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. 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 

FOR THE TRANSITION PERIOD FROM              TO        

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

AGILENT TECHNOLOGIES, INC.

TABLE OF CONTENTS

 

 

 

 

 

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

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

 

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

 

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

 

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.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary for a fair statement of our condensed consolidated balance sheet as of July 31, 2016April 30, 2017 and October 31, 2015,2016, condensed consolidated statement of comprehensive income (loss) for the three and ninesix months ended July 31,April 30, 2017 and 2016, and 2015, condensed consolidated statement of operations for the three and ninesix months ended July 31,April 30, 2017 and 2016, and 2015, and condensed consolidated statement of cash flows for the ninesix months ended July 31, 2016April 30, 2017 and 2015.

primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the carrying value by approximately $102$168 million and $30$104 million as of July 31, 2016April 30, 2017 and October 31, 2015,2016, respectively. The change in the excess of fair value over carrying value in the ninesix months ended July 31, 2016April 30, 2017 is due to fluctuations in market interest rates. The carrying value as of October 31, 2016 reflects the new accounting guidance related to the presentation of debt issuance costs which we adopted on November 1, 2016. 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 9,8, "Fair Value Measurements" for additional information on the fair value of financial instruments.

 2. REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS

There were no changes to the new accounting pronouncements not yet adopted as described in our Annual Report on Form 10-K for the fiscal year ended October 31, 20152016 except for the following:

In March 2016,April 2015, the Financial Accounting Standards Board (“FASB”("FASB") issued amendments to simplify the presentation of debt issuance costs. The amendments require that change the accounting for certain aspects of share-based paymentsdebt issuance costs related to employees. The new guidance requires excess tax benefits and tax deficienciesa recognized debt liability to be recordedpresented in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classifiedbalance sheet as a financing activity apartdirect deduction from other income tax cash flows.the carrying amount of that debt liability, consistent with debt discounts. The standard also allows us to repurchase more of an employee’s sharesrecognition and measurement guidance for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur.debt issuance costs remain unchanged. The amendments also remove the requirement to delay the recognition of an excess tax benefit until it reduces current taxes payable. Under the new guidance the benefit will be recorded when it arises with a cumulative effect adjustment to opening retained earnings for previously unrecognized benefits. The new guidance iswere effective for us beginning November 1, 2017, with early adoption permitted.

In May 2014, the FASB issued amendments to the accounting guidance related to revenue recognition.recognition, Topic 606, Revenue from contracts with customers. The objective of the amendments was to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. The amendments are effective for us beginning fiscal 2019.   The company expects to adopt this guidance on November 1, 2018 and will apply the modified retrospective method. We are currently evaluating the impact the adoption of this standard will  have on our consolidated financial statements and disclosures.

In March 2016,2017, the FASB clarified the implementationissued guidance on principal versus agent considerations. In April 2016, the FASB clarified certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB provided additional guidance related to disclosure of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of salesthe net periodic pension and other similar taxes collected from customers.postretirement benefit cost. This guidance also specifies that only the service cost component of net benefit cost is eligible for capitalization. The amendments are effective for us beginning November 1, 2018, including interim periods within those annual periods. We are evaluating the impact of adopting this guidance to our consolidated financial statements.

In May 2017, the FASB issued an update to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The amendments are effective for us beginning November 1, 2018. Early adoption is permitted for us beginning November 1, 2017.  The company is currently assessing the potentialWe do not expect this guidance to have a material impact of these amendments on our consolidated financial statements.statements and disclosures.

Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

4.3.     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.

Participants in the LTPP are entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets are met. Certain LTPP awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the Total Stockholders’ Return (“TSR”) set at the beginning of the performance period. Effective November 1, 2015, the Compensation Committee of the Board of Directors approved another type of performance stock award, for the company's executive officers and other key employees. Participants in this program are also entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets over the three-year period are met. The performance target for grants made in 2016 and 2017 were based on Operating Margin (“OM”) overand Earnings Per Share ("EPS"), respectively. The performance targets for the three-LTPP-EPS grants for year 2 and year 3 of the performance period are met.will be set in the first quarter of year 2 and year 3, respectively. All LTPP awards granted after November 1, 2015, are subject to a one yearone-year post-vest holding period.

