business, but not
classified within discontinued operations, were not reallocated to our other segments. These charges are presented below as a
component of the reconciliation between segments' income from operations and Agilent's income from continuing operations and
are classified as unallocated corporate charges. In addition, we do not allocate amortization and impairment of acquisition-related
intangible assets, restructuring and transformational expenses, acquisition and integration costs and certain other charges to the
operating margin for each segment because management does not include this information in its measurement of the performance
of the operating segments.
The following tables reflect the results of our reportable segments under our management reporting system. The performance
of each segment is measured based on several metrics, including segment income from operations. These results are used, in part,
by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
100
The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment
gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as
noted in the reconciliations below.
Year ended October 31, 2016:
Total net revenue
Income from operations
Depreciation expense
Share-based compensation expense
Year ended October 31, 2015:
Total net revenue
Income from operations
Depreciation expense
Share-based compensation expense
Year ended October 31, 2014:
Total net revenue
Income from operations
Depreciation expense
Share-based compensation expense
Life Sciences
and Applied
Markets
Diagnostics
and
Genomics
Agilent
CrossLab
Total
Segments
(in millions)
$
$
$
$
$
$
$
$
$
$
$
$
2,073
429
36
29
2,046
380
27
27
2,078
369
29
29
$
$
$
$
$
$
$
$
$
$
$
$
709
114
31
10
662
88
37
9
663
93
43
9
$
$
$
$
$
$
$
$
$
$
$
$
1,420
316
28
21
1,330
299
34
18
1,307
301
33
18
$
$
$
$
$
$
$
$
$
$
$
$
4,202
859
95
60
4,038
767
98
54
4,048
763
105
56
For the year ended October 31, 2014, depreciation expense and share-based compensation expense excludes unallocated
corporate charges.
The following table reconciles reportable segments' income from operations to Agilent's total enterprise income before
taxes:
Total reportable segments' income from operations
Restructuring and business exit related costs
Asset Impairments
Transformational programs
Amortization of intangibles
Acquisition and integration costs
Acceleration of share-based compensation expense related to workforce
reduction
One-time and pre-separation costs
Pension curtailment gain
Impairment of loans
Other
Interest Income
Interest Expense
Other income (expense), net
Unallocated corporate charges
Income before taxes, as reported
$
$
Years Ended October 31,
2016
2015
(in millions)
2014
859
(11)
(4)
(38)
(152)
(41)
—
—
16
(7)
(7)
11
(72)
(10)
—
544
$
$
767
(12)
(3)
(56)
(156)
(13)
(2)
—
—
—
(3)
7
(66)
17
—
480
$
$
763
(66)
(4)
(29)
(189)
(11)
(1)
(14)
—
—
10
9
(110)
(89)
(40)
229
Major customers. No customer represented 10 percent or more of our total net revenue in 2016, 2015 or 2014.
101
The following table presents assets and capital expenditures directly managed by each segment. Unallocated assets primarily
consist of cash, cash equivalents, accumulated amortization of other intangibles and other assets.
As of October 31, 2016:
Assets
Capital expenditures
As of October 31, 2015:
Assets
Capital expenditures
Life Sciences
and Applied
Markets
Diagnostics
and
Genomics
Agilent
CrossLab
Total
Segments
(in millions)
$
$
$
$
1,687
53
1,539
28
$
$
$
$
1,960
41
2,027
33
$
$
$
$
1,082
45
1,008
37
$
$
$
$
4,729
139
4,574
98
The following table reconciles segment assets to Agilent's total assets:
Total reportable segments' assets
Cash, cash equivalents and short-term investments
Short-term restricted cash and cash equivalents
Prepaid expenses
Investments
Long-term and other receivables
Other
Total assets
October 31,
2016
2015
(in millions)
4,729
2,289
—
92
135
92
465
7,802
$
$
4,574
2,003
242
105
86
104
365
7,479
$
$
The other category primarily includes deferred tax assets and long-term investments which are not allocated to the segments.
The following table represents total revenue by product category:
Instrumentation
Analytical lab services
Analytical lab consumables
Diagnostics and genomics solutions
Informatics and other
Total
Years Ended October 31,
2016
2015
(in millions)
2014
$
$
1,871
910
510
709
202
4,202
$
$
1,827
843
489
662
217
4,038
$
$
1,839
831
476
663
239
4,048
The following table presents summarized information for net revenue and long-lived assets by geographic region. Revenues
from external customers are generally attributed to countries based upon the customer's location. Long lived assets consist of
property, plant, and equipment, long-term receivables and other long-term assets excluding intangible assets. The rest of the world
primarily consists of rest of Asia and Europe.
