A-01.31.2015-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(MARK ONE) 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2015 
OR 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
FOR THE TRANSITION PERIOD FROM              TO        
 COMMISSION FILE NUMBER: 001-15405
 AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
 
77-0518772
(State or other jurisdiction of
 
(IRS employer
incorporation or organization)
 
Identification no.)
 
 
 
5301 STEVENS CREEK BLVD.,
 
 
SANTA CLARA, CALIFORNIA
 
95051
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (408) 345-8886  
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x  No  ¨
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the exchange act.
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
CLASS
 
OUTSTANDING AT JANUARY 31, 2015
COMMON STOCK, $0.01 PAR VALUE
 
335,810,297


Table of Contents

AGILENT TECHNOLOGIES, INC.
TABLE OF CONTENTS
 
 
 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
— FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
January 31,
 
2015
 
2014
Net revenue:
 

 
 

Products
$
815

 
$
803

Services and other
211

 
205

Total net revenue
1,026

 
1,008

Costs and expenses:
 

 
 

Cost of products
395

 
382

Cost of services and other
118

 
116

Total costs
513

 
498

Research and development
88

 
88

Selling, general and administrative
310

 
298

Total costs and expenses
911

 
884

Income from operations
115

 
124

Interest income
2

 
2

Interest expense
(16
)
 
(29
)
Other income (expense), net
12

 

Income from continuing operations before taxes
113

 
97

Provision (benefit) for income taxes
11

 
(24
)
Income from continuing operations
102

 
121

Income (loss) from discontinued operations (net of tax expense (benefit) of $(2) million and $20 million)
(30
)
 
74

Net income
$
72

 
$
195

 
 
 
 
Net income per share - basic:
 

 
 

Income from continuing operations
$
0.30

 
$
0.37

Income (loss) from discontinued operations
(0.09
)
 
0.22

Net income per share - basic
$
0.21

 
$
0.59

 
 
 
 
Net income per share - diluted:
 
 
 
Income from continuing operations
$
0.30

 
$
0.36

Income (loss) from discontinued operations
(0.09
)
 
0.22

Net income per share - diluted
$
0.21

 
$
0.58

 
 
 
 
Weighted average shares used in computing net income per share:
 

 
 

Basic
336

 
333

Diluted
338

 
338

 
 
 
 
Cash dividends declared per common share
$
0.100

 
$
0.132

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


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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(Unaudited)

 
Three Months Ended
 
January 31,
 
2015
 
2014
 
 
 
 
Net income
$
72

 
$
195

Other comprehensive income (loss):
 
 
 
Unrealized loss on investments, net of tax benefit of $0 and $1

 
(3
)
Unrealized gain (loss) on derivative instruments, net of tax (expense) benefit of $(3) and $1
7

 
(2
)
Amounts reclassified into earnings related to derivative instruments, net of tax (expense) benefit of $1 and $(1)
(3
)
 

Foreign currency translation, net of tax benefit of $6 and $5
(265
)
 
(55
)
Net defined benefit pension cost and post retirement plan costs:
 
 
 
Change in actuarial net loss, net of tax expense of $(2) and $(4)
4

 
13

Change in net prior service benefit, net of tax benefit of $2 and $4
(2
)
 
(8
)
Other comprehensive loss
(259
)
 
(55
)
Total comprehensive income (loss)
$
(187
)
 
$
140


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


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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except par value and share amounts)
(Unaudited)
 
January 31,
2015
 
October 31,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
2,118

 
$
2,218

Accounts receivable, net
615

 
626

Inventory
560

 
574

Other current assets
361

 
261

Current assets of discontinued operations

 
1,821

Total current assets
3,654

 
5,500

Property, plant and equipment, net
610

 
631

Goodwill
2,352

 
2,507

Other intangible assets, net
559

 
649

Long-term investments
90

 
96

Other assets
254

 
283

Non-current assets of discontinued operations

 
1,165

Total assets
$
7,519

 
$
10,831

LIABILITIES AND EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
257

 
$
302

Employee compensation and benefits
183

 
228

Deferred revenue
278

 
260

Other accrued liabilities
210

 
289

Current liabilities of discontinued operations

 
623

Total current liabilities
928

 
1,702

Long-term debt
1,658

 
1,663

Retirement and post-retirement benefits
194

 
209

Other long-term liabilities
499

 
522

Long-term liabilities of discontinued operations

 
1,434

Total liabilities
3,279

 
5,530

Commitments and contingencies (Note 13)


 


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; 609 million shares at January 31, 2015 and 608 million shares at October 31, 2014 issued
6

 
6

Treasury stock at cost; 273 million shares at January 31, 2015 and 273 million shares at October 31, 2014
(9,813
)
 
(9,807
)
Additional paid-in-capital
8,957

 
8,967

Retained earnings
5,348

 
6,466

Accumulated other comprehensive loss
(261
)
 
(334
)
Total stockholders' equity
4,237

 
5,298

Non-controlling interest
3

 
3

Total equity
4,240

 
5,301

Total liabilities and equity
$
7,519

 
$
10,831

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

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(Unaudited)
 
 
Three Months Ended
 
January 31,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
72

 
$
195

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
68

 
96

Share-based compensation
22

 
36

Excess tax benefit from share-based plans

 
(3
)
Deferred taxes
(7
)
 
(5
)
Excess and obsolete inventory related charges
4

 
11

Other non-cash expenses, net
3

 
6

Changes in assets and liabilities:
 

 
 

Accounts receivable
(15
)
 
40

Inventory
(5
)
 
(33
)
Accounts payable
(39
)
 
(1
)
Employee compensation and benefits
(34
)
 
(62
)
Other assets and liabilities
(89
)
 
(86
)
Net cash provided by (used in) operating activities
(20
)
 
194

 
 
 
 
Cash flows from investing activities:
 

 
 

Investments in property, plant and equipment
(32
)
 
(45
)
Change in restricted cash and cash equivalents, net
1

 

Acquisitions of businesses and intangible assets, net of cash acquired

 
(2
)
Net cash used in investing activities
(31
)
 
(47
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Issuance of common stock under employee stock plans
8

 
73

Payment of dividends
(34
)
 
(44
)
Excess tax benefit from share-based plans

 
3

Transfer of cash and cash equivalents to Keysight inc.
(796
)
 

Treasury stock repurchases
(6
)
 
(100
)
Net cash used in financing activities
(828
)
 
(68
)
 
 
 
 
Effect of exchange rate movements
(31
)
 
(12
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(910
)
 
67

 
 
 
 
Change in cash and cash equivalents within current assets of discontinued operations
810

 

 
 
 
 
Cash and cash equivalents at beginning of period
2,218

 
2,675

Cash and cash equivalents at end of period
$
2,118

 
$
2,742

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

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AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
OVERVIEW, BASIS OF PRESENTATION 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.

