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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
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<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO______________ TO ______________
COMMISSION FILE NUMBER: 001-15405
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AGILENT TECHNOLOGIES, INC.
Exact name of registrant as specified in its charter:
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<S> <C>
DELAWARE 77-0518772
State or other jurisdiction of I.R.S. Employer Identification No.:
incorporation or organization:
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
3000 Hanover Street, Palo Alto, California 94304
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(650) 857-1501
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock New York Stock
par value $0.01 per share Exchange, Inc.
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
------------------------
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the registrant's common stock held by
non-affiliates as of December 31, 1999 was approximately $5.57 billion. As of
January 20, 2000, there were outstanding 452,000,000 shares of common stock, par
value $0.01 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT DESCRIPTION 10-K PART
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III
Pages 5-7 and 11-27 of the registrant's Notice of Annual
Meeting of Stockholders and Proxy Statement dated
January 13, 2000
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FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this report or in the
pages from our Proxy Statement incorporated by reference into this report. This
report contains forward-looking statements that involve risks and uncertainties.
We use words such as "anticipates", "believes", "plans", "expects", "future",
"intends", "may", "will", "should", "estimate", "predicts", "potential",
"continue", and similar expressions to identify such forward-looking statements.
This report also contains forward-looking statements attributed to third parties
relating to their estimates regarding the growth of our markets. Forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors that may cause our actual results, as well as those of the test and
measurement, semiconductor products, healthcare solutions, chemical analysis and
related markets we serve, levels of activity, performance, achievements and
prospects to be materially different from those expressed or implied by such
forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
SEPARATION FROM HEWLETT-PACKARD
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company, subsequently named Agilent Technologies, Inc., that comprised
Hewlett-Packard's test and measurement, semiconductor products, healthcare
solutions and chemical analysis businesses, related portions of Hewlett-Packard
Laboratories, and associated infrastructure. After the completion of our initial
public offering on November 23, 1999, Hewlett-Packard owns approximately 84.1%
of our outstanding common stock. Hewlett-Packard has also announced its
intention to distribute to its stockholders all of its remaining interest in us
by the middle of calendar year 2000 (the distribution). Hewlett-Packard and we
have entered into various agreements related to certain interim and ongoing
relationships between the two companies. More information about the separation
and the ongoing relationships with Hewlett-Packard is contained in Item 7 of
this report.
BUSINESS
Agilent Technologies is a global diversified technology company that
provides enabling solutions to high growth markets within the communications,
electronics, healthcare and life sciences industries. Our broad technology
portfolio and our experience in working with market-leading customers in more
than 120 countries have allowed us to establish and advance our leadership
across multiple markets.
Agilent Technologies includes the following four primary businesses:
- TEST AND MEASUREMENT, which provides test instruments, standard and
customized test, measurement and monitoring instruments and systems for
the design, manufacture and support of electronics and communications
devices and software for the design of high-frequency electronic and
communications devices;
- SEMICONDUCTOR PRODUCTS, which provides fiber optic communications devices
and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronics and image
sensors;
- HEALTHCARE SOLUTIONS, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
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ITEM 1. BUSINESS (CONTINUED)
- CHEMICAL ANALYSIS, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
Our test and measurement and semiconductor businesses share focus on growth
opportunities in the communications sector, while our healthcare and chemical
analysis businesses share focus on growth opportunities in healthcare and life
sciences. All of our businesses are supported by the technical expertise of
Agilent Technologies Laboratories, one of the world's foremost industrial
research and development organizations. Agilent Technologies Laboratories is
thoroughly integrated with our businesses in design, development and
manufacturing engineering, and substantially all of its development engineers
are aligned with the research and development teams in our individual
businesses.
Over our 60-year history, our businesses have developed close relationships
with market-leading customers, working with thousands of customers around the
world as technologies, business needs and global economic conditions have
undergone dramatic changes. These close relationships have provided us
invaluable strategic market insights and have been central to our success.
We have established leadership positions across multiple markets and are a
leading supplier of:
- test and measurement instruments and systems;
- application-specific semiconductor devices and fiber optic components and
assemblies;
- patient monitoring and ultrasound imaging equipment and automatic external
defibrillators; and
- chemical measurement instruments and systems.
We sell our products primarily through our direct sales force, but we also
utilize distributors, resellers, telesales and electronic commerce. Of our total
net revenue of $8.3 billion in the fiscal year ended October 31, 1999, we
generated 44.8% in the United States and 55.2% internationally. As of
October 31, 1999, we employed approximately 42,000 people worldwide. We have
major research and development and manufacturing sites in California, Colorado,
Delaware, Massachusetts, and Washington in the United States and in China,
Germany, Japan, Korea, Malaysia, Singapore and the United Kingdom.
Our net revenue by business segment for each of the years ending
October 31, 1999, 1998 and 1997 was:
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YEARS ENDED OCTOBER 31,
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1999 1998 1997
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(IN MILLIONS)
<S> <C> <C> <C>
Test and measurement................................ $4,082 $4,100 $4,203
Semiconductor products.............................. 1,722 1,574 1,479
Healthcare solutions................................ 1,501 1,340 1,208
Chemical analysis................................... 1,026 938 895
------ ------ ------
Total net revenue............................... $8,331 $7,952 $7,785
====== ====== ======
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More financial information about the business segments is contained in Note 15,
"Segment Information," of the consolidated financial statements included in Item
8 of this report. In the fiscal year ended October 31, 1999, Hewlett-Packard
accounted for 10% of our total net revenue.
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ITEM 1. BUSINESS (CONTINUED)
INDUSTRY OVERVIEW
Many of the markets we serve are undergoing rapid change and experiencing
significant growth. We believe that these trends will provide us with major
growth opportunities.
COMMUNICATIONS INDUSTRY
The communications industry is undergoing fundamental change and growth
resulting principally from explosive demand for Internet access and data
transmission services. Traditional voice telecommunications have been carried as
an electrical signal over copper wire. Since this technology was designed for
low-capacity voice transmission, it is unable to meet the high-volume
transmission requirements of Internet access and other forms of high-speed,
digital data communications. Increased bandwidth is critically important to the
transmission of high-volume data and is the driving force behind the deployment
of the high-speed, high-capacity, digital network infrastructure.
Fiber optic networks are increasingly replacing copper-based technologies in
local area and wide area networks. Fiber optics enable digital information, such
as coded data, voice or video, to be transmitted as pulses of light. The light
being transmitted along each fiber-optic cable can be divided up into multiple
frequencies, and each frequency can be used as a separate transmission path.
Thus each fiber optic cable can simultaneously carry multiple transmissions.
Other new communications technologies, such as Gigabit Ethernet, Digital
Subscriber Line and Asynchronous Transfer Mode, are being deployed to expand the
capabilities of existing networks or build new broadband data networks. Cable
service providers are in the early stages of introducing broadband interactive
data services and Internet access to their customers by redesigning their
networks and deploying cable modem technologies.
The usage levels of wireless communications around the world are increasing
dramatically, as penetration increases in developed countries, and
lesser-developed countries deploy wireless networks as a means to quickly
address the surging demand for communications. As an alternative to wireline
access, some carriers and service providers are utilizing wireless technologies
to provide voice, data and Internet services to their customers. While broadband
wireless data services are still in the early stages, the development and
deployment of next generation cellular technologies and services is likely to
lead to their rapid growth.
We believe that these emerging trends in the communications industry provide
us with a number of significant business opportunities. The widespread
deployment of fiber optic networks generates increasing demand for high-speed
optoelectronic components to connect the electronic systems controlling the
network to the transmission fiber. The manufacture, physical installation and
maintenance of network switches, routers and other high-speed devices rely on
increasingly sophisticated testing, calibration and measurement instruments and
systems. Additionally, these systems typically require physical layer integrated
circuits to prepare data for transmission across high-speed networks, such as
Gigabit Ethernet, Digital Subscriber Line, Asynchronous Transfer Mode and next-
generation cable networks. Service providers face increased competition as a
result of these emerging technologies and deregulation of the industry.