Net revenue:
Year ended October 31, 2016
Year ended October 31, 2015
Year ended October 31, 2014
United
States
China
Rest of the
World
Total
(in millions)
$
$
$
1,251
1,206
1,019
$
$
$
821
633
543
$
$
$
2,130
2,199
2,486
$
$
$
4,202
4,038
4,048
102
Long-lived assets:
October 31, 2016
October 31, 2015
20. SUBSEQUENT EVENT
United
States
Germany
Rest of the
World
Total
(in millions)
$
$
449
391
$
$
89
64
$
$
266
315
$
$
804
770
On December 19, 2016 we signed an agreement to acquire 100 percent of the stock of Multiplicom NV (“Multiplicom”),
a leading European diagnostics company with state-of-the-art genetic testing technology and products, for approximately €68
million in cash. Multiplicom, headquartered in Belgium, develops, manufactures and commercializes molecular diagnostic assays,
provided as kits, which enable personalized medicine. The acquisition is expected to be completed by mid-January, subject to
local laws and regulations and customary closing conditions. The financial results of Multiplicom will be included within Agilent's
from the date of the close, which is expected to be during the first quarter of 2017.
103
QUARTERLY SUMMARY
(Unaudited)
Three Months Ended
January 31,
(As Adjusted)
April 30,
July 31,
October 31,
(in millions, except per share data)
2016
Net revenue
Gross profit
Income from operations
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net income per share — basic:
Income from continuing operations
Loss from discontinued operations
Net income per share - basic
Net income per share — diluted:
Income from continuing operations
Loss from discontinued operations
Net income per share — diluted
Weighted average shares used in computing net income
per share:
Basic
Diluted
Cash dividends per common share
Range of stock prices on NYSE
2015
Net revenue
Gross profit
Income from operations
Income from continuing operations
Income from discontinued operations, net of tax
Net income
Net income per share — basic:
Income from continuing operations
Income from discontinued operations
Net income per share - basic
Net income per share — diluted:
Income from continuing operations
Income from discontinued operations
Net income per share — diluted
Weighted average shares used in computing net income
per share:
Basic
Diluted
$
$
$
$
$
$
1,028
537
155
121
—
121
$
$
1,019
530
131
91
—
91
$
$
1,044
542
146
124
—
124
$
$
0.37
$
— $
$
0.37
0.28
$
— $
$
0.28
0.38
$
— $
$
0.38
0.36
—
0.36
$
$
0.28
—
0.28
$
$
0.38
—
0.38
$
$
1,111
588
183
126
—
126
0.39
—
0.39
0.38
—
0.38
329
332
$
0.115
$36.01-$42.48
326
328
$
0.115
$34.15-$42.00
325
328
$
0.115
$40.39-$48.18
324
328
$
0.115
$43.11-$48.63
$
$
$
$
$
$
1,026
513
115
93
(30)
63
0.28
(0.09)
0.19
0.28
(0.09)
0.19
$
$
$
$
$
$
963
480
107
92
(5)
87
0.28
(0.02)
0.26
0.27
(0.01)
0.26
$
$
$
$
$
$
1,014
513
144
113
(2)
111
0.34
(0.01)
0.33
0.34
(0.01)
0.33
$
$
$
$
$
$
1,035
535
156
140
—
140
0.42
—
0.42
0.42
—
0.42
336
338
$
0.100
$37.68-$42.99
334
337
$
0.100
$37.71-$43.59
332
334
$
0.100
$38.48-$42.93
331
333
$
0.100
$33.12-$41.35
Cash dividends per common share
Range of stock prices on NYSE
The above quarterly financial data includes Keysight which is presented as discontinued operations. See Note 3, "Discontinued
Operations" for additional information. In addition, the first quarter of fiscal year 2016 has been adjusted to include an additional
$2 million of tax expense as a result of our early adoption of Accounting Standard Update (ASU) 2016-09 "Improvements to
Employees Share-based Payment Accounting", in the third quarter of fiscal year 2016. Please refer to Note 2, "New Accounting
Pronouncements."