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

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-Q. See "Basis of Presentation".

New Segment Structure. In November 2014, we announced a change in organizational structure designed to better serve our customers. Our life sciences business, excluding the nucleic acid solutions division, together with the chemical analysis business combined to form a new segment called life sciences and applied markets business. Our diagnostics and genomics businesses combined with the nucleic acid solutions division from our life sciences business and became the diagnostics and genomics segment. Finally, the Agilent CrossLab segment was formed from the services and consumables businesses previously part of the life sciences and chemicals analysis businesses. Financial reporting under this new structure is included within this report on Form 10-Q and historical financial segment information has been recast to conform to this new presentation within our financial statements.

Basis of Presentation. We have prepared the accompanying financial data for the three months ended January 31, 2015 and 2014 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our condensed consolidated balance sheet as of January 31, 2015 and October 31, 2014, condensed consolidated statement of comprehensive income for the three months ended January 31, 2015 and 2014, condensed consolidated statement of operations for the three months ended January 31, 2015 and 2014, and condensed consolidated statement of cash flows for the three months ended January 31, 2015 and 2014.

The prior year results of operations and the prior year end financial position of Keysight are included in the consolidated financial statements of Agilent and reported as discontinued operations. The prior year statement of comprehensive income and prior year statement of cash flows have not been adjusted to reflect the effect of the separation of Keysight. Unless indicated otherwise, the information in the Notes to the condensed consolidated financial statements relates to our continuing operations.

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

Update to Significant Accounting Policies. For the stock option and long term performance plan grants in 2015 we are now using a volatility measure derived from a selection of our peer companies.  In prior periods, we used Agilent stock historical volatility. We now 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. There have been no other material changes to our significant accounting

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policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014.

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 $45 million and $53 million as of January 31, 2015 and October 31, 2014, 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 9, "Fair Value Measurements" for additional information on the fair value of financial instruments.

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 2014, we assessed goodwill impairment for three reporting units under our previous reporting structure which consisted of one segment: chemical analysis and two reporting units under the life sciences and diagnostics segment. The first of these two reporting units related to our life sciences business and the second related to our diagnostics business. We performed a qualitative test for goodwill impairment of our previous three reporting units as of September 30, 2014. 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. In connection with our annual goodwill impairment testing in 2015, we will assess for potential impairment of goodwill on our new reporting units resulting from our reorganization. In the three months ended January 31, 2015 and 2014, there was no triggering event that would indicate that there was an impairment of goodwill therefore there was no impairment of goodwill during the three months ended January 31, 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 condensed 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

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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, 2014. 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. There was no impairment of indefinite-lived intangible asset during the three months ended January 31, 2015 and January 31, 2014.

 2. NEW ACCOUNTING PRONOUNCEMENTS

There were no changes to the new accounting pronouncements as described our Annual Report on Form 10-K for the fiscal year ended October 31, 2014 except for the following:

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 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 disclosure of Keysight meets the definition of a discontinued operation under both the existing and amended accounting guidance. 

In January 2015 FASB issued guidance on simplifying income statement presentation by eliminating the concept of extraordinary items from U.S. GAAP. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively and retrospectively to all periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We have evaluated the accounting guidance and determined that there is no impact of this update to our consolidated financial statements.

In February 2015, FASB issued an amendment to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendments in this update are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015.  We are evaluating the impact of adopting this guidance to our consolidated financial statements.

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 ensures that Keysight had approximately $700 million of total cash immediately following distribution.
 
The historical results of operations and statement of financial position of Keysight have been presented as discontinued operations in the condensed 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.


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The following table summarizes results from discontinued operations of Keysight included in the condensed consolidated statement of operations:

 
Three Months Ended
 
January 31,
 
2015
 
2014
 
(in millions)
Net revenue
$

 
$
671

Costs and expenses
32

 
577

Operating income (loss)
(32
)
 
94

Other income (expense), net

 

Income (loss) from discontinued operations before tax
(32
)
 
94

Provision (benefit) for income taxes
(2
)
 
20

Net income (loss) from discontinued operations
$
(30
)
 
$
74

   
Net income (loss) from discontinued operations includes transaction, information systems and other costs to effect the separation of $32 million and $18 million for the three months ended January 31, 2015 and 2014, respectively. In the three months ended January 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.


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The following table presents Agilent's electronic measurement business assets and liabilities removed from the condensed consolidated balance sheet as of November 1, 2014 and presented as discontinued operations as of October 31, 2014:
 
October 31, 2014
 
(in millions)
Assets:
 
Cash
$
810

Accounts receivable
357

Inventory
498

Other current assets
156

Current assets of discontinued operations
1,821

Property, plant and equipment
470

Goodwill
392

Other intangibles
18

Long-term investments
63

Other assets
222

Non-current assets of discontinued operations
1,165

Total assets of discontinued operations
$
2,986

Liabilities:
 
Accounts payable
$
173

Employee compensation and benefits
167

Deferred revenue
175

Other accrued liabilities
108

Current liabilities of discontinued operations
623

Long-term debt
1,099

Retirement and post-retirement benefits
213

Other long-term liabilities
122

Long-term liabilities of discontinued operations
1,434

Total liabilities of discontinued operations
$
2,057


In addition, $332 million of accumulated other comprehensive loss, net of income taxes, primarily related to pension and other postretirement 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 transferred. As of January 31, 2015, the net receivable balance due to Agilent from Keysight was $62 million related to excess cash and other pre-separation receivables per the Separation and Distribution Agreement and is included within the balance sheet of Agilent continuing operations. Excess cash represents the amount by which Agilent over-funded Keysight at distribution and is repayable to Agilent in accordance with the Separation and Distribution Agreement. In February  2015, substantially all balances due to Agilent have been settled by Keysight. See Note 5 “Income Taxes” for tax implications of the distribution and Note 4 “Share Based Compensation” for changes to share based compensation awards as a result of the distribution of Keysight.