Traditional communications service providers and emerging Internet service
providers, competing aggressively for subscribers, require advanced test and
monitoring solutions to optimize quality of service to their customers.
Similarly, the manufacturers of cellular handsets, base stations and other
wireless network equipment require advanced design software and test and
measurement instruments and systems to develop, manufacture and deploy advanced
wireless communications products and capture the high growth market opportunity.
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ITEM 1. BUSINESS (CONTINUED)
SEMICONDUCTOR AND ELECTRONICS INDUSTRIES
The semiconductor and electronics industries are still largely driven by
rapid technological advancement, a phenomenon commonly known as Moore's Law,
which states that the functionality and performance of a digital integrated
circuit doubles roughly every 18-24 months. Decreased size and greater density
of the individual electronic components on the integrated circuit drive
improvements in the performance and functionality of the device and decrease
price to the end user. This continuous cycle of increased performance at lower
cost drives the pervasiveness of semiconductor devices in multiple applications,
from communications networks to consumer products. At the same time, the cycle
places increasing demands on companies that develop and use electronic
components, products and systems to keep up with the fast pace of technological
advances.
The effect of Moore's Law creates major business opportunities for us. Each
new integrated circuit design presents new challenges for test and measurement
systems: smaller, more densely-packed elements; faster operating speeds; and
greater complexity. Semiconductor devices and electronic components and
assemblies comprise an increasing proportion of the overall value of
end-products, increasing the importance of testing within the electronic
component and systems design and manufacturing process. The increasing
pervasiveness of semiconductor devices creates strong growth opportunities for
many of our products, including our electronic and optical components, our high
frequency and digital design solutions, as well as our automated test equipment
used in high volume manufacturing settings.
PHARMACEUTICAL, BIOSCIENCE AND HEALTHCARE INDUSTRIES
The time and expense required to discover and develop new drugs demand that
pharmaceutical companies continually find ways to improve the efficiency of the
drug-discovery process, often relying on analytical instruments to improve
productivity while remaining compliant with laws and regulations. At the same
time, the healthcare industry is seeking ways to reduce costs and improve the
quality of health care. We believe this trend will require healthcare solutions
that can be deployed in non-hospital settings, such as in smaller clinics and in
patients' homes. Healthcare research and development institutions are also
focusing increased resources on disease diagnosis and prevention. Greater
understanding of the genetic basis of disease is considered critical to learning
how to prevent, diagnose and manage diseases and requires advanced
instrumentation for DNA and related analysis.
STRATEGY
FOCUS ON HIGH GROWTH MARKET OPPORTUNITIES
Our strategy is to use our strengths as a diversified technology company to
enter new markets through internal development, strategic partnerships and
acquisitions. To achieve this objective, we work closely with our customers'
research and development teams to understand emerging markets, technologies and
standards and we invest accordingly in our own development of enabling solutions
in those areas. We intend to use strategic partnerships and make tactical
acquisitions to develop advanced systems that complement our existing
technologies and products to accelerate our entry into strategic, high-growth
markets.
Within the communications markets, we are focused on providing test,
measurement and monitoring technologies and solutions for the development and
deployment of next-generation fiber optic, broadband, Internet and cellular
networks, as well as leading edge fiber optic and semiconductor components. We
work closely with cellular component and device manufacturers at the research
and development stage to understand emerging industry standards. We have also
continued to invest in our
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ITEM 1. BUSINESS (CONTINUED)
market-leading high-frequency design solutions. We were able to take advantage
of our product diversity by applying the technologies we developed for the
defense industries in the 1980s to the higher growth communications industry
when growth of the defense market slowed. In life sciences, we have focused our
efforts on the high-growth segments of the pharmaceutical industry. In
healthcare, we recently made an acquisition that accelerated our entry and gave
us leading market share in the fast-growing automatic external defibrillator
market.
CONTINUE TO INNOVATE TECHNOLOGICALLY
Agilent Technologies and Agilent Technologies Laboratories have a long
legacy of technological innovation and product generation as part of
Hewlett-Packard. We will continue to invest in and build research and
development expertise, focusing our centralized laboratories on fundamental
technology and process developments and utilizing innovations from our
businesses to develop products to address high growth market segments. Our
scientists have provided significant contributions and technological advances
across multiple markets and industries. Our reputation for technological
innovation allows us to work closely with both established and emerging leaders
in the communications, electronics, life sciences and healthcare industries, and
to provide advanced solutions to meet emerging market requirements. The
experience and knowledge of our engineers, combined with our close customer
relationships, enable us to anticipate customer needs for next-generation
products and solutions. In healthcare, we market our equipment and establish
strong relationships with influential medical research and development centers
around the world, to gain valuable insights into new discoveries and strategic
initiatives in the healthcare and life sciences industries. Similarly, in
semiconductor test, we have worked closely with Rambus to develop a high-speed
test solution for advanced memory chips, which has been used in selected niche
products such as video games, but is now being developed as main memory for
high-performance personal computers.
MAXIMIZE THE BENEFITS OF OUR SCALE AND GLOBAL PRESENCE
We believe our scale and global presence provide us with a competitive
advantage across multiple industries. In many of our targeted markets and in
many of the countries in which we operate, we believe we are the largest
industry participant and possess greater resources for research and development
and service and support than any competitor. Our global direct sales force
gathers valuable insights into emerging industry trends around the world and
provides us an effective means of bringing new products to market rapidly. In
addition, we believe our customers value our global ability to provide more
complete solutions with our training, systems integration, and project
management programs. Our regional support centers enable us to provide localized
service and support, and our telesales and electronic commerce systems allow
remote customers to order products, obtain product information and utilize
remote support services. We intend to continually enhance overall customer
satisfaction by remaining focused on providing effective service and support.
AGILENT TECHNOLOGIES LABORATORIES
We are supported by the technological expertise of Agilent Technologies
Laboratories, one of the world's foremost industrial research and development
organizations. Agilent Technologies Laboratories consists of those operations of
Hewlett-Packard Laboratories that historically conducted basic research in our
focus areas. Agilent Technologies Laboratories works with our businesses in
design, development and manufacturing engineering, and substantially all of its
development staff are aligned with the research and development staff in our
specific businesses.
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ITEM 1. BUSINESS (CONTINUED)
Agilent Technologies Laboratories conducts applied research in electronics,
medical and analytical measurements, biotechnology, photonics, solid-state
materials and components, and measurement systems and solutions. The scientists
in Agilent Technologies Laboratories have made significant contributions and
advances in many of these areas, including LEDs, gallium-arsenide integrated
circuits, lightwave and LAN-based instruments, mass spectrometry, ultra-violet
and visible spectrophotometry, cardiac ultrasound imaging, electrocardiogram
algorithms and the wireless mouse.
Agilent Technologies Laboratories is located primarily in Palo Alto,
California and employs approximately 500 people. Approximately half of the 300
technical professionals in Agilent Technologies Laboratories have doctoral
degrees and over 75% have some form of advanced degree. In recent years, an
average of 80 patents have been issued to Agilent Technologies Laboratories
annually.
TEST AND MEASUREMENT
Our test and measurement business is a leader in providing test and
measurement solutions to companies in the communications, electronics,
semiconductor and related industries. We provide standard and customized
solutions that are used in the design, development, manufacture, installation,
deployment and operation of electronic equipment and systems. These solutions
are used by our customers to improve time-to-market, lower cost of manufacturing
and improve the quality of their products. These solutions include test and
measurement instruments and systems, automated test equipment, communications
network monitoring and management tools and software design tools and associated
services. Our solutions are employed by a wide range of customers, including:
- communications and network equipment manufacturers, including providers of
fiber optic, wireless and wireline components, products and systems;
- providers of communications services, including telecommunications,
Internet and cellular service providers;
- designers and manufacturers of semiconductor products, including
microprocessors, memory devices, ASICs, radio frequency and microwave
integrated circuits and other types of integrated circuits; and
- designers and manufacturers of electronic equipment, including printed
circuit board assemblies and electronic equipment, such as cellular
handsets, personal computers and avionics equipment.