104
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures as of October 31, 2016, pursuant to and as required
by Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”). Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of October 31, 2016, the company's disclosure controls and procedures,
as defined by Rule 13a-15(e) under the Exchange Act, were effective and designed to ensure that (i) information required to be
disclosed in the company's reports filed under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and (ii) information is accumulated and communicated to management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such
term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). As a result of that assessment, management concluded that our internal
control over financial reporting was effective as of October 31, 2016 based on criteria in Internal Control - Integrated Framework
(2013) issued by the COSO.
The effectiveness of our internal control over financial reporting as of October 31, 2016 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8
of this Annual Report on Form 10-K.
Remediation of Material Weakness in Internal Control Over Financial Reporting
During the year ended October 31, 2015, management identified certain errors in the tax accounts, primarily related to prior
years, and disclosed a material weakness in our controls over the accounting for income taxes.
To remediate the material weakness described above, during fiscal 2016, we designed and implemented additional rigorous
reviews and other controls and enhanced and revised the design of existing controls and procedures to validate the inputs and
outputs for the significant tax accounting processes, as well as enhancing the tax accounting expertise within the tax function.
During the fourth quarter of fiscal 2016, we successfully completed the testing necessary to conclude that the controls were
operating effectively and have concluded that the material weakness has been remediated.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during Agilent's last fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information regarding our directors appears under “Proposal No. 1 - Election of Directors” in our Proxy Statement for the
Annual Meeting of Stockholders (“Proxy Statement”), to be held March 15, 2017. That portion of the Proxy Statement is
105
incorporated by reference into this report. Information regarding our executive officers appears in Item 1 of this report under
“Executive Officers of the Registrant.” Information regarding our Audit and Finance Committee and our Audit and Finance
Committee's financial expert appears under “Audit and Finance Committee Report” and “Board Structure and Compensation” in
our Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
There were no material changes to the procedures by which security holders may recommend nominees to our Board of
Directors. Information regarding our code of ethics (the company's Standards of Business Conduct) applicable to our principal
executive officer, our principal financial officer, our controller and other senior financial officers appears in Item 1 of this report
under “Investor Information.” We will post amendments to or waivers from a provision of the Standards of Business Conduct with
respect to those persons on our website at www.investor.agilent.com.
Compliance with Section 16(a) of the Exchange Act
Information about compliance with Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.
Item 11. Executive Compensation
Information about compensation of our named executive officers appears under “Executive Compensation”, “Compensation
Committee Interlocks and Insider Participation” in the Proxy Statement. Information about compensation of our directors appears
under “Director Compensation” and “Compensation Committee Report” and “Stock Ownership Guidelines” in the Proxy
Statement. Those portions of the Proxy Statement are incorporated by reference into this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information about security ownership of certain beneficial owners and management appears under "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. That portion of the Proxy Statement is
incorporated by reference into this report.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes information about our equity compensation plans as of October 31, 2016. All outstanding
awards relate to our common stock.
Plan Category
Equity compensation plans approved by security
holders (1)(2)(3)
Equity compensation plans not approved by security
holders
Total
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans
(Excluding Securities
Reflected in Column
(a))
(a)
(b)
(c)
7,168,592
$
—
7,168,592
$
33
—
33
55,484,274
—
55,484,274
(1) The number of securities remaining available for future issuance in column (c) includes 45,168,192 shares of common
stock authorized and available for issuance under the Agilent Technologies, Inc. Employee Stock Purchase Plan ("423(b)
Plan"). The number of shares authorized for issuance under the 423(b) Plan is subject to an automatic annual increase of
the lesser of one percent of the outstanding common stock of Agilent or an amount determined by the Compensation
Committee of our Board of Directors. Under the terms of the 423(b) Plan, in no event shall the aggregate number of shares
issued under the Plan exceed 75 million shares.
(2) We issue securities under our equity compensation plans in forms other than options, warrants or rights. On November 19,
2008 and March 11, 2009, the Board and the stockholders, respectively, approved the Agilent Technologies, Inc. 2009 Stock
Plan ("2009 Plan") to replace the company's 1999 Plan and 1999 Non-Employee Director Stock Plan for awards of stock-
based incentive compensation to our employees (including officers), directors and consultants. The 2009 Plan provides for
106
the grant of awards in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance
shares and performance units with performance-based conditions to vesting or exercisability, and cash awards. The 2009
Plan has a term of ten years.
(3) We issue securities under our equity compensation plans in forms which do not require a payment by the recipient to us at
the time of exercise or vesting, including restricted stock, restricted stock units and performance units. Accordingly, the
weighted-average exercise price in column (b) does not take these awards into account.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information about certain relationships and related transactions appears under "Related Person Transaction Policy and
Procedures" in the Proxy Statement. Information about director independence appears under the heading "Board Structure and
Compensation — Director Independence" in the Proxy Statement. Each of those portions of the Proxy Statement is incorporated
by reference into this report.