In order to effect the separation and govern our relationship with Keysight after the separation, we entered into a Separation and Distribution Agreement and other agreements including a Tax Matters Agreement, an Employee Matters Agreement and a Transition Services Agreement. The Separation and Distribution Agreement governs the separation of the electronic measurement business, the transfer of assets and other matters related to our relationship with Keysight.

The Tax Matters Agreement governs the respective rights, responsibilities and obligations of Keysight and Agilent with respect to taxes, tax attributes, tax returns, tax proceedings and certain other tax matters.


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The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Keysight and Agilent, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Keysight will no longer participate in benefit plans sponsored or maintained by Agilent. In addition, the Employee Matters Agreement provides that each of the parties will be responsible for their respective former and current employees and compensation plans for such current employees.

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 which we anticipate will be largely completed by the end of the second quarter of 2015. In total we expect to receive income for all services provided to Keysight of approximately $12 million. In addition, Agilent expects to receive lease income from Keysight over the next 4-5 years of approximately $13 million per year.  In the three months ended January 31, 2015 other income (expense), net includes $11 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 authoritative 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 employee stock purchase plan (“ESPP”) and performance share awards granted to selected members of our senior management under the long-term performance plan (“LTPP”) based on estimated fair values.
 
The impact on our results for share-based compensation was as follows:
 

Three Months Ended

January 31,
 
2015

2014
 
(in millions)
Cost of products and services
$
5


$
6

Research and development
2


4

Selling, general and administrative
15


14

Share-based compensation expense in continuing operations
$
22


$
24

Share-based compensation expense in discontinued operations

 
13

Total share-based compensation expense
$
22

 
$
37

 
At January 31, 2015 and October 31, 2014, there was no share-based compensation capitalized within inventory. For the three months ended January 31, 2015 and 2014, the windfall tax benefit realized from exercised stock options and similar awards was zero and $3 million, respectively.

The following assumptions were used to estimate the fair value of the options and LTPP grants.
 
 
Three Months Ended
 
January 31,
 
2015
 
2014
Stock Option Plans:
 

 
 

Weighted average risk-free interest rate
1.8
%
 
1.7
%
Dividend yield
1
%
 
1
%
Weighted average volatility
28
%
 
39
%
Expected life
5.5 yrs

 
5.8 yrs

LTPP:
 
 
 
Volatility of Agilent shares
25
%
 
36
%
Volatility of selected peer-company shares
12%-57%

 
13%-57%

Price-wise correlation with selected peers
37
%
 
47
%
 
In connection with the separation of Keysight on November 1, 2014 and in accordance with the Employee Matters Agreement

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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.

The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to the separation of Keysight on November 1, 2014, expected volatility for grants of options in fiscal 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 2015 LTPP 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 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.

In developing our estimated life of our employees' stock options of 5.5 years, we considered the separation of Keysight and the historical option exercise behavior for our executive employees who were granted the majority of the options in the annual grants made which we believe is representative of future behavior.

The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.

5.     INCOME TAXES
 
The company’s effective tax rate from continuing operations was 9.3 percent and (24.7) percent for the three months ended January 31, 2015 and 2014, respectively. The income tax expense was $11 million for the three months ended January 31, 2015 and an income tax benefit of $24 million for the three months ended January 31, 2014.

The income tax provision from continuing operations for the three months ended January 31, 2015 included a net discrete tax benefit of $12 million. Current period items included in this total are $6 million of tax benefit for the extension, which occurred in the first quarter of 2015, of the U.S. research and development tax credit attributable to the company's prior fiscal year, and $3 million of other discrete tax expense items. In addition, the net discrete benefit included out of period adjustments for a $13 million tax benefit related to a tax rate change in Denmark and $4 million of tax expense attributable to an error discovered on a prior year U.S. tax return. These corrections are not considered to be material to current or prior periods. The income tax provision for the three months ended January 31, 2014 included a net discrete benefit of $50 million due to the settlement of an Internal Revenue Service ("IRS") audit in the U.S. offset by the recognition of tax expense related to the repatriation of dividends to the U.S.

On November 1, 2014, Agilent transferred deferred tax assets of $238 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 2008 for federal income tax purposes and the year 2000 for significant states. 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 $61 million principally related to additional foreign earnings that were recognized in conjunction with the settlement. Agilent's U.S. federal income tax returns for 2008 through 2011 are currently under audit by the IRS.

In connection with the settlement of the 2006-2007 IRS audit, we identified during the first quarter of fiscal year 2014 an overstatement of approximately $65 million in our long-term tax liabilities. The overstatement was recorded in 2008 as a cumulative effect of a change in accounting principle when we adopted Accounting Standard Codification 740-10, Income Taxes. Accordingly, we corrected the error by reducing long-term tax liabilities and increasing retained earnings by $65 million in the first quarter of fiscal 2014. The correction had no impact on net income or cash flows in any prior period and is not considered material to total liabilities or equity in any prior period.

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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.  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.

6. NET INCOME PER SHARE
 
The following is a reconciliation of the numerator and denominator of the basic and diluted net income per share computations for the periods presented below:
 
 
Three Months Ended
 
 
January 31,
 
 
2015
 
2014
 
 
(in millions)
Numerator:
 

 
 

 
Income from continuing operations
$
102

 
$
121

 
Income (loss) from discontinued operations
(30
)
 
74

 
Net income
$
72

 
$
195

 
Denominator:
 
 
 
 
Basic weighted-average shares
336

 
333

 
Potential common shares— stock options and other employee stock plans
2

 
5

 
Diluted weighted-average shares
338

 
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 with the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable and non-exercisable stock options, restricted stock grants, and long-term performance plan grants were converted to those of the entity where the employee is working post-separation and were adjusted to retain the intrinsic value of the awards prior to separation. 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, the tax benefits or shortfalls recorded to additional paid-in capital 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 and tax benefits or shortfalls collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.

We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For the three months ended January 31, 2015 and 2014, 1.3 million options and zero options to purchase shares were excluded from the calculation of diluted earnings per share, respectively. 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, unamortized fair value and excess tax benefits or shortfalls collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive.  For the three months ended January 31, 2015 and 2014, no additional options to purchase shares were excluded from the calculation of diluted earnings per share. 