We believe that we are the leader in the overall test and measurement
market, with leadership positions in:
- network and spectrum analyzers;
- communications test equipment;
- wireless test equipment;
- in-circuit test and x-ray inspection systems for printed circuit board
assemblies;
- lightwave test equipment;
- logic analyzers and logic-signal sources; and
- high-frequency computer-aided engineering and simulation software.
Our test and measurement business employed approximately 18,000 people as of
October 31, 1999. We serve customers in more than 110 countries and sell our
products primarily through our direct sales force, as well as through resellers,
distributors, telesales and electronic commerce. Our products are
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ITEM 1. BUSINESS (CONTINUED)
complemented by service and support offerings such as consulting, training,
local solutions integration, and instrument calibration and repair. We have
manufacturing and research and development facilities in Australia, Canada,
China, Germany, Japan, Korea, Malaysia, Singapore, the United Kingdom and the
United States. Our test and measurement business generated $4.1 billion in
revenue in both fiscal years 1999 and 1998.
MARKETS
The market for our test and measurement products comprises three major
customer groups:
- communications network equipment manufacturers and service providers;
- electronic component and equipment manufacturers; and
- semiconductor manufacturers and purchasers of semiconductors.
COMMUNICATIONS NETWORK EQUIPMENT MANUFACTURERS AND SERVICE PROVIDERS
Network equipment manufacturers provide products to facilitate the
transmission of voice and data traffic. This transmission may be in various
forms, such as electronic signals over copper wire, optical signals over fiber
cables, and radio frequency or microwave signals. The customers of the network
equipment manufacturers are the communications service providers that deploy and
operate the networks. The communication service providers are facing increasing
competitive pressures as a result of deregulation in the telecommunications
industry and the rapid advances in transmission technology, including
communications switching and routing. Communications service providers must
provide high-quality, highly reliable service to remain competitive, maintain
customer loyalty and meet the rapidly growing demand for data transmission and
related services. As a result, these service providers require network equipment
that enables their networks to operate at increasingly faster speeds while
providing rapidly expanding capacity and superior reliability. To meet these
demands, network component and equipment manufacturers require test and
measurement instruments, systems and solutions for the development, production,
installation and operation of each new network technology. These solutions
include:
- test instruments and systems for developing and manufacturing
communications modules, assemblies and products; and
- test instruments and systems to support the installation and deployment of
network equipment and to validate the operational performance of the
equipment in the network.
Communications and Internet service providers also require a range of
sophisticated test instruments and systems to evaluate network performance and
to identify any sources of communications failure. Additionally, these customers
require advanced software and systems to monitor and manage the network
infrastructure on a continuous, proactive basis to achieve either regulated or
customer-specified service levels. Real-time monitoring of the network
infrastructure also enables the implementation of additional services, such as
fraud detection, which customers increasingly require of service providers. Many
corporations manage their own internal voice and data communications networks.
As enterprises increasingly rely on these networks for critical applications,
they also require advanced test and monitoring equipment, systems and software
to optimize network performance.
The market for cellular telephony has increased dramatically in recent
years, as the levels of wireless penetration in developed countries have grown
rapidly. Many lesser-developed countries have decided to build wireless
communications infrastructure to meet their nations' needs for telephony,
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ITEM 1. BUSINESS (CONTINUED)
rather than invest in expensive wire-based infrastructure. To develop cellular
telephone equipment, manufacturers require electronic design software and test
instruments and systems for the development of high-frequency communications
circuits, devices and systems. Cellular equipment manufacturers also require
advanced, high-frequency test instruments and systems to develop, manufacture
and deploy cellular base stations for these wireless networks. In addition, the
rapid growth of the cellular handset market has created a new market segment for
automated test equipment to test cellular handsets on the factory floor.
Further, as new standards evolve in the wireless industry, new test and
measurement equipment and systems have to be developed to enable testing of the
new standards in the research and development and later in the manufacturing and
deployment phases.
We believe that in the last several years, producers of networking
communications equipment have increased their use of contract manufacturers to
reduce cost, retain business flexibility and access high end or high volume
manufacturing capabilities. Contract manufacturers require test solutions that
are particularly well-suited for faster production and flexible for use in
different applications. Recently, cellular phone producers have also begun to
increasingly use contract manufacturers, including for functional test. This
requires specialized test products and services to address the particular needs
of these high-frequency products.
ELECTRONIC EQUIPMENT MANUFACTURERS
The electronics industry designs, develops, manufactures and distributes a
wide range of products, including products produced in high volumes, such as
computers, computer peripherals and consumer electronics. In addition,
electronic components and printed circuit assemblies are incorporated into other
products, such as aircraft, satellites and automobiles. These components and
printed circuit assemblies may be designed, developed and manufactured by
electronic components companies, by original equipment manufacturers or by
third-party contract manufacturers. For the development and timely
commercialization of new technologies, original equipment manufacturers require
state-of-the-art test instruments, systems and software design tools in order to
design the products for efficient and cost-effective manufacturing and validate
product performance in a variety of configurations and environments. We believe
that these demands have resulted in an increasing trend toward the use of
contract manufacturers by electronics equipment manufacturers.
Designers and developers of electronic devices and products require
state-of-the-art digital design tools and instruments in order to build
electronic circuits, components and products, to validate their performance and
functionality and to improve the efficiency of the overall design and
development process.
High volume manufacturers of electronics products, such as printed circuit
board assemblies, require sophisticated automated test equipment to operate and
perform highly accurate tests at speeds and volumes matching those of the
production line. This equipment includes in-circuit testing systems, automated
x-ray inspection systems and automated optical inspection systems, all of which
examine the printed circuit assemblies for manufacturing defects. Manufacturers
are also beginning to demand automated functional test systems, which test an
electronic device as if it were in its final environment. Functional test
equipment must have a wide range of capabilities in order to simulate the
functions of a wide variety of electronic devices such as personal computers,
personal computer peripherals or automotive electronics.
Electronics manufacturing also requires standardized test instruments,
system components and complete solutions. These offerings are used for testing
electronic devices in a broad range of applications, such as radar systems,
electronics used in the operation of household appliances and industrial
automation. Aerospace and defense are important markets for standardized
electronic
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ITEM 1. BUSINESS (CONTINUED)
equipment because of the high electronic content of advanced defense systems and
defense-related communications and surveillance equipment. We believe that
following recent reductions in defense spending, defense purchasers are shifting
from specialized test equipment to off-the-shelf test products and systems.
SEMICONDUCTOR MANUFACTURERS
Semiconductor test systems are used by semiconductor designers,
semiconductor manufacturers and electronic component manufacturers in the
design, manufacture and testing of a wide variety of semiconductor products,
including logic, memory, mixed analog and digital signal, and system-on-a-chip
integrated circuits. Semiconductor test systems are sold to semiconductor
manufacturers and assembly and test subcontractors to the semiconductor
industry. Semiconductor manufacturers use our semiconductor test systems to
measure product performance, to confirm functionality, to improve product and
production process quality, to shorten time to market, to enhance
manufacturability, to reduce labor costs and to increase production yields.
According to VLSI Research, the market for automatic test equipment for
semiconductor manufacturing was approximately $3.3 billion in 1998 and is
expected to grow at a compound annual rate of approximately 20% over the next
five years. Demand for this test equipment is driven primarily by the increased
volume of semiconductor devices produced. The use of semiconductors has
proliferated across many industries, including communications, computing, and
consumer electronics, driving up the overall production volume of semiconductor
devices. Advances in semiconductor technology are also increasing demand for
semiconductor test equipment. The development of increasingly faster and more
complex semiconductor devices stimulates demand for testers capable of
evaluating these high-speed devices. In addition, the continuing integration of
functions, such as microprocessor, logic and memory, on a single integrated
circuit has created a new category of device called system-on-a-chip. These
devices require a new category of sophisticated and flexible automatic test
equipment.