Item 14. Principal Accounting Fees and Services
Information about principal accountant fees and services as well as related pre-approval policies appears under "Fees Paid
to PricewaterhouseCoopers" and "Policy on Audit and Finance Committee Preapproval of Audit and Permissible Non-Audit
Services of Independent Registered Auditors" in the Proxy Statement. Those portions of the Proxy Statement are incorporated by
reference into this report.
Item 15. Exhibits and Financial Statement Schedules
(a)
The following documents are filed as part of this report:
PART IV
1.
2.
Financial Statements.
See Index to Consolidated Financial Statements under Item 8 on Page 51 of this report.
Financial Statement Schedule.
107
The following additional financial statement schedule should be considered in conjunction with our consolidated financial
statements. All other schedules have been omitted because the required information is either not applicable or not sufficiently
material to require submission of the schedule:
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Column A
Description
Column B
Balance at
Beginning
of Period
Column C
Column D
Additions Charged to
Expenses or
Other Accounts*
Deductions Credited
to Expenses or
Other Accounts**
Column E
Balance at
End of
Period
2016
Tax valuation allowance
2015
Tax valuation allowance
2014
Tax valuation allowance
$
$
$
131
134
131
$
$
$
(in millions)
22
6
3
$
$
$
(24) $
(9) $
— $
129
131
134
* Additions include current year additions charged to expenses and current year build due to increases in net deferred tax
assets, return to provision true-ups, other adjustments and OCI impact to deferred taxes.
** Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred
tax assets, return to provision true-ups, other adjustments and OCI impact to deferred taxes.
108
3.
Exhibits.
Exhibits are incorporated herein by reference or are filed with this report as indicated below (numbered in
accordance with Item 601 of Regulation S-K):
Exhibit
Number
Description
Form
Date
Exhibit
Number
Filed
Herewith
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.2
2.1
2.1
2.1 Master Separation and Distribution Agreement between
S-1/A
11/10/1999
effective as of August 12, 1999.
2.2 General Assignment and Assumption Agreement between
S-1/A
11/10/1999
2.3 Master Technology Ownership and License Agreement
S-1/A
11/10/1999
2.4 Master Patent Ownership and License Agreement
S-1/A
11/10/1999
2.5 Master Trademark Ownership and License Agreement
S-1/A
11/10/1999
2.6
ICBD Technology Ownership and License Agreement
S-1/A
11/10/1999
2.7
2.8
and Agilent Technologies, Inc.
Agilent Technologies, Inc.
S-1/A
11/10/1999
S-1/A
11/10/1999
2.9 Master IT Service Level Agreement between
S-1/A
11/10/1999
2.10
and Agilent Technologies, Inc.
S-1/A
11/10/1999
2.11
Environmental Matters Agreement between
S-1/A
11/10/1999
2.12 Master Confidential Disclosure Agreement between
S-1/A
11/10/1999
2.13
Indemnification and Insurance Matters Agreement
S-1/A
11/10/1999
2.14 Non U.S. Plan.
2.15
Share Purchase Agreement, dated as of August 12, 2005,
by and among Agilent Technologies, Inc. and Agilent
LED International, Philips Lumileds Holding B.V. and
Koninklijke Philips Electronics N.V.
2.16 Agreement and Plan of Merger dated as of July 26, 2009,
by and among Agilent Technologies, Inc., Cobalt
Acquisition Corp. and Varian, Inc.
2.17 Asset Purchase Agreement, dated February 10, 2010, by
and between Agilent Technologies, Inc. and JDS
Uniphase Corporation (pursuant to Item 601(b)(2) of
Regulation S-K, schedules to the Asset Purchase
Agreement have been omitted; they will be
supplementally provided to the SEC upon request)
2.18
Separation and Distribution Agreement, dated August 1,
2014, by and between Agilent Technologies, Inc. and
Keysight Technologies, Inc. (pursuant to Item 601(b)(2)
of Regulation S-K, schedules to the Separation and
Distribution Agreement have been omitted; they will be
supplementally provided to the SEC upon request)
109
S-1/A
11/10/1999
8-K
8/15/2005
10-Q
9/4/2009
10-Q
3/10/2010
8-K
8/1/2014
2.1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Exhibit
Number
Description
Form
Date
Exhibit
Number
Filed
Herewith
Incorporation by Reference
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
Registration Rights Agreement between Agilent
Technologies, Inc. and Credit Suisse First Boston
Corporation, J.P. Morgan Securities, Inc. and Salomon
Smith Barney, Inc. dated November 27, 2001.