7. INVENTORY
 
 
January 31,
2015
 
October 31,
2014
 
(in millions)
Finished goods
$
356

 
$
366

Purchased parts and fabricated assemblies
204

 
208

Inventory
$
560

 
$
574



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8. GOODWILL AND OTHER INTANGIBLE ASSETS
 
The following table presents goodwill balances and the movements for each of our reportable segments during the three months ended January 31, 2015:
 
 
Life Sciences and Applied Markets
 
Diagnostics and Genomics
 
Agilent CrossLab
 
Total
 
(in millions)
Goodwill as of October 31, 2014
$
668

 
$
1,345

 
$
494

 
$
2,507

Foreign currency translation impact
(11
)
 
(136
)
 
(8
)
 
(155
)
Goodwill as of January 31, 2015
$
657

 
$
1,209

 
$
486

 
$
2,352

 
The components of other intangibles as of January 31, 2015 and October 31, 2014 are shown in the table below:
 
 
Purchased Other Intangible Assets
 
Gross
Carrying
Amount
 
Accumulated
Amortization
and
Impairments
 
Net Book
Value
 
(in millions)
As of October 31, 2014:
 

 
 

 
 

Purchased technology
$
880

 
$
475

 
$
405

Trademark/Tradename
167

 
52

 
115

Customer relationships
368

 
257

 
111

Total amortizable intangible assets
1,415

 
784

 
631

In-Process R&D
18

 

 
18

Total
$
1,433

 
$
784

 
$
649

As of January 31, 2015:
 

 
 

 
 

Purchased technology
848

 
503

 
345

Trademark/Tradename
157

 
55

 
102

Customer relationships
362

 
269

 
93

Total amortizable intangible assets
1,367

 
827

 
540

In-Process R&D
19

 

 
19

Total
$
1,386

 
$
827

 
$
559

 
During the three months ended January 31, 2015, there were no additions to goodwill and there were no additions to other intangible assets. During the three months ended January 31, 2015, other intangible assets decreased $47 million, due to the impact of foreign exchange translation.
 
During the three months ended January 31, 2014, there were no additions to goodwill or to other intangible assets. We also transferred $4 million from in-process R&D to purchased technology in the three months ended January 31, 2014, as projects were completed.

Amortization of intangible assets was $43 million and $49 million for the three months ended January 31, 2015 and 2014, respectively. Future amortization expense related to existing finite-lived purchased intangible assets is estimated to be $115 million for the remainder of 2015, $133 million for 2016, $93 million for 2017, $61 million for 2018, $46 million for 2019, $36 million for 2020, and $56 million thereafter.
 
9. 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.


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Fair Value Hierarchy
 
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
 
Level 1- applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
 
Level 2- applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
 
Level 3- applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
Financial assets and liabilities measured at fair value on a recurring basis as of January 31, 2015 were as follows:
 
 
 
 
Fair Value Measurement at January 31, 2015 Using
 
January 31,
2015
 
Quoted Prices
 in Active
 Markets for
 Identical Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant
 Unobservable
 Inputs
 (Level 3)
 
(in millions)
Assets:
 

 
 

 
 

 
 

Short-term
 

 
 

 
 

 
 

Cash equivalents (money market funds)
$
1,649

 
$
1,649

 
$

 
$

Derivative instruments (foreign exchange contracts)
26

 

 
26

 

Long-term
 
 
 
 
 
 
 
Trading securities
33

 
33

 

 

Available-for-sale investments

 

 

 

Total assets measured at fair value
$
1,708

 
$
1,682

 
$
26

 
$

Liabilities:
 

 
 

 
 

 
 

Short-term
 
 
 
 
 
 
 
Derivative instruments (foreign exchange contracts)
$
19

 
$

 
$
19

 
$

Long-term
 
 
 
 
 
 
 
Deferred compensation liability
33

 

 
33

 

Total liabilities measured at fair value
$
52

 
$

 
$
52

 
$




16

Table of Contents

Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2014 were as follows:
 
 
 
 
Fair Value Measurement at October 31, 2014 Using
 
October 31,
2014
 
Quoted Prices
 in Active
 Markets for
 Identical Assets
 (Level 1)
 
Significant
 Other
 Observable
 Inputs
 (Level 2)
 
Significant
 Unobservable
 Inputs
 (Level 3)
 
(in millions)
Assets:
 

 
 

 
 

 
 

Short-term
 

 
 

 
 

 
 

Cash equivalents (money market funds)
$
1,117

 
$
1,117

 
$

 
$

Derivative instruments (foreign exchange contracts)
10

 

 
10

 

Long-term
 
 
 
 
 
 
 
Trading securities
35

 
35

 

 

Total assets measured at fair value
$
1,162

 
$
1,152

 
$
10

 
$

Liabilities:
 

 
 

 
 

 
 

Short-term
 
 
 
 
 
 
 
Derivative instruments (foreign exchange contracts)
$
4

 
$

 
$
4

 
$

Long-term
 
 
 
 
 
 
 
Deferred compensation liability
35

 

 
35

 

Total liabilities measured at fair value
$
39

 
$

 
$
39

 
$

 
Our money market funds and trading securities investments 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 other comprehensive income.
 
Impairment of Investments. There were no impairments for investments for the three months ended January 31, 2015 and 2014.
 
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

For the three months ended January 31, 2015 and 2014, there were no impairments of long-lived assets held and used. For the three months ended January 31, 2015 and 2014, there were no impairments of long-lived assets held for sale.

10. 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 to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange 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 January 31, 2015, 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

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Table of Contents

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 January 31, 2015 was $2 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 January 31, 2015 was $21 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 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 condensed 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 condensed 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 the three months ended January 31, 2015 and 2014 was not significant. For the three months ended January 31, 2015 and 2014 gains and losses recognized in other income (expense) due to de-designation of cash flow hedge contracts were not significant.

In July 2012, Agilent executed treasury lock agreements for $400 million in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income of $3 million which is being amortized to interest expense over the life of the 2022 senior notes.

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 condensed 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 January 31, 2015, was $6 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of January 31, 2015.