Based on the performance metrics the final LTPP award may vary from zero to 200 percent of the target award. The maximum award value cannot exceed 300 percent of the grant date target value. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.

The impact on our results for share-based compensation was as follows:

 

 

                                               

The following assumptions were used to estimate the fair value of the options and LTPP grants.awards granted.

 

 

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 (TSR) were valued using a Monte Carlo simulationsimulations model. Both the Black-Scholes andThe Monte Carlo simulation fair value models requiremodel requires 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 20162015 and 20152016 LTPP (TSR) grants, we used the 3 year3-year average historical stock price volatility of a group of our peer companies.  We believebelieved our historical volatility prior to the separation of Keysight in 2015 was no longer relevant to use. For the volatility of our 2017 LTPP (TSR) grants, we used our own historical stock price volatility.  

The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the price at purchase and uses the purchase date to establish the fair market value.

The estimated fair value of restricted stock unitunits, LTPP (OM) and LTPP (OM)(EPS) awards is determined based on the market price of Agilent’s common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (OM) and LTPP (EPS) reflects the cost of awards that are probable to vest at the end of the performance period.

All awards granted in 2017 and 2016 to our senior management employees have a one yearone-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model.model (see table above). The model calculates the potential lost value if the employee were able to sell the shares during the lack of marketability period, instead of being required to hold the shares. The model used the 3 year averagesame historical stock price volatility of a group of our peer companiesand dividend yield assumption used for the Monte Carlo simulations model and an expected dividend yield to compute the discount. The grants made during 2016 have a discount of 5.5 percent while computing the fair value.

5.4.     INCOME TAXES

 

The company’s effective tax rate from continuing operations was 7.514.1 percent and 14.513.5 percent for the three and ninesix months ended July 31, 2016,April 30, 2017, respectively. The company’s effective tax rate from continuing operations was 11.722.2 percent and 11.618.1 percent for the three and ninesix months ended July 31, 2015, respectively. The income tax expense from continuing operations was $10 million and $57 million for the three and nine months ended July 31,April 30, 2016, respectively. The income tax expense from continuing operations was $15$27 million and $39$52 million for the three and ninesix months ended July 31, 2015,April 30, 2017, respectively. The income tax expense was $26 million and $47 million for the three and six months ended April 30, 2016, respectively.

The income tax provision from continuing operations for the three and ninesix months ended July 31, 2016April 30, 2017 included net discrete tax benefits of $6$1 million and $9$3 million, respectively. The net discrete tax benefit for the three months ended July 31, 2016,April 30, 2017 included an out-of-period correcting$5 million of tax benefit related to return-to-provision adjustments in foreign jurisdictions and $4 million of $11 million associated with a true-uptax expense related to changes in the realization of the deferred tax liabilityassets for unremitted foreign earnings that should have been recorded in the third quarter of fiscal year 2015 and $5 million net expense related to other discrete items.earnings. In addition to the aforementioned, the net discrete tax benefit for the ninesix months ended July 31,April 30, 2017 included $7 million of tax benefit for the settlement of an audit in Italy, $11 million of tax expense related to the employee pension settlement gain and $6 million of other discrete tax benefit items.