S-1
8-K
8-K
8/16/1999
11/20/2012
11/27/2001
Indenture, dated October 24, 2007, between Agilent
Technologies, Inc. and the trustee for the debt securities.
S-3ASR
10/24/2007
8-K
10/26/2007
3.1
3.1
99.3
4.01
4.01
Form of First Supplemental Indenture, dated as of
October 29, 2007, between Agilent Technologies, Inc. and
U.S. Bank National Association and Form of Global Note
for Agilent Technologies, Inc. 6.50% Senior Notes due
2017.
Fifth Supplemental Indenture, dated as of July 20, 2010,
between the Company and U.S. Bank National
Association and Form of Global Note for the Company's
5.00% Senior Notes due 2020.
Sixth Supplemental Indenture, dated as of September 13,
2012, between the Company and U.S. Bank National
Association
Form of Global Note for the Company's 3.20% Senior
Notes due 2022 (contained in Exhibit 4.01)
Seventh Supplemental Indenture, dated as of June 21,
2013, between the Company and U.S. Bank National
Association and Form of Global Note for the Company’s
3.875% Senior Notes due 2023.
Eighth Supplemental Indenture, dated as of September
22, 2016, between the Company and U.S. Bank National
Association and Form of Global Note for the Company’s
3.050% Senior Note due 2026
8-K
7/20/2010
4.02
8-K
9/13/2012
4.01
8-K
9/13/2012
8-K
6/21/2013
4.02
4.01
8-K
9/22/2016
4.01
10.1 Agilent Technologies, Inc. 1999 Stock Plan (Amendment
and Restatement Effective November 14, 2006).*
10-K
12/22/2006
10.2
10.3
Form of Award Agreement (U.S.) for grants under the
Agilent Technologies, Inc. 1999 Stock Plan.*
Form of Award Agreement (Non-U.S.) for grants under
the Agilent Technologies, Inc. 1999 Stock Plan.*
8-K
11/12/2004
8-K
11/12/2004
10.4 Agilent Technologies, Inc. Employee Stock Purchase Plan
10-Q
9/5/2008
(Amended and Restated, effective November 1, 2008).*
10.8
10.1
10.2
10.1
10.5 Agilent Technologies, Inc. 1999 Non-Employee Director
10-K
12/21/2007
10.23
Stock Plan (Amended and Restated Effective
November 14, 2007).*
10.6
10.7
Form of Stock Option Agreement for grants under the
Agilent Technologies, Inc. 1999 Non-Employee Director
Stock Plan.*
Form of Stock Option Award Agreement for grants under
the Agilent Technologies, Inc. 1999 Non-Employee
Director Stock Plan.*
8-K
11/12/2004
10.3
10-Q
9/5/2008
10.2
10.8 Agilent Technologies, Inc. 2009 Stock Plan.*
DEF14A
1/27/2009
Appendix A
110
Exhibit
Number
10.9
10.1
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Description
Form
Date
Incorporation by Reference
Exhibit
Number
10.17
Filed
Herewith
12/20/2010
Form of Stock Option Award Agreement under the 2009
Stock Plan for U.S. Employees (for awards made after
October 31, 2010).*
Form of Stock Option Award Agreement under the 2009
Stock Plan for U.S. Employees.*
Form of Stock Option Award Agreement under the 2009
Stock Plan for non-U.S. Employees (for awards made
after October 31, 2010).*
Form of Stock Option Award Agreement under the 2009
Stock Plan for non-U.S. Employees.*
Form of Stock Award Agreement for Standard Awards
granted to Employees (for awards made after October 31,
2010).*
Form of Stock Award Agreement for Standard Awards
granted to Employees.*
10-K
12/21/2009
10.31
12/20/2010
10.19
10-K
12/21/2009
10.32
12/20/2010
10.21
10-K
12/21/2009
10.33
Form of New Executive Stock Award Agreement under
the 2009 Stock Plan.*
8-K
3/25/2009
Form of Non-Employee Director Stock Option Award
Agreement under the 2009 Stock Plan.*
8-K
3/25/2009
10.4
10.5
Form of Long-Term Performance Program Stock Award
Agreement under the 2009 Stock Plan.*
Form of Stock Award Agreement under the 2009 Stock
Plan for Standard Awards granted to Employees (for
awards made after November 17, 2015).*
Form of Stock Award Agreement under the 2009 Stock
Plan for Standard Awards granted to Officers (for awards