18

Table of Contents

There were 53 foreign exchange forward contracts and 3 foreign exchange option contracts open as of January 31, 2015 and designated as cash flow hedges. There were 160 foreign exchange forward contracts open as of January 31, 2015 not designated as hedging instruments. The aggregated notional amounts by currency and designation as of January 31, 2015 were as follows:
 
 
 
Derivatives in Cash Flow
Hedging Relationships
 
Derivatives
Not
Designated
as Hedging
Instruments
 
 
Forward
Contracts USD
 
Option
Contracts USD
 
Forward
Contracts USD
 
Forward
Contracts DKK
Currency
 
Buy/(Sell)
 
Buy/(Sell)
 
Buy/(Sell)
 
Buy/(Sell)
 
 
(in millions)
Euro
 
$
(48
)
 
$

 
$
149

 
$
(55
)
British Pound
 
(17
)
 

 
1

 
(7
)
Canadian Dollar
 
(29
)
 

 

 
(3
)
Australian Dollar
 
3

 

 
19

 
(2
)
Malaysian Ringgit
 

 

 
(3
)
 

Japanese Yen
 
(49
)
 
(12
)
 
(9
)
 
(4
)
American Dollar
 

 

 

 
52

Other
 
(8
)
 

 
(2
)
 

Totals
 
$
(148
)
 
$
(12
)
 
$
155

 
$
(19
)
 
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 January 31, 2015 and October 31, 2014 were as follows:

Fair Values of Derivative Instruments
Asset Derivatives
 
Liability Derivatives
 
 
Fair Value
 
 
 
Fair Value
Balance Sheet Location
 
January 31,
2015
 
October 31,
2014
 
Balance Sheet Location
 
January 31,
2015
 
October 31,
2014
(in millions)
Derivatives designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Cash flow hedges
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
Other current assets
 
$
15

 
$
9

 
Other accrued liabilities
 
$
1

 
$
1

Derivatives not designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

Foreign exchange contracts
 
 

 
 

 
 
 
 

 
 

Other current assets
 
$
11

 
$
1

 
Other accrued liabilities
 
$
18

 
$
3

Total derivatives
 
$
26

 
$
10

 
 
 
$
19

 
$
4



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Table of Contents

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:
 

 
Three Months Ended
 
 
January 31,
 
 
2015
 
2014
 
 
(in millions)
Derivatives designated as hedging instruments:
 

 
 

 
Cash Flow Hedges
 
 
 
 
Foreign exchange contracts:
 
 
 
 
Gain (loss) recognized in accumulated other comprehensive income
$
10

 
$
(3
)
 
Gain (loss) reclassified from accumulated other comprehensive income into cost of sales
$
4

 
$
(1
)
 
Derivatives not designated as hedging instruments:
 
 
 
 
Loss recognized in other income (expense)
$
(13
)
 
$
(1
)
 
 
The estimated amount of existing net gain at January 31, 2015 that is expected to be reclassified from other comprehensive income to cost of sales within the next twelve months is $15 million.
 
11.   EXIT OF NMR BUSINESS

During the fourth quarter of fiscal year 2014, we made the decision to cease the manufacture and sale of our NMR product line within our life sciences and applied markets segment. The exit of the NMR business was primarily due to the lack of growth and profitability of the product line. These actions involved severance and other personnel costs related to the workforce reduction of approximately 300 employees primarily located in the United Kingdom and California and non-cash charges related to intangible asset impairments and other asset write-downs including inventory. We expect to substantially complete these restructuring activities by the end of fiscal 2016. As of January 31, 2015, approximately 200 employees are pending termination under the above actions.

A summary of total “NMR” restructuring activity and other special charges is shown in the table below:

 
Workforce
Reduction
Special Charges Related to Inventory and Others
Total
 
(in millions)
Balance as of October 31, 2014
$
14

$
3

$
17

Income statement expense
1

2

3

Inventory charges

(1
)
(1
)
Cash payments
(3
)

(3
)
Balance as of January 31, 2015
$
12

$
4

$
16


The restructuring and other special accruals related to the NMR closure, which totaled $16 million at January 31, 2015, are recorded in other accrued liabilities on the condensed consolidated balance sheet. These balances reflect estimated future cash outlays.


20

Table of Contents

12. RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
 
In connection with the separation of Keysight 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 employees as follows:

 
U.S. Defined
Benefit Plans
 
Non-U.S. Defined
Benefit Plans
 
U.S. Post-Retirement
Benefit Plans
 
(in millions)
Fair value of plan assets transferred to Keysight
$
491

 
$
1,318

 
$
187

Benefit obligation transferred to Keysight
$
514

 
$
1,429

 
$
206


Plan Amendments. Effective November 1, 2014, Agilent’s U.S. defined benefit retirement plan closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. These employees are instead eligible for an enhanced 6 percent employer match in the Agilent 401(k) plan.   In addition, any new employee hired on or after November 1, 2014, is not eligible to participate in the retiree medical plans upon retiring. Current eligible employees will continue to participate in the U.S. defined benefit retirement plan and retiree medical programs in place today and will remain eligible for the 401(k) plan with the current 4 percent employer match.  Retirees will maintain the retirement benefits and retiree medical benefits they are eligible for today.

Components of net periodic costs. For the three months ended January 31, 2015 and 2014, our net pension and post retirement benefit costs were comprised of the following:
 
 
Pensions
 
 
 
U.S. Plans
 
Non-U.S.
Plans
 
U.S. Post Retirement
Benefit Plans
 
Three Months Ended January 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Service cost—benefits earned during the period
$
6

 
$
12

 
$
4

 
$
9

 
$
1

 
$
1

Interest cost on benefit obligation
4

 
8

 
6

 
18

 
1

 
3

Expected return on plan assets
(7
)
 
(16
)
 
(11
)
 
(29
)
 
(2
)
 
(5
)
Amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial losses
1

 

 
7

 
11

 
1

 
3

Prior service cost
(1
)
 
(3
)
 

 

 
(3
)
 
(9
)
Total net plan costs
$
3

 
$
1

 
$
6

 
$
9

 
$
(2
)
 
$
(7
)
Summary of net plan costs:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
3

 

 
6

 
6

 
(2
)
 
(4
)
Discontinued operations

 
1

 

 
3

 

 
(3
)
Total net plan costs
$
3

 
$
1

 
$
6

 
$
9

 
$
(2
)
 
$
(7
)
 
 
 
 
 
 
 
 
 
 
 
 
We contributed zero to our U.S. defined benefit plans during the three months ended January 31, 2015. We contributed $5 million to our non-U.S. defined benefit plans during the three months ended January 31, 2015.

We contributed zero to our U.S. defined benefit plans during the three months ended January 31, 2014. We contributed $7 million to our non-U.S. defined benefit plans during the three months ended January 31, 2014.

We expect to contribute $15 million to our U.S. defined benefit plans during the remainder of 2015 and we expect to contribute $21 million to our non-U.S. defined benefit plans during the remainder of 2015.

13. WARRANTIES AND CONTINGENCIES
 
Warranties
 
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

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accrued and other long-term liabilities on our condensed consolidated balance sheet. Our standard warranty terms typically extend to one year from the date of delivery, depending on the product.
 