STRATEGY
Our test and measurement business pursues the following strategies to
maintain and extend our global leadership position and to be the preferred
supplier of enabling solutions for our customers:
ADDRESS THE NEEDS OF HIGH GROWTH MARKETS
Our test and measurement business is focused on addressing the needs of the
communications and electronics industries. We believe these markets will provide
significant growth opportunities as end-users' demands are driven by the rapid
adoption of new technologies providing increased performance at lower cost. In
communications markets, we address the needs of both network component and
equipment manufacturers and network service providers, including fiber optic,
Internet Protocol-based and cellular networks. As demand for greater
communications capacity increases, network manufacturers must develop higher
speed and higher capacity equipment. Similarly, network service providers must
be able to expand and operate existing networks, as well as create and operate
new networks, at high service levels. In the electronics industry, designers
must develop next generation electronic devices and equipment rapidly and in a
cost-effective manner. To keep pace with the speed of innovation in this market,
manufacturers need to bring product to market faster and achieve high quality at
high volume production levels. We have targeted our test and measurement
business products and services to enable our customers in these high growth
markets to achieve these goals.
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ITEM 1. BUSINESS (CONTINUED)
UTILIZE OUR INVESTMENTS IN NEW TECHNOLOGY ACROSS MULTIPLE CUSTOMER
APPLICATIONS
We design our products to be used in many phases of our customers'
business--from design and development through installation and deployment. We
invest heavily in the development of new test and measurement instruments,
systems and design tools to meet the requirements of our most innovative
customers. Our work with these customers in developing tools and test
instruments targeted for the research and development labs provides us with
valuable insight into emerging technologies and standards. Once we have
developed a testing solution for what we anticipate will become a sizable
market, we invest in further product development to market the solution to a
broader customer base. Our initial solutions often combine several general
purpose instruments with customized software applications. This approach enables
us to move our solutions more easily from our customers' research and
development laboratories to their manufacturing lines, allowing us to meet their
manufacturing test needs in a timely manner. By working closely with our
customers to understand the final application of their products, we are able to
modify the software and hardware design of our solutions for use in the
installation and deployment phase of their products. We believe that this
strategy allows us to utilize fully our investments in these new technologies.
MAINTAIN STRONG CUSTOMER RELATIONSHIPS TO ANTICIPATE IMPORTANT INDUSTRY
TRENDS
A central component of our strategy is to work closely with our customers in
their product design stage to understand emerging technologies and applications
and develop advanced test and measurement instruments, systems and solutions. We
gather information from our customers so that we may design and create new
instruments to test emerging technologies as they develop them. For example, as
communications networks have been overwhelmed by demand for increased speed and
capacity, we have focused our product development on the technologies to enable
next-generation, high-speed networks. We provide advanced fiber optic network
test instruments and solutions to service providers to maximize the performance
and minimize the total cost of ownership of high-speed fiber optic networks. In
the cellular communications industry, we are working closely with industry
leaders such as Telefonaktiebolaget LM Ericsson, Motorola, Inc. and Nokia Oy to
develop testing solutions to support next-generation high-capacity wireless
cellular standards. We have also worked closely with Rambus in developing
advanced test solutions for high-speed memory devices.
EXPAND OUR SERVICES AND CONSULTING BUSINESS GLOBALLY
We believe that the rapid pace of technology innovation and our customers'
focus on more efficient uses of their resources have created an opportunity for
us to differentiate ourselves from our competitors with our global support and
service capabilities. We provide basic support services, such as repair and
calibration; systems integration services; training and customer education; and
advanced business services, such as design services and consulting. For some of
our more complex products, such as our automated test equipment, we provide
proactive maintenance and support to ensure maximum reliability and continuous
operation. In addition, we believe we provide customers with more flexibility
and lower the total cost of ownership with our asset management, financing and
pay-per-use programs.
PRODUCTS
Our test and measurement business designs, develops and manufactures test
and design products that range from single-unit electronic measurement devices
priced under $1,000 to large scale integrated test solutions priced at $1
million and higher.
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COMMUNICATIONS EQUIPMENT TEST SOLUTIONS
We provide test solutions for fiber optic, broadband wire-based, radio
frequency and microwave communications networks and products.
FIBER OPTICS. We make products that enable the development, production,
installation, verification and maintenance of fiber optic networks. Our products
include optical signal and spectrum analysis instruments used by the industry's
leading equipment manufacturers to develop and manufacture reliable optical
components. We also make products that test dense wavelength division
multiplexing systems, a new technology that is used to increase the transmission
capacity of optical fibers. Our products also include network analyzers and
high-speed bit-error rate testers that measure key transmission properties of
high-speed optical and electrical signals. These products are used by network
component and equipment manufacturers as well as service providers to test the
proper functioning of fiber optic components and networks.
BROADBAND AND DATA NETWORKS. Our network test equipment is used by service
providers to install and maintain connections to the Internet, high-speed data
networks, telephone systems and cable television lines. This equipment is also
used by network equipment manufacturers to develop and manufacture high- speed
network equipment. We market test solutions for high-speed network equipment
based on broadband data transmission technologies such as Digital Subscriber
Line, Asynchronous Transfer Mode and Integrated Services Digital Network. Our
suite of solutions for network equipment based on the Internet Protocol tests
quality and service performance of voice and data traffic transmitted over
Internet Protocol-based networks. Enterprise network managers, network equipment
designers and third-party field network maintenance service providers rely on
our Internet Advisor product line for comprehensive diagnostic and problem
solving solutions for troubleshooting high-speed local area networks, wide area
networks and asynchronous transfer mode networks. Our cable television test
equipment is designed to ensure maximum radio frequency and video performance
and troubleshooting of components in the cable infrastructure and the connection
to the cable subscriber.
WIRELESS COMMUNICATIONS AND MICROWAVE. In wireless communications, we
market our test solutions to manufacturers of cellular handsets and wireless
telephone infrastructure. Our radio frequency and microwave test instruments
assist in the design and production of cellular handsets and base stations, as
well as satellite and aerospace defense systems. Examples of our radio frequency
and microwave products include network analyzers, spectrum analyzers and signal
sources. These products generate and measure electronic communications signals.
We have combined several of our instruments into integrated test solutions, such
as our single-box testers for cellular handsets that determine the ability of a
handset to send and receive signals accurately as well as successfully switch
between cellular base stations while traveling. Another example is our
integrated solution for testing communication satellite electronics.
COMMUNICATIONS SERVICE TEST AND MONITORING SOLUTIONS
Our acceSS7 product is designed to allow major communications service
providers that use the communications network protocol Signaling System 7 (SS7)
to monitor and analyze their signaling network traffic for network performance
and management, fraud management and billing of interconnecting service
providers. Similarly, our AccessFiber products and solutions perform fault
detection and monitor fiber optic communications networks. Our acceSS7 and
AccessFiber products are typically sold as a combination of hardware, software
and services. Our Firehunter network management software solution provides
performance monitoring, analysis and reporting capabilities for
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Internet service providers. Firehunter allows Internet service providers to
monitor and analyze network occurrences and helps improve the availability and
responsiveness of the network, while reducing the time required to isolate
problems. It gives Internet service providers the capability to monitor and
measure important service level parameters and thus to offer and meet customer
service level agreements. Our NetMetrix local area network probes and software
provide local area network management solutions for the enterprise.
We also market benchtop and handheld measurement devices such as lightwave
multimeters, power meters and optical sources. In addition, we market portable
test instruments for installation and field service testing and monitoring for
many types of communications networks. For example, our portable bit error rate
test instruments are used by service providers for transmission performance
analysis during installation and for ongoing maintenance.
ELECTRONICS DESIGN AND MANUFACTURING SOLUTIONS
GENERAL PURPOSE INSTRUMENTS. General purpose instruments are used by a wide
variety of customers across all electronics-related industries. They are used
principally by engineers in research and development laboratories,
manufacturing, calibration and service for measuring voltage, current,
frequency, signal pulse width and other standard electronics measurements. These
products are often the core of an electrical engineer's benchtop equipment.
Examples of general purpose instruments include:
- digitizing oscilloscopes;
- voltmeters and multimeters;
- frequency counters;
- bench and system power supplies; and
- function generators and waveform synthesizers.
Our general purpose instruments have been the basic building blocks for many
of our more advanced products and solutions.