made after November 17, 2015). *
Form of Stock Award Agreement under the 2009 Stock
Plan for Long-Term Performance Program Awards (for
awards made after November 17, 2015). *
Form of Stock Award Agreement under the 2009 Stock
Plan for New Executives (for awards made after
November 17, 2015). *
10-K
12/21/2009
10.36
10-K
12/21/2015
10.26
10-K
12/21/2015
10.27
10-K
12/21/2015
10.28
10-K
12/21/2015
10.29
10.22 Agilent Technologies, Inc. Supplemental Benefit
10-K
12/21/2007
10.25
Retirement Plan (Amended and Restated Effective
January 1, 2005).*
10.23 Agilent Technologies, Inc. Long-Term Performance
10-Q
3/9/2006
10.63
Program (Amended and Restated through November 1,
2005).*
10.24 Agilent Technologies, Inc. 2005 Deferred Compensation
Plan for Non-Employee Directors (Amended and
Restated Effective November 18, 2009).*
10.25 Agilent Technologies, Inc. 2005 Deferred Compensation
Plan (Amended and Restated Effective January 1, 2011).*
10.26
10.27
Compensation Plan for Covered Employees. (as adopted
on November 19. 2014)
Form of Amended and Restated Indemnification
Agreement between Agilent Technologies, Inc. and
Directors of the Company, Section 16 Officers and
10-K
12/21/2009
10.39
12/20/2010
10.29
DEF14A
2/6/2015
Annex A
8-K
4/10/2008
10.1
111
Exhibit
Number
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Description
Form of Tier I Change of Control Severance Agreement
between Agilent Technologies, Inc. and the Chief
Executive Officer*
Form of Amended and Restated Change of Control
Severance Agreement between Agilent Technologies, Inc.
and Section 16 Officers (other than the Company's Chief
Executive Officer).*
Form of Tier II Change of Control Severance Agreement
between Agilent Technologies, Inc. and Section 16
Officers (other than the Company’s Chief Executive
Offier)*
Form of New Executive Officer Change of Control
Severance Agreement between Agilent Technologies, Inc.
and specified executives of the Company (for executives
hired, elected or promoted after July 14, 2009).*
Form of Tier III Change of Control Severance Agreement
between Agilent Technologies, Inc. and specified
executives of the Company*
Tax Matters Agreement, dated August 1, 2014, by and
between Agilent Technologies, Inc. and Keysight
Technologies, Inc.
Employee Matters Agreement, dated August 1, 2014, by
and between Agilent Technologies, Inc. and Keysight
Technologies, Inc.
Intellectual Property Matters Agreement, dated August 1,
2014, by and between Agilent Technologies, Inc. and
Keysight Technologies, Inc.
Trademark License Agreement, dated August 1, 2014, by
and between Agilent Technologies, Inc. and Keysight
Technologies, Inc.
Real Estate Matters Agreement, dated August 1, 2014, by
and between Agilent Technologies, Inc. and Keysight
Technologies, Inc.
Incorporation by Reference
Form
10-K
Date
12/22/2014
Exhibit
Number
10.35
Filed
Herewith
8-K
4/10/2008
10.3
10-K
12/22/2014
10.37
10-K
12/21/2009
10.50
10-K
12/22/2014
10.39
8-K
8/5/2014
10.1
8-K
8/5/2014
10.2
8-K
8/5/2014
10.3
8-K
8/5/2014
10.4
8-K
8/5/2014
10.5
10.38 Underwriting Agreement, dated October 24, 2007, by and
8-K
10/26/2007
1.01
among Agilent Technologies, Inc., Citigroup Global
Markets Inc. and J.P. Morgan Securities Inc., on behalf of
the several underwriters named therein.
10.39 Underwriting Agreement, dated September 9, 2009, by
8-K
9/14/2009
1.01
and among the Company, Barclays Capital Inc., Citigroup
Global Markets Inc. and Credit Suisse Securities
(USA) LLC, on behalf of the several underwriters named
therein.
10.40 Underwriting Agreement, dated July 13, 2010, by and
8-K
7/19/2010
1.01
among the Company, Banc of America Securities LLC,
Barclays Capital Inc. and Credit Suisse Securities
(USA) LLC, on behalf of the several underwriters named
therein.