A summary of the standard warranty accrual activity is shown in the table below:
 
 
Three Months Ended
 
January 31,
 
2015
 
2014
 
(in millions)
Beginning balance as of November 1
$
30

 
$
31

Accruals for warranties including change in estimate
10

 
12

Settlements made during the period
(11
)
 
(13
)
Ending balance as of January 31
$
29


$
30

 
 
 
 
Accruals for warranties due within one year
$
26

 
$
26

Accruals for warranties due after one year
3

 
4

Ending balance as of January 31
$
29

 
$
30

 
Contingencies
 
We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters. There are no matters pending that we currently believe are probable of having a material impact to our business, consolidated financial condition, results of operations or cash flows.

14. 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. As of January 31, 2015, the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit facility during the three months ended January 31, 2015.

As a result of the Dako acquisition, we have a credit facility in Danish Krone equivalent of $8 million with a Danish financial institution. No borrowings were outstanding under the facility as of January 31, 2015.   

15. LONG-TERM DEBT
 
Senior Notes
 
The following table summarizes the company’s long-term senior notes and the related interest rate swaps:
 
 
January 31, 2015
 
October 31, 2014
 
Amortized Principal
 
Swap
 
Total
 
Amortized
Principal
 
Swap
 
Total
 
(in millions)
2017 Senior Notes
$
100

 
$
2

 
$
102

 
$
100

 
$
3

 
$
103

2020 Senior Notes
499

 
21

 
520

 
499

 
22

 
521

2022 Senior Notes
399

 

 
399

 
399

 

 
399

2023 Senior Notes
598

 

 
598

 
598

 

 
598

Total
$
1,596

 
$
23

 
$
1,619

 
$
1,596

 
$
25

 
$
1,621

 
All outstanding notes listed above are unsecured and rank equally in right of payment with all of Agilent’s other senior unsecured indebtedness. There have been no changes to the principal, maturity, interest rates and interest payment terms of the Agilent senior notes, detailed in the table above, in the three months ended January 31, 2015 as compared to the senior notes described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014. All swap contracts have been terminated

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and amounts to be amortized over the remaining life of the senior notes as of January 31, 2015 and October 31, 2014 are detailed above.
 
Other Debt

As of January 31, 2015 and October 31, 2014, we have mortgage debt, secured on buildings in Denmark, in Danish Krone equivalent of $39 million and $42 million, respectively, aggregate principal outstanding with a Danish financial institution. The loans have a variable interest rate based on 3 months Copenhagen Interbank Rate ("Cibor") and will mature on September 30, 2027. Interest payments are made in March, June, September and December of each year.

16. STOCKHOLDERS' EQUITY
 
Stock Repurchase Program
 
On November 22, 2013 we announced that our board of directors had authorized a new share repurchase program effective in the first quarter of fiscal year 2014, upon the conclusion of the company's $1 billion repurchase program. The new 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 three months ended January 31, 2015, we repurchased 158 thousand shares for $6 million. For the three months ended January 31, 2014, 2 million shares were repurchased for $100 million. All such shares and related costs are held as treasury stock and accounted for using the cost method.
 
Cash Dividends on Shares of Common Stock
 
During the three months ended January 31, 2015, we paid cash dividends of $0.100 per common share or $34 million on the company's common stock. During the three months ended January 31, 2014, we paid cash dividends of $0.132 per common share or $44 million on the company's common stock.

The timing and amounts of any future dividends are subject to determination and approval by our board of directors.

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Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive income (loss) by component and related tax effects for the three months ended January 31, 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
 
 
(in millions)
As of October 31, 2014
 
$
17

 
$
156

 
$
255

 
$
(771
)
 
$
9

 
$
(334
)
Transfer to Keysight
 
(17
)
 
(9
)
 
(83
)
 
444

 
(3
)
 
332

Balance after transfer to Keysight
 

 
147

 
172

 
(327
)
 
6

 
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
 

 
(271
)
 

 
(3
)
 
10

 
(264
)

 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified out of accumulated other comprehensive income (loss)
 

 

 
(4
)
 
9

 
(4
)
 
1


 
 
 
 
 
 
 
 
 
 
 
 
Tax (expense) benefit
 

 
6

 
2

 
(2
)
 
(2
)
 
4


 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
(265
)
 
(2
)
 
4

 
4

 
(259
)

 
 
 
 
 
 
 
 
 
 
 
 
As of January 31, 2015
 
$

 
$
(118
)
 
$
170

 
$
(323
)
 
$
10

 
$
(261
)
 
 
 
 
 
 
 
 
 
 
 
 
 



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Reclassifications out of accumulated other comprehensive income (loss) for the three months ended January 31, 2015 and 2014 were as follows (in millions):
Details about accumulated other
 
Amounts Reclassified
Affected line item in
comprehensive income (loss) components
 
from other comprehensive income (loss)
statement of operations
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
January
 
 
 
 
2015

2014
 
 
 
 



 
 
Unrealized gains and (losses) on derivatives
 
$
4


$
(1
)
 
Cost of products
 
 
4


(1
)
 
Total before income tax
 
 
(1
)

1

 
(Provision)/benefit for income tax
 
 
3



 
Total net of income tax
Net defined benefit pension cost and post retirement plan costs:
 



 
 
 
 



 
 
Actuarial net loss
 
(9
)

(17
)
 
 
Prior service benefit
 
4


12

 
 
 
 
(5
)

(5
)
 
Total before income tax
 
 



 
(Provision)/benefit for income tax
 
 
(5
)

(5
)
 
Total net of income tax
 
 



 
 
Total reclassifications for the period
 
$
(2
)

$
(5
)
 
 

Amounts in parentheses indicate reductions to income and increases to other comprehensive income (loss).

Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 12 "Retirement Plans and Post Retirement Pension Plans").