MODULAR INSTRUMENTS AND TEST SOFTWARE. Our modular instruments and test
software, including instruments incorporating the VXI bus, a standard interface
for building test systems using modular components, and modular measurement
system software is used to dynamically configure and reconfigure test systems
for designers and manufacturers of electronic devices.
DATA ACQUISITION DEVICES. Our data acquisition and control products measure
physical phenomena, acquire data from sensors and perform digital-to-analog
conversion, signal processing and control functions. Data acquisition and
control products include digital-to-analog converters that are attached to
sensors to measure a wide range of physical data such as temperature, airplane
wing strain and vibrations in cars, jet engines and power generation equipment.
DIGITAL DESIGN PRODUCTS. Our digital design and test products are used
primarily by research and development engineers to design, test and remove
design defects from digital electronic systems, including microprocessors,
computers and computer peripherals. These systems range from simple digital
control circuits to complex, high-speed servers incorporating the latest
microprocessor technology. Our digital design products include logic analyzers,
logic-signal sources and data generators.
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AUTOMATED IN-CIRCUIT TESTING. We believe that we offer the leading family
of in-circuit test products, which test printed circuit board assemblies to find
defects caused by the manufacturing process. In-circuit testers use a probe
fixture which makes electrical contact with the circuit board and provides
electrical measurements. These products are used with a suite of proprietary
tools for testing printed circuit assemblies where probing may be able to access
as little as 50% of the contacts due to very densely packed or very small
components. These tools enable our current systems to test up to twice as fast
as previous in-circuit test systems.
AUTOMATED X-RAY INSPECTION. Our leading x-ray inspection products provide a
three-dimensional scan of printed circuit board assemblies to identify and
isolate quality defects caused by the manufacturing process. Using patented
techniques, our products can look through a device to identify structural
defects in soldering that are not identified by visual inspection and that may
not be detected with in-circuit testing. This technique also eliminates the need
for expensive physical probe fixtures.
AUTOMATED OPTICAL INSPECTION. Our automated optical inspection line of
products enables automated visual inspection of printed circuit assemblies.
These systems are able to locate, with a high degree of repeatability and
reliability, misplaced and misaligned parts, gross solder defects and other
process faults without the need for a human inspector.
INTELLIGENT TEST. In products that demand the highest reliability, like
those used in networking and communications, customers will often require that
their printed circuit assemblies be tested using a combination of automated test
processes. Our AwareTest Software enables customers to design test processes
that avoid unnecessary test duplication. For example, an in-circuit test device
will receive information about the faults that have already been detected by an
x-ray inspection system and not repeat the test of that circuit. AwareTest
allows customers to obtain maximum test coverage while decreasing total test
time and cost.
SEMICONDUCTOR AUTOMATED TEST EQUIPMENT
Our automated test equipment supports the development and manufacture of
semiconductor devices. We produce semiconductor test equipment to perform
electrical and functional testing of the operation of memory, logic, mixed
signal, systems-on-a-chip, and radio frequency integrated circuits. Our
parametric test instruments and systems are used to examine semiconductor wafers
during the semiconductor manufacturing process. Our semiconductor parametric
test systems combine hardware technology with system software. The software can
be customized to meet specific application needs to allow faster verification of
the accuracy of the manufacturing process of a silicon wafer and wafer quality
through its first electrical test. Our product development efforts are targeted
at leading edge technologies, such as systems-on-a-chip and high-speed memory
products.
Our semiconductor test products test a variety of different circuit types.
These devices are usually tested after final assembly, but the testing of some
devices is most effective immediately after the production of the silicon wafer,
when the wafers are sorted. We believe we are the industry leader in wafer-sort
test solutions for flash memory devices, which retain data even when the power
is turned off and that are critical for use in digital cameras, cellular phones,
personal digital assistants and storage of portable digital audio files. Our
flash memory test products can test as many as 16 devices in parallel, greatly
improving test throughput for our customers.
In the final test area, we are exploiting our successful logic and mixed
signal semiconductor test offerings into two market areas. Based on our high
performance logic technology, we have recently developed and begun shipping an
accurate, high-speed test system, initially focused on Direct Rambus dynamic
random access memory chip testing. The Rambus architecture addresses performance
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limitations in other random access memory chips by moving data quickly in and
out of memory. Rambus-designed memory has been used in products such as video
games for several years. Our Rambus memory testers will initially test 16
devices in parallel. In the year 2000, we expect to offer the ability to test 32
devices in parallel, which we believe will result in an extremely competitive
cost of test.
Our test equipment for the system-on-a-chip market is based on our newest
generation logic and mixed signal product platform. This platform is designed to
span the wide range of price, performance and functionality that the
system-on-a-chip market will require. Also, we produce a radio frequency
integrated circuit test system that we believe has established a leadership
position in the wireless device market.
HIGH-FREQUENCY ELECTRONIC DESIGN TOOLS
Our high-frequency electronic design automation software tools are used by
radio frequency integrated circuit design engineers to model, simulate and
analyze communications product designs at the circuit and system levels. Our
technology is the first in the industry to allow the simulation of complete
communication product design in a single environment. According to Dataquest, we
are the leader in the market for high-frequency computer aided engineering
software.
CUSTOMERS
We market our test and measurement solutions to customers across a broad
array of industries. Several of our customers purchase products across several
of our major product lines for their different business units.
A representative list of the customers of our test and measurement business
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Alcatel Alsthom Intel Corporation Qualcomm, Inc.
AT&T LG Group Samsung Electronics Co., Ltd.
Bell Canada Enterprises, Inc. Lockheed Martin Corporation Siemens
(Nortel Networks Corporation) Lucent Solectron Corporation
The Boeing Company Matsushita Electric Industrial Co., Sprint
Ltd.
Ericsson Mitsubishi Electronics THOMSON Multimedia, S.A.
America, Inc.
Fujitsu Limited Motorola Toshiba Corporation
General Electric NEC Corporation Tyco International Ltd.
General Motors Corporation Nippon Telephone & Telegraph United States Air Force
Hitachi, Ltd. Corporation U S WEST, Inc.
IBM Nokia
</TABLE>
SALES, MARKETING AND SUPPORT
We have a focused sales strategy to strengthen customer satisfaction. Our
worldwide sales and support teams are key elements of this strategy. Our direct
sales force is focused on identifying customer needs and recommending solutions
involving the effective use and deployment of our equipment and systems. Some
members of our direct sales force focus on global accounts, providing uniform
services on a worldwide basis. Others focus on our more complex products such as
our communications monitoring systems and our automated test equipment, where
customers require intensive strategic consultation. Our sales force also
specifically targets the contract manufacturer market by collaborating with
original equipment manufacturers to specify that our test equipment be used by
contract manufacturers, as well as marketing to contract manufacturers directly.
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Our direct sales force consists of field engineers and systems engineers who
often hold advanced degrees and who have in-depth knowledge of the customers'
business and technology needs. Some of our field engineers are account managers
for our large accounts, and enhance our understanding of the future needs of
these customers. Our systems engineers provide a combination of consulting,
systems integration and application and software engineering services, and are
instrumental in all stages of the sale, implementation and support of our
complex systems and solutions. We have more than 3,000 sales, service and
support engineers located throughout the world. In support of our selling
efforts, we have regional sales and customer support centers in Hong Kong, the
Netherlands and the United States. We believe that the scale and global presence
of our direct sales force are an important competitive advantage. We also use
value-added resellers to address specific market segments.
We sell our less complex products through a combination of our direct sales
force, distributors, mail order, telephone and electronic commerce, utilizing
our extensive catalogs. In many cases, initial sales of our products may be made
by our direct sales force, with follow-up sales of the products through one of
our alternative sales channels.
We have a support organization dedicated to delivering a full range of
services to our customers, including:
- instrument repair and calibration;
- proactive support to ensure continuous productivity of our semiconductor
and electronics manufacturing test equipment;
- application and process consulting;
- solution development and product integration;
- customer education;
- system integration; and
- software support.
We offer these services worldwide through an integrated team of support
engineers. We also provide support services over the Internet and through call
centers.