10.41 Underwriting Agreement, dated September 10, 2012, by
8-K
9/13/2012
1.01
and among the Company, Barclays Capital Inc., J.P.
Morgan Securities LLC and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, on behalf of the several
underwriters named therein
112
Exhibit
Number Description
Form
Date
10.42 Underwriting Agreement, dated June18, 2013, by and
8-K
6/21/2013
Exhibit
Number
1.01
Filed
Herewith
Incorporation by Reference
among the Company, BNP Paribas Securities Corp.,
Citigroup Global Markets Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, on behalf of the several
underwriters named therein.
Credit Agreement, dated September 15, 2014, by and
among the Company, the Lenders party thereto and BNP
Paribas, as Administrative Agent.
Letter Agreement dated as of June 9, 2015 by and among
the Company, BNP Paribas, as Administrative Agent
under the Credit Agreement and certain banks
Share Purchase Agreement by and among Delphi S.a.r.l.,
Agilent Technologies Europe B.V. and Agilent
Technologies, Inc., dated May 16, 2012.
Contract of Employment - Corporate Vice President, by
and among Dako Denmark A/S and Jacob Thaysen*
Letter of Terms and Conditions International Long Term
Assignment, by and among Jacob Thaysen and the
Company*
Bonus Retention Agreement, by and among Jacob
Thaysen and the Company*
Bonus Retention Notification for FY 13 and FY13-FY15
Performance Periods, by and among Jacob Thaysen and
the Company*
Letter of Terms and Conditions Localization Program by
and among Jacob Thaysen and the Company *
Letter of Terms and Conditions Localization Program by
and among Patrick Kaltenbach and the Company *
Letter of Terms and Conditions of U.S. Indefinite
Relocation and U.S. Domestic Relocation Agreement,
each by and among Michael R. McMullen and the
Company*
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
11.1
See Note 6, “Net Income Per Share”, to our Consolidated
Financial Statements on page 76.
12.1
Computation of ratio of earnings to fixed charges.
14.1
See Investor Information in Item 1: Business on page 16
of this Annual Report on Form 10-K.
Significant subsidiaries of Agilent Technologies, Inc. as
of October 31, 2016.
Consent of Independent Registered Public Accounting
Firm.
Powers of Attorney. Contained in the signature page of
this Annual Report on Form 10-K.
Certification of Chief Executive Officer pursuant to
Certification of Chief Financial Officer pursuant to
Certification of Chief Executive Officer pursuant to
21.1
23.1
24.1
31.1
31.2
32.1
113
8-K
9/15/2014
10.2
8-K
6/10/2015
10.1
8-K
5/22/2012
10.1
10-K
12/22/2014
10.61
10-K
12/22/2014
10.62
10-K
12/22/2014
10.63
10-K
12/22/2014
10.64
10-K
12/21/2015
10.70
10-K
12/21/2015
10.71
10-Q
3/8/2016
10.1
X
X
X
X
X
X
X
X
X
Exhibit
Number Description
32.2
Certification of Chief Financial Officer pursuant to
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase
Document.
Incorporation by Reference
Form
Date
Exhibit
Number
Filed
Herewith
X
X
X
X
X
X
X
*
+
Indicates management contract or compensatory plan, contract or arrangement.
Pursuant to a request for confidential treatment, confidential portions of this Exhibit have been redacted and have been
filed separately with the Securities and Exchange Commission.
114
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
AGILENT TECHNOLOGIES, INC.
BY
/s/ MICHAEL TANG
Michael Tang
Senior Vice President,
General Counsel and Secretary
Date: December 20, 2016
115
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Michael Tang and P. Diana Chiu, or either of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign
any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that any of said attorneys-in-fact, or substitute or
substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ MICHAEL R. MCMULLEN
Director, President and Chief Executive Officer
December 20, 2016
Michael R. McMullen
/s/ DIDIER HIRSCH
Didier Hirsch
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
December 20, 2016
(Principal Financial Officer)
/s/ RODNEY GONSALVES
Vice President, Corporate Controllership
December 20, 2016
Rodney Gonsalves
(Principal Accounting Officer)
/s/ JAMES G. CULLEN
James G. Cullen
/s/ PAUL N. CLARK
Paul N. Clark
/s/ HEIDI FIELDS
Heidi Fields
/s/ ROBERT J. HERBOLD
Robert J. Herbold
/s/ KOH BOON HWEE
Koh Boon Hwee
/s/ DANIEL K. PODOLSKY, M.D.