17. 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.
In November 2014, we announced a change in organizational structure designed to better serve our customers. Our new structure reflects our strategy to focus our expertise on the market segments we serve and utilize our resources to offer product solutions to address our customer needs. The new operating structure ensures that we are able to respond to market demand while reducing costs through increased efficiencies. As a result, our life sciences business, excluding the nucleic acid solutions division, together with the chemical analysis business merged to form a new segment called life sciences and applied markets business. Our diagnostics and genomics businesses combined and includes the nucleic acid solutions division of our life sciences business and became the diagnostics and genomics segment. Finally, the Agilent CrossLab segment was formed from the services and consumables businesses. The historical financial segment information has been recast to conform to this new presentation.
Following this reorganization, 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

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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-OES") instruments; laboratory software and informatics systems; laboratory automation and robotic systems; dissolution testing; X-Ray Diffraction systems; vacuum pumps and measurement technologies.
Our diagnostics and genomics business is comprised of three areas of activity providing solutions that include reagents, instruments, software and consumables that enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and molecular level. First, the former Dako 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. Secondly 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 NGS target enrichment. Finally our nucleic acid solutions business provides equipment and expertise focused on production of synthesized oligonucleotides under pharmaceutical GMP conditions for use as APIs (Active Pharmaceutical Ingredients) in an emerging class of drugs that utilize nucleic acid molecules for disease therapy.

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. These results are not necessarily in conformity with U.S. GAAP. The performance of each segment is measured based on several metrics, including adjusted income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.


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The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as noted in the reconciliations below.
 
Life Sciences and Applied Markets
 
Diagnostics and Genomics
 
Agilent CrossLab
 
Total
 
(in millions)
Three months ended January 31, 2015:
 

 
 

 
 

 
 

Total net revenue
$
547

 
$
148

 
$
331

 
$
1,026

Income from operations
$
107

 
$
1

 
$
68

 
$
176

Three months ended January 31, 2014:
 

 
 

 
 

 
 

Total net revenue
$
537

 
$
157

 
$
314

 
$
1,008

Income from operations
$
105

 
$
19

 
$
69

 
$
193

 
 
 
 
 
 
 
 
The following table reconciles reportable segments’ income from operations to Agilent’s total enterprise income before taxes:
 
 
Three Months Ended
 
 
January 31,
 
 
2015
 
2014
 
 
(in millions)
Total reportable segments’ income from operations
$
176

 
$
193

 
Restructuring (expense) reversals and business exit costs
(3
)
 
2

 
Acceleration of share-based compensation related to workforce reduction
(1
)
 

 
Transformational initiatives
(12
)
 
(3
)
 
Amortization of intangibles
(43
)
 
(49
)
 
Acquisition and integration costs
(1
)
 
(6
)
 
Pre-separation costs

 
(2
)
 
Other
(1
)
 
(1
)
 
Interest income
2

 
2

 
Interest expense
(16
)
 
(29
)
 
Other income (expense), net
12

 

 
Unallocated corporate charges

 
(10
)
 
Income from continuing operations before taxes, as reported
$
113

 
$
97

 

The following table reflects segment assets under our management reporting system. Segment assets include allocations of corporate assets, including deferred tax assets, goodwill, other intangibles and other assets. Unallocated assets primarily consist of cash, cash equivalents, accumulated amortization of other intangibles, the valuation allowance relating to deferred tax assets and other assets.
 
 
Life Sciences and Applied Markets
 
Diagnostics and Genomics
 
Agilent CrossLab
 
Total
 
(in millions)
Assets:
 

 
 

 
 

 
 

As of January 31, 2015
$
2,407

 
$
2,893

 
$
1,065

 
$
6,365

As of October 31, 2014
$
2,209

 
$
2,887

 
$
1,031

 
$
6,127

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (UNAUDITED)
 
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality 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, the impact of foreign currency movements on our performance, remediation activities, 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, 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, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our capital expenditures, our contributions to our pension plans, our cost-control activities, timing of savings and headcount reduction recognized from our restructuring programs 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, post-separation expenses, our stock repurchase program, our declared dividends, our transition to lower-cost regions, 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 II Item 1A and elsewhere in this Form 10-Q.

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

In November 2014, we announced a change in organizational structure designed to better serve our customers. Our life sciences business, excluding the nucleic acid solutions division, together with the chemical analysis business combined to form a new segment called life sciences and applied markets business. Our diagnostics and genomics businesses combined with the nucleic acid solutions division from our life sciences business and became the diagnostics and genomics segment. Finally, the Agilent CrossLab segment was formed from the services and consumables businesses previously part of the life sciences and chemical analysis businesses. Financial reporting under this new structure is included within this report on Form 10-Q and historical financial segment information has been recast to conform to this new presentation within our financial statements.

Total orders for the three months ended January 31, 2015 increased 2 percent compared to the same period last year. Foreign currency movements for the three months ended January 31, 2015, had an unfavorable impact of approximately 4 percentage points when compared to the same period last year. For the three months ended January 31, 2015, life sciences and applied markets orders were flat, diagnostics and genomics orders increased 1 percent and Agilent CrossLab orders increased 5 percent when compared to the same period last year.
  
Net revenue of $1,026 million for the three months ended January 31, 2015 increased 2 percent when compared to the same period last year.  Foreign currency movements for the three months ended January 31, 2015 had an unfavorable impact of approximately 4 percentage points when compared to the same period last year.

The life sciences and applied markets business brings together Agilent's analytical laboratory instrumentation and informatics. Revenue grew 2 percent in the life sciences and applied markets business for the three months ended January 31, 2015 when compared to the same period last year. Increased revenue in the three months ended January 31, 2015 was the result

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of growth in most customer end-markets with strength within all life sciences markets. There was also revenue growth in the applied markets led by food and environmental offset by a decline in forensics.

The diagnostics and genomics business is comprised of three areas of activity. First, the former Dako company is focused on pathology, companion diagnostics and reagent partnerships. Second the genomics business includes our arrays, NGS target enrichment and our other genomics solutions. Third, the nucleic acid solutions business manufactures synthetic RNA to be potentially used as active pharmaceutical ingredients. Revenue decreased 6 percent within the diagnostics and genomics business in the three months ended January 31, 2015, when compared to the same period last year, with the businesses experiencing manufacturing issues which resulted in a decline in revenue generated across a number of markets.

The Agilent CrossLab business combines our analytical laboratory services and consumables business. Revenue generated by Agilent cross lab increased 5 percent in the three months ended January 31, 2015 when compared to the same period last year. Revenue increased in all markets led by strong performance in pharmaceutical and biotechnology and food markets in the three months ended January 31, 2015 when compared to the same period last year.
 
Net income from continuing operations for the three months ended January 31, 2015 was $102 million compared to $121 million for the corresponding period last year. In the three months ended January 31, 2015, cash outflow from operations was $20 million. For the three months ended January 31, 2015 cash flow from operations was negatively impacted by separation related expenses, transformational and restructuring expenses and additional income tax payments related to the separation.