MANUFACTURING
We concentrate our test and measurement manufacturing efforts primarily on
final assembly and test of our products. To maximize our productivity and our
ability to respond to market conditions, we use contract manufacturers for the
production of printed circuit boards, sheetmetal fabrication, metal die casting,
plastic molding and standard electronic components. We also manufacture
proprietary devices and assemblies, such as x-ray tubes and high-frequency
integrated circuits and devices, in our own foundries for competitive advantage.
We have approximately 2.5 million square feet of manufacturing space
worldwide dedicated to our test and measurement business.
COMPETITION
The market for test and measurement equipment is highly competitive, and we
expect this competition to increase. We believe that the principal factors of
competition are:
- speed, accuracy and cost of test;
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- breadth of product offerings;
- scalability and flexibility of products;
- ease of product use;
- ability to upgrade product platform;
- time to market of new technologies;
- adherence to industry standards;
- ability to support emerging industry protocols; and
- ability to provide localized service and support on a worldwide basis.
We believe we compete favorably with respect to each of these factors and
have gained significant market share in many of our targeted markets as a
result. We believe our success has been driven by technology leadership, our
ability to generate customer loyalty and our track record at anticipating market
trends.
Our test and measurement business competes with a number of significant
competitors in all our major product categories and across our targeted
industries. In communications test, our primary competitors are Anritsu, IFR
Systems, Inc./Marconi Communications Ltd., Network Associates, Inc., Rhode &
Schwartz, Tektronix, Inc. and Wandel & Goltermann Technologies, Inc./Wavetek
Corporation, as well as INET Technologies, Inc. and Micromuse Inc. in the
communications network monitoring market. In the semiconductor test market, we
compete primarily against Advantest Corporation, Schlumberger Limited and
Teradyne. In the printed circuit board test market, a segment of the electronics
manufacturing market, we compete against GenRad, Inc. and Teradyne. In the
general purpose electronic test market, we compete against companies such as
Fluke Corporation (a subsidiary of Danaher Corporation), Keithley Instruments,
Inc., LeCroy Corporation, National Instruments Corporation and Tektronix. Some
of our competitors may have a strategic advantage based on geographic location
that could make it difficult for us to compete in those markets. In addition to
our larger competitors, we also face competition from start-up companies with
newer technologies or products based on next-generation industry protocols,
particularly in communications test. Any of these start-up or other emerging
competitors, as well as our existing competitors, may develop technologies that
more effectively address our targeted markets at a lower cost. In addition,
these small competitors may enter into strategic alliances or business
combinations that increase their ability to innovate and address our markets.
SEMICONDUCTOR PRODUCTS
Our semiconductor products business is a leading supplier of semiconductor
components, modules and assemblies for high performance communications
infrastructure, computing devices and mobile information appliances. We design,
develop and manufacture:
- fiber-optic communication devices, components and assemblies;
- integrated circuits for high-speed local area networks;
- integrated circuits and board-level solutions for storage area networks;
- discrete devices and integrated circuits for microwave and radio frequency
mobile wireless devices and infrastructure;
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- infrared components used for short-range communication between portable
and stationary devices;
- ASICs for workstations, servers and laser and inkjet printers;
- LEDs for electronic image and information display; and
- semiconductors for image capture.
We believe we are the leading provider of:
- fiber optic communications transceiver (transmitter/receiver) modules used
for high speed data transmission;
- integrated circuits for storage area networks based on the Fibre Channel
protocol, a protocol for communications among storage area networks;
- infrared components;
- optoelectronic components and displays; and
- ASICs to Hewlett-Packard for its workstations, servers and printers.
In total, we produce more than 9,000 products for high-speed networking,
mobile communications and computing devices worldwide. As of October 31, 1999,
our semiconductor products business had approximately 10,100 employees
worldwide. We have eleven major design centers and eight manufacturing sites
around the world. Our semiconductor products business generated revenue of $1.7
billion in fiscal year 1999 and $1.6 billion in fiscal year 1998.
MARKETS
Our semiconductor products business serves two primary markets:
communications and computing.
COMMUNICATIONS
HIGH-SPEED NETWORKING. The advent of the Internet as a communications
medium has dramatically increased business and consumer demand for high-speed,
reliable access to data and, as a result, has placed considerable stress on
existing communications networks. In data communications, speed is measured in
the number of bits of data per second that can be transmitted across the
network.
As the volume of data transferred over networks grows, users are becoming
increasingly frustrated with the low performance of the existing communications
infrastructure, which was originally designed for lower speed analog
transmission rather than high-speed digital transmission. This infrastructure
consists primarily of copper wiring, which was originally intended for analog
voice transmission. Copper wiring is highly susceptible to noise and
interference, making accurate transmission of data at high speeds difficult.
Fiber optic cables, which carry information in the form of pulses of light
produced by light-emitting diodes or lasers, can carry very large amounts of
data in a small space and are immune to electrical and magnetic interference.
Because fiber optic cables are not susceptible to interference, they can
minimize error in data transmission and prevent the crossing of telephone
conversations between lines. Fiber optic cables can also provide enhanced
security compared to copper wiring, since intercepting communications on a fiber
optic line without detection is difficult. Because of these benefits,
telecommunications service providers have historically used fiber-optic cables
for their ultra-long-distance, typically undersea, communications
infrastructure. For a number of years, fiber-optic
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ITEM 1. BUSINESS (CONTINUED)
cables have also been the method of choice for long-distance, high-volume voice
and data, and have more recently been increasingly used in local area networks,
in place of traditional copper wires, for higher-speed and more reliable data
communication.
We are a major supplier of fiber optic transceivers, which convert digital
data into light signals for transmission, and convert light signals back into
digital form on the receiving end of the communication. We market fiber optic
transceivers for both short-range, local area network applications and
long-range, wide area network applications to major telecommunications and data
networking equipment vendors such as Alcatel, Cisco Systems, Inc., Lucent and
Nortel. In addition, we supply high reliability solid-state lasers to major
telecommunications companies for high-reliability, ultra-long-distance
applications. We are also a major supplier of physical layer integrated circuits
for high-speed networking applications, which prepare data for transmission
across fiber networks.
STORAGE AREA NETWORKING. As the volume of data that is being transmitted,
processed and stored in networked environments has increased, the market for
storage area network equipment, which connects computers and storage devices,
has grown dramatically. The increase in data transmission speeds across networks
has created a demand for high-speed and high-performance storage-to-server and
server-to-server connectivity. The Fibre Channel interconnect protocol, a
standard for the transfer of information between computers and storage devices
defined by the American National Standards Institute, was developed to meet this
growing demand. Fibre Channel supports the transfer of large amounts of data
within storage area networks at speeds of one gigabit per second and greater and
provides high transmission reliability. We supply a broad range of integrated
circuits, fiber optic components and systems to manufacturers of storage area
network systems utilizing the Fibre Channel protocol, such as Data General
Corporation, EMC Corporation, Hitachi and NEC.
WIRELESS COMMUNICATIONS. Worldwide subscriber growth for wireless
communications has been increasing rapidly in recent years. The Strategis Group
anticipates that the worldwide market for cellular services will increase to
approximately 650 million subscribers by 2002 from approximately 300 million
subscribers in 1998. We supply a wide range of radio frequency and microwave
integrated circuits and devices to mobile telephone manufacturers and vendors of
equipment for the mobile telephone infrastructure to meet this increasing
demand. We supply infrared and radio frequency devices and modules for
short-range, point-to-point wireless communications to manufacturers of
computers, printers and consumer electronics products, such as mobile
telephones, digital cameras, personal digital assistants and pagers.
COMPUTING
We are the largest supplier to Hewlett-Packard of ASICs for printers,
workstations and servers. ASICs are semiconductors that are designed for a
unique, customer-specified application and typically replace a number of
discrete components resulting in improved performance, lower cost and high
reliability.
STRATEGY
To service the needs of our customers in the communications and computer
industries, the semiconductor products business pursues the following
strategies:
APPLY OUR BROAD TECHNOLOGY BASE TO CAPTURE DEMAND FOR HIGHER-SPEED AND
MOBILE DATA TRANSMISSION
We have established leadership positions in the design and development of
semiconductors used in fiber optic communications and infrared technology.