The income tax provision for the three and six months ended April 30, 2016 included net discrete tax expense of $3 million and tax benefit of $3 million, respectively. The net discrete tax expense for the three months ended April 30, 2016 included a tax expense of $7 million for return-to-provision adjustments associated with the filing of the return in Germany, $5 million of which was determined to be out of period. The remaining discrete items in the quarter included an $8 million tax benefit related to the realization of tax credits that reduce the deferred tax liability for unremitted foreign earnings, $2 million tax expense of other miscellaneous return-to-provision adjustments in other foreign jurisdictions and $2 million of miscellaneous other discrete tax expense. In addition to the aforementioned, the net discrete tax benefit for the six months ended April 30, 2016 included $5 million of tax benefit for the extension, which occurred in the first quarter of 2016, of the U.S. research and development tax credit attributable to the company's prior fiscal year, and $6 million of tax expense related to the curtailment gain recognized with respect to the U.S. retirement plan and Supplemental Benefits Plan, $8Plan. The net discrete tax benefit for the six months ended April 30, 2016 also included $9 million of tax benefit related primarily to the realization of tax credits that reduce the deferred tax liability for unremitted foreign earnings,return-to-provision adjustments in Singapore and a net $4$2 million of other discrete tax expense primarily related to return-to-provision true-ups, including an out-of-period adjustment recorded in the second quarter of fiscal year 2016 of $5 million of expense in Germany. The out-of-period corrections were determined to be immaterial to the previously issued and current period financial statements.

In the U.S., tax years remain open back to the year 2012 for federal income tax purposes and the year 2000 for significant states. On September 22, 2015, we reached an agreement withThere were no substantial changes from our 2016 Annual Report on Form 10-K to the Internal Revenue Service ("IRS") for thestatus of these open tax years 2008 through 2011. Duringin the first quartersix months of 2016, we made a payment of approximately $9 million of tax plus interest as part of closing the exam.  In 2015, we reclassified a portion of other long-term liabilities to other accrued liabilities related to uncertain tax positions of continuing operations that we expected to pay within the next twelve months. This amount was partially offset by a prepaid tax account of approximately $3 million that the IRS allowed as an offset to the $12 million in incremental taxes. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $119 million, offset by a tax liability on foreign distributions of approximately $99 million principally related to the repatriation of foreign earnings.fiscal 2017.

In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2003.  2001.  During the first quarter of 2017, the company settled its ongoing tax audit in Italy for the years 2011-2013 resulting in a net tax expense of $7 million. The settlement resulted in the recognition of previously unrecognized tax benefits of approximately $14 million.

With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable.  Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.

On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court

on December 1, 2015. At this time,The IRS is appealing the U.S. Departmentdecision and filed its arguments opposing the Tax Court decision in June 2016. Due to the uncertainty surrounding the status of the Treasury has not withdrawncurrent regulations, questions related to the requirement from its regulations to include stock-based compensation in an intercompany cost-sharing arrangement. The IRS notifiedscope of potential benefits or obligations, and the U.S. Courtrisk of Appeals for the Ninth Circuit on February 19, 2016 of its intent to appeal the Tax Court'sCourt’s decision in the case. Webeing overturned upon appeal, we concluded that no adjustment to our condensed consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.time.

6.5. 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:

 

The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards.

 

 

 

 

On November 1, 2015,January 20, 2017, we acquired Seahorse Bioscience,Multiplicom NV (“Multiplicom”), a leaderleading European diagnostics company with state-of-the-art genetic testing technology and products, for approximately $72 million in providing instrumentscash. The valuation of the tangible and assay kits for measuring cell metabolismintangible assets of this acquisition was finalized in the second quarter of fiscal year 2017 and bioenergetics, for $242 million. Asas a result we adjusted goodwill and other intangible assets by an immaterial amount. We recorded additions to goodwill of $137$51 million and additions to other intangible assets of $118$26 million during the ninesix months ended July 31, 2016.April 30, 2017. During the ninesix months ended July 31, 2016,April 30, 2017, we also wrote-off the gross carrying amount of $131 million and the related accumulated amortization of fully amortized intangible assets. During the six months ended April 30, 2017, other intangible assets, net increased $3$1 million due to the impact of foreign exchange translation.

 

9.8. FAIR VALUE MEASUREMENTS

 

The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:

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 July 31, 2016April 30, 2017 were as follows:

 

 

 

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, which is comprised of mutual funds, bonds and other similar instruments, and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in accumulated

other comprehensive loss within stockholders' equity. Realized gains and losses from the sale of these instruments are recorded in net income.

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

10.9. DERIVATIVES

 

We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of our risk management strategy, we use derivative instruments, primarily forward contracts, purchased options to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates.

 

Fair Value Hedges

 

 

 

Cash Flow Hedges

 

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.