For the three months ended January 31, 2015, cash dividends of $34 million were paid on the company's outstanding common stock. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.

On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The 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 three months ended January 31, 2015, we repurchased 158 thousand shares for $6 million.

We have introduced an improvement initiative to transform a number of the company's operations. It is expected that these actions, including the previously announced NMR restructuring program, will produce savings of approximately $50 million in total in 2015.

Looking forward, we expect to focus on organic growth within the analytical laboratory market by continuing to bring innovative new product offerings and to expand our laboratory-wide services and consumables. The strength in analytical laboratory is also expected to drive growth in genomics, clinical research and diagnostics markets. We anticipate that the strong U.S. dollar will continue to have an unfavorable impact on our performance for the near future. However, we are confident that our commitment to provide value driven solutions for our customers and our focus on our target market segments will help counter those currency headwinds.

Critical Accounting Policies and Estimates
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, restructuring, share-based compensation, retirement and post-retirement benefit plan assumptions, goodwill and purchased intangible assets and accounting for income taxes. There have been no significant changes to our critical accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2014. A number of our critical accounting policies are described in the following paragraphs. 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.
 

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Share-based compensation. Due to the separation of Keysight on November 1, 2014, expected volatility for grants of options in fiscal 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.   For the grants of options prior to November 1, 2014, the expected stock price volatility assumption was determined using the historical volatility of Agilent’s stock options over the most recent historical period equivalent to the expected life of 5.8 years. A 10 percent increase in our estimated volatility from 28 percent to 38 percent for our most recent employee stock option grant would generally increase the value of an award and the associated compensation cost by approximately 31 percent if no other factors were changed. In estimating the expected life of our options granted we considered the historical option exercise behavior of our executive employees, which we believe is representative of future behavior.

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 2014, we assessed goodwill impairment for three reporting units under our previous reporting structure which consisted of one segment: chemical analysis and two reporting units under the life sciences and diagnostics segment. The first of these two reporting units related to our life sciences business and the second related to our diagnostics business. We performed a qualitative test for goodwill impairment of our previous three reporting units as of September 30, 2014. 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. In connection with our annual goodwill impairment testing in 2015, we will assess for potential impairment of goodwill on our new reporting units resulting from our reorganization. In the three months ended January 31, 2015 and 2014, there was no triggering event that would indicate that there was an impairment of goodwill therefore there was no impairment of goodwill during the three months ended January 31, 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 condensed 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, 2014. 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. There was no impairment of indefinite-lived intangible asset during the three months ended January 31, 2015 and January 31, 2014.

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Adoption of New Pronouncements
 
See Note 2, “New Accounting Pronouncements,” to the condensed consolidated financial statements for a description of new accounting pronouncements.
 
Exit of NMR 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 diagnostics segment. The exit of the NMR business was primarily due to the lack of growth and profitability of the product line. These actions involved severance and other personnel costs related to the workforce reduction of approximately 300 employees primarily located in the United Kingdom and California and non-cash charges related to intangible asset impairments and other asset write-downs including inventory. We expect to substantially complete these restructuring activities by the end of fiscal 2016. The exit of the NMR business is expected to result in a positive impact of approximately $15 million in operating profit in fiscal year 2015. As of January 31, 2015, approximately 200 employees are pending termination under the above actions and approximately $5 million was paid to date under these restructuring activities.

Foreign Currency
 
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (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.
 
Results from Operations

Orders and Net Revenue
  
 
Three Months Ended

Year over Year Change
 
January 31,

Three

 
2015

2014

Months

 
(in millions)
 
 
 
Orders
$
995

 
$
979

 
2%

Net revenue:
 
 
 
 
 

Products
$
815

 
$
803

 
1%

Services and other
211

 
205

 
3%

Total net revenue
$
1,026


$
1,008


2%

 
Total orders for the three months ended January 31, 2015 increased 2 percent compared to the same period last year. Foreign currency movements for the three months ended January 31, 2015, had an unfavorable impact of approximately 4 percentage points when compared to the same period last year. For the three months ended January 31, 2015, life sciences and applied markets orders were flat, diagnostics and genomics orders increased 1 percent and Agilent CrossLab orders increased 5 percent when compared to the same period last year.
  
Net revenue of $1,026 million for the three months ended January 31, 2015 increased 2 percent when compared to the same period last year.  Foreign currency movements for the three months ended January 31, 2015 had an unfavorable impact of approximately 4 percentage points when compared to the same period last year.

The life sciences and applied markets business brings together Agilent's analytical laboratory instrumentation and informatics. Revenue grew 2 percent in the life sciences and applied markets business for the three months ended January 31, 2015 when compared to the same period last year. Increased revenue in the three months ended January 31, 2015 was the result

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of growth in most customer end-markets with strength within all life sciences markets. There was also revenue growth in the applied markets led by food and environmental offset by a decline in forensics.

The diagnostics and genomics business is comprised of three areas of activity. First, the former Dako company is focused on pathology, companion diagnostics and reagent partnerships. Second the genomics business includes our arrays, NGS target enrichment and our other genomics solutions. Third, the nucleic acid solutions business manufactures synthetic RNA to be potentially used as active pharmaceutical ingredients. Revenue decreased 6 percent within the diagnostics and genomics business in the three months ended January 31, 2015, when compared to the same period last year, with the businesses experiencing manufacturing issues which resulted in a decline in revenue generated across a number of markets.

The Agilent CrossLab business combines our analytical laboratory services and consumables business. Revenue generated by Agilent cross lab increased 5 percent in the three months ended January 31, 2015 when compared to the same period last year. Revenue increased in all markets led by strong performance in pharmaceutical and biotechnology and food markets in the three months ended January 31, 2015 when compared to the same period last year.

Services and other revenue include revenue generated from servicing our installed base of products, warranty extensions and consulting. Services and other revenue increased 3 percent in the three months ended January 31, 2015 compared to the same period last year. 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 in the three months ended January 31, 2015 when compared to the same periods last year due to increased instrument service contract renewals and laboratory productivity services.
 
Operating Results
 
 

Three Months Ended

Year over Year Change
 

January 31,

Three

 

2015

2014

Months

Total gross margin

50.0
%

50.6
%

(1)ppt

Operating margin

11.2
%

12.3
%

(1)ppt



 

 

 

(in millions)

 


 


 

Research and development

$
88


$
88


—%

Selling, general and administrative

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