Building on this leadership and our broad
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ITEM 1. BUSINESS (CONTINUED)
technology base, we continue to invest in designing and marketing semiconductor
products to address the growing demand for higher-speed, higher-capacity
connections and mobile communications. In particular, we are focused on
developing devices that enable data transmission speeds of one gigabit per
second or greater to address the increasing demand for high speed networking. We
currently produce integrated circuits for the most prevalent mobile
communications standards, and we believe we are well positioned to benefit from
the increased demand for these products.
CONTINUE TO BE HEWLETT-PACKARD'S LEADING SUPPLIER OF ASICS
Key elements of our remaining a leading supplier of ASICs to Hewlett-Packard
for use in its printers, workstations and servers have been:
- our development, external sourcing and application of intellectual
property;
- our ability to meet competitive pricing and performance requirements; and
- our dedicated sales force and co-location of design personnel with major
Hewlett-Packard businesses.
To maintain this position, we will continue to pursue our intellectual
property strategy through both internal development and acquisitions, and apply
this intellectual property strategically to our products. In addition, to remain
competitive, we are focused on reducing the costs and improving the performance
of the ASICs we provide to Hewlett-Packard by pursuing higher levels of device
integration and employing advanced process technology. We also intend to
increase sales of ASICs to purchasers other than Hewlett-Packard, in areas other
than workstations, servers and printers, particularly in the networking area.
TAKE ADVANTAGE OF TECHNOLOGY PARTNERSHIPS
To maintain technology leadership in a cost-effective manner, we have formed
several strategic technology partnerships. We intend to continue to enter into
strategic technology partnerships to gain access to intellectual property and
advanced semiconductor manufacturing process technology. For example, through
our joint venture with Chartered Semiconductor Manufacturing, Ltd. and the joint
venture's technology sharing arrangements with Motorola, we obtain access to
advanced semiconductor process technology and volume production capacity while
reducing capital outlays and design process costs.
PRODUCTS
Our major product areas include:
FIBER OPTICS
Our fiber optic transceiver products address all segments of the market for
high-speed optical communications, including local area networking, wide area
networking, long-distance networks and custom-built, proprietary network
solutions. We market optical transceivers, transmitters and receivers for
high-speed local area network applications from 10 megabits per second to one
gigabit per second and higher, and wide area network applications at up to 2.5
gigabits per second. We also produce solid-state lasers, which are used for
high-reliability undersea transmission by major communications companies, such
as intercontinental communications.
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ITEM 1. BUSINESS (CONTINUED)
HIGH-SPEED NETWORK INPUT-OUTPUT CIRCUITS
We market integrated circuits and solutions for high-speed input-output
devices, focusing on the high-speed networking and storage area networking
markets. We produce physical layer integrated circuits for high speed network
switches and routers, devices that direct network traffic. We are also the
industry leader in Fibre Channel protocol-based integrated circuits for storage
area networks. We also produce subsystems for storage area networks.
RADIO FREQUENCY AND MICROWAVE COMMUNICATIONS DEVICES
We produce a broad family of radio frequency and microwave communications
products, primarily integrated circuits for wireless communications products and
infrastructure. Our products include integrated circuits, individual transistors
and diodes and amplifiers used in higher speed and higher frequency
applications. These products are focused on applications in a broad variety of
wireless communications standards, including Cellular and Personal
Communications Systems based on Code Division Multiple Access and Global Systems
for Mobile Communications. We offer products for both cellular base stations and
handsets.
INFRARED EMITTERS, DETECTORS AND TRANSCEIVER MODULES
We produce a full line of infrared products that enable short range,
point-to-point wireless communication between portable and stationary devices.
Examples of these portable devices include notebook personal computers, cellular
phones, personal digital assistants and digital cameras. Our infrared products
utilize our strength in high-speed communication design and our expertise in
optics and are used in a substantial portion of the notebook computers and laser
printers produced today.
ASICS
Through a competitive process, we have been the primary supplier to
Hewlett-Packard of ASICs for Hewlett-Packard's printers. In addition, we provide
graphics chips, core electronics chipsets that surround central processing units
and microprocessors for Hewlett-Packard's workstations and servers. However, we
expect shipments of microprocessors to Hewlett-Packard to be substantially
reduced before the end of 2000. The terms of our license limit our use of
Hewlett-Packard's intellectual property for the sale of integrated circuits in
printing devices, printer supplies, components and accessories, document
scanners and some computing devices for a period of three years in some cases
and 10 years in other cases.
OPTICAL IMAGE SENSORS AND OPTICAL POSITION SENSORS
We have recently begun applying our capabilities in optoelectronics and
integrated circuit design to image and position sensors. Our sensor products
include color and monochrome still and video camera image capture solutions and
intelligent optical sensors. Our focus in this area is to enable pervasive
imaging through low-cost digital image sensors for use on a stand-alone basis or
embedded within personal computers, laptops, peripherals, cellular telephones
and affordable digital cameras.
We also produce optical position motion control products used primarily for
motion control in printers and small motors that require precise control. These
optical position sensors are used to locate the printing device in an inkjet
printer. In addition, our optical image sensors are being used as the sensing
system in a new generation of computer mice.
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LEDS AND OPTOCOUPLERS
We manufacture and sell a broad range of LEDs, alphanumeric displays and
optocouplers. LEDs are semiconductor devices that emit light when an electrical
signal is applied. LEDs and alphanumeric displays are primarily used as status
indicators, back-lighting for panels or switches and information in consumer,
home office and industrial applications. Typical applications include status
indicators on computers, fax and other office equipment, display panels and
indicators for audio and video equipment, and as indicators and displays on
industrial grade electronic equipment. Optocoupler products are devices that
provide both electrical insulation, for protection, and signal isolation, to
prevent distortion of data, between differing electrical environments. Typical
applications for these products include industrial automation, electrical motor
control and data communications interface isolation.
LIGHTING JOINT VENTURE
In November 1999, we extended our existing joint venture with Philips
relating to the design and production of LEDs. The joint venture was expanded to
take advantage of our technology and manufacturing strength in high-brightness
color LEDs, and Philips' strength in developing, manufacturing and selling
innovative lighting products and systems. Under the terms of the new agreement,
the global joint venture will develop, manufacture and sell LEDs, modules,
products and systems for a broad spectrum of lighting applications, including
automotive lighting, high-brightness traffic signals, contour lighting and
signs, outdoor illumination, and white LEDs for both indoor and outdoor
applications. We equally own the joint venture with Philips, which involves
approximately 1,000 employees located in California, Malaysia and the
Netherlands.
COMPETITION
The markets for our semiconductor products are intensely competitive, and we
expect competition to increase. Our ability to compete effectively depends upon
a number of factors, including:
- product reliability and performance in operation;
- price;
- power consumption;
- compliance with standards;
- product size and integration; and
- time to market.
We believe that we compete favorably on the basis of these factors. In the
fiber-optic products market, our principal competitors are Tyco, Lucent and
Siemens. In the market for high-speed network components, our principal
competitors are Emulex Corporation, LSI Logic Corporation, QLogic Corporation
and Vitesse Semiconductor Corporation. Our principal competitors in wireless
communications are Motorola, NEC and Siemens. In the market for infrared
products, our principal competitors are Vishay Intertechnology, Inc. and IBM. We
compete with companies including LSI, IBM, Mitsubishi, Motorola and NEC in the
production of integrated circuits. Principal competitors in our LED businesses
include Lite-on, Inc., Stanley Electronic Co., Ltd., Siemens and Toshiba.