Daniel K. Podolsky, M.D.
/s/ SUE H. RATAJ
Sue H. Rataj
/s/ GEORGE A. SCANGOS, Ph D
George A. Scangos, Ph D.
/s/ TADATAKA YAMADA, M.D.
Tadataka Yamada, M.D.
Chairman of the Board of Directors
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
December 20, 2016
Director
Director
Director
Director
Director
Director
Director
Director
116
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Agilent Technologies, Inc.
5301 Stevens Creek Boulevard
Santa Clara, CA 95051
Phone: (408) 345-8886
STOCK LISTING
Agilent Technologies, Inc. common stock is traded on the
New York Stock Exchange (NYSE) under the trading
symbol A.
TRANSFER AGENT AND REGISTRAR
Please contact our transfer agent with any questions
pertaining to your stock account.
Computershare Investor Services
250 Royall Street
Canton, MA 02021
United States
www.computershare.com/contactus
Within the United States or Canada:
(877) 309-9856
Outside the United States and Canada:
(312) 588-4672
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
488 Almaden Boulevard
Suite 1800
San Jose, CA 95110
United States
ANNUAL MEETING
Agilent Technologies, Inc.’s 2017 Annual Meeting of
Stockholders is scheduled to be held at 8:00 am on March
15, 2017 at Agilent’s headquarters, 5301 Stevens Creek
Boulevard, Building No. 5, Santa Clara, CA 95051. The
meeting will also be audio webcast on our website
(www.agilent.com).
CERTIFICATIONS
The CEO/CFO certifications required to be filed with the
Securities and Exchange Commission pursuant to Section
302 of the Sarbanes Oxley Act are included as Exhibits 31.1
and 31.2 to our Annual Report on Form 10-K. In addition, an
annual CEO certification was submitted to the NYSE on
March 24, 2016, in accordance with the NYSE’s listing
standards.
INVESTOR CONTACT
Agilent Technologies, Inc.
Investor Relations
5301 Stevens Creek Boulevard, MS 1A-IR
Santa Clara, CA 95051
Email: investor_relations@agilent.com
General Inquiries: (408) 345-8862
BOARD OF
DIRECTORS
Paul N. Clark
Former Operating Partner of
Genstar Capital, LLC
James G. Cullen
Non-executive Chairman,
Agilent Technologies, Inc.
Former President and Chief Operating Officer,
Bell Atlantic
Heidi Kunz
Former Executive Vice President and
Chief Financial Officer
Blue Shield of California
Robert J. Herbold
Retired Executive Vice President
Microsoft Corporation
Koh Boon Hwee
Managing Partner,
Credence Capital Fund II (Cayman) Ltd.
SENIOR
EXECUTIVES
Michael R. McMullen*
President and Chief Executive Officer
Henrik Ancher-Jensen*
Senior Vice President, Agilent
President, Order Fulfillment and Supply Chain
Richard A. Burdsall
Senior Vice President,
Chief Infrastructure Officer
Mark Doak*
Senior Vice President, Agilent
President, Agilent CrossLab Group
Rodney Gonsalves*
Vice President,
Chief Accounting Officer
Dominique Grau*
Senior Vice President,
Human Resources
2016 ANNUAL REPORT
Michael R. McMullen
President and Chief Executive Officer,
Agilent Technologies, Inc.
Daniel K. Podolsky, M.D.
President
University of Texas Southwestern Medical
Center
Sue H. Rataj
Former Chief Executive
BP plc–Petrochemicals
George A. Scangos, Ph.D.
Chief Executive Officer
Biogen Inc.
Tadataka Yamada, M.D.
Venture Partner, Life Sciences Team, and
Senior Advisor, Growth Buyout Team, for Frazier
Healthcare
Didier Hirsch*
Senior Vice President and
Chief Financial Officer
Patrick Kaltenbach*
Senior Vice President, Agilent
President, Life Sciences & Applied
Markets
Darlene J.S. Solomon, Ph.D.
Senior Vice President,
Technology Officer and
Research
Michael Tang*
Senior Vice President,
General Counsel and
Secretary
Jacob Thaysen*
Senior Vice President, Agilent
President, Diagnostics & Genomics
* These individuals are executive officers
of Agilent under Section 16 of the Securities Exchange
Act of 1934.
© Agilent Technologies, Inc. 2017
www.agilent.com