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CUSTOMERS
We sell to a broad array of customers in the communications and computing
industries. We sell to original equipment manufacturers directly, as well as
contract manufacturers including Celestica, Inc., Jabil Circuit, Inc., SCI
Systems, Inc. and Solectron. Our top customers by product line, including
customers purchasing through contract manufacturers and distributors, include
the following:
<TABLE>
<CAPTION>
HIGH-SPEED
FIBER OPTICS NETWORKING COMPONENTS WIRELESS
- ------------ ----------------------------- -----------------------------
<S> <C> <C>
Alcatel Cisco Alcatel
Allied Telesyn International Compaq Computer Corporation Ericsson
Corp
Cabletron Systems, Inc. Data General LG Group
Cisco EMC Lucent
FORE Systems, Inc. Hewlett-Packard Motorola
IBM Hitachi Nokia
Lucent IBM Nortel
Motorola Interphase Corporation Qualcomm
Nortel NEC Samsung
Tellabs, Inc. 3Com Siemens
3Com Corporation
Tyco
</TABLE>
In addition, through sales of ASICs, storage area networking components,
motion-control products and microprocessors, Hewlett-Packard accounted for
approximately 37% of our semiconductor products revenue in fiscal year 1999, and
approximately 34% in fiscal years 1998 and 1997. We have begun marketing our
imaging products to companies such as Microsoft Corporation and Logitech
International S.A.
SALES, MARKETING AND SUPPORT
Our sales organization consists of 375 professionals. Our sales organization
is divided into four groups, with responsibilities for large, global accounts
and three regional areas: the Americas, Europe and Asia Pacific. We also have a
direct sales team that has several years of experience in servicing our customer
relationship with Hewlett-Packard. Our sales force has specialized product and
service knowledge that enables it to sell specific offerings at key levels
throughout a customer's organization. In addition to our direct sales force, we
generate approximately 25% of our revenue through our relationships with key
electronic distributors, such as Arrow Electronics, Inc. and Avnet, Inc. on a
worldwide basis, EBV Electronik GmbH/Wyle Electronics in Europe and North
America, Future Electronics, Inc. in Europe and North America, and Ryoyo Electro
Singapore PTE, Ltd. and Tokyo Electric Power Company in Japan. We have also
recently focused a sales effort to major contract manufacturers such as
Celestica, Jabil, SCI and Solectron. Our total sales effort reaches 45 countries
through 200 distribution locations.
In support of our selling effort, we also have regional sales and customer
support centers in Germany, Hong Kong, Japan, Singapore, the United Kingdom and
the United States. These regional centers are responsible for sales support,
product presentations, developing new services and business opportunities, and
meeting the demands of our customers for localized aftermarket support. We also
provide a broad range of products and applications-related information to
customers and channel partners via the Internet.
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ITEM 1. BUSINESS (CONTINUED)
MANUFACTURING
Our semiconductor products business has a total of eight manufacturing sites
located in California and Colorado in the United States, as well as Malaysia,
Singapore and the United Kingdom. The sites together have usable manufacturing
space of over 897,000 square feet and, as of October 31, 1999, approximately
7,900 employees devoted strictly to manufacturing. The majority of our silicon
and gallium arsenide wafer fabrication is done in the United States and
Singapore, while our assembly and test operations are in Malaysia, Singapore and
the United Kingdom. In addition to these facilities, we utilize a network of
contract manufacturers throughout Asia for semiconductor fabrication and test.
Our manufacturing strategy has been to outsource more mature technologies
while using our in-house manufacturing fabrication, assembly and test
capabilities to develop new, leading edge-products. In addition, through our
relationship with Chartered Semiconductor Manufacturing and with Chartered
Silicon Partners, we have access to an assured source of silicon wafers for our
integrated circuit designs at favorable prices. Chartered Semiconductor
Manufacturing provides us with access to Motorola's fabrication process
developments through licensing arrangements with Motorola.
Our production facilities have developed several quality-management
processes designed to increase productivity. We have developed proprietary
automated test systems, particularly in optical, light-emitting diode and
microwave.
HEALTHCARE SOLUTIONS
Our healthcare solutions business is a worldwide leader in electro-medical
clinical measurement and diagnostic solutions. Our products and systems enable
medical professionals to gather and analyze information in hospital intensive
care units and emergency rooms, outpatient clinics, doctors' offices, patients'
homes and other settings. Our products and services include patient monitoring
systems, imaging systems, external defibrillators, cardiology products and
related professional services and support, each aimed at helping our customers
improve the quality of patient care while decreasing their costs. We hold
leading market share with our patient monitoring and associated clinical
information-management systems for critical care and cardiovascular ultrasound
imaging systems.
We market our products to professionals and institutions in more than 100
countries. We have sales offices in 33 countries and manufacturing sites in
Massachusetts and Washington in the United States, China and Germany. As of
October 31, 1999, the healthcare solutions business had approximately 4,700
employees worldwide. Our healthcare solutions business generated revenue of $1.5
billion in fiscal year 1999 and $1.3 billion in fiscal year 1998.
MARKETS
The principal markets in which we participate are patient monitoring,
ultrasound imaging and external defibrillator and cardiology products.
PATIENT MONITORING
Patient monitoring systems continuously assess a patient's vital signs, such
as heart rate, blood pressure and respiration rates, to enable very rapid
decision making in emergency and critical care environments. Our patient
monitoring systems are used in three major market segments: critical care,
anesthesia care and neonatal care. According to Frost & Sullivan, the worldwide
market for multi-functional patient monitoring equipment totaled $5.3 billion in
1997, growing at a compound annual rate of 8.7% from 1994 to 1997. This market
is forecasted to grow at a compound annual rate of 11.5% from 1998 to 2003.
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ITEM 1. BUSINESS (CONTINUED)
Patient monitoring equipment and services are also used in non-critical care
environments. As providers seek to reduce costs, patient care is often being
delivered in non-critical care environments. Many patients who previously would
have remained in the intensive-care unit are being moved to non-critical care
areas, where portable monitors and remote measurement systems are used. These
non-critical care areas, which include non-intensive-care areas of hospitals,
outpatient care facilities and patients' homes, are expected to provide
significant growth opportunities for patient monitoring markets in the future.
Frost & Sullivan expects the market for lower cost and portable monitoring
equipment to grow from $675 million in 1998 to $1.3 billion by the year 2004, a
11.3% compound annual growth rate.
ULTRASOUND IMAGING
Ultrasound imaging systems enable medical professionals to view multiple
parts of the human anatomy with high-resolution images that are produced
non-invasively from sound waves. The ultrasound imaging equipment market
includes cardiovascular, radiology, obstetrical and general imaging equipment.
Frost & Sullivan estimates that the worldwide market for ultrasound imaging
equipment was $2.5 billion in 1998 and grew at a compound annual rate of 5.1%
from 1996 to 1998. Frost & Sullivan forecasts the overall market to grow at a
compound annual rate of 6.7% over the next five years. Within ultrasound
imaging, our principal targeted market is cardiology ultrasound imaging.
Frost & Sullivan estimates that the global market for cardiology ultrasound
imaging equipment was approximately $768 million in 1998 and grew at a compound
annual rate of 5.5% from 1996 to 1998. In line with the overall ultrasound
market, Frost & Sullivan forecasts the cardiovascular imaging segment to grow at
an annual rate of approximately 6.8% over the next five years.
CARDIOLOGY PRODUCTS
Our cardiology products business includes external defibrillators,
electrocardiographs and related information systems. External defibrillators are
devices that deliver an electrical shock designed to restart the heart of
victims of sudden cardiac arrest. Theta Corporation estimates the worldwide
external defibrillator market was approximately $425 million for 1998 and
forecasts a compound annual growth of 8% for the years 1998 through 2000. The
fastest-growing segment of the defibrillator market is the out-of-hospital
segment, which is expected to grow, on average, more than 35% annually for the
next three years, according to Frost & Sullivan. Each year in the United States,
sudden cardiac arrest strikes approximately 350,000 people, of whom less than 5%
survive, largely because defibrillators do not reach victims in time. In 1997,
the American Heart Association called for the broad deployment of automatic
external defibrillators in public places where large groups of people gather and
estimated that broader public access to defibrillators could save an additional
20,000 lives each year in the United States.
We also sell electrocardiography equipment, which measures and displays
information about the electrical activity of the heart. Frost & Sullivan
estimates that the total worldwide electrocardiography equipment market was
approximately $200 million in 1998 and grew at a compound annual growth rate of
approximately 2.3% from 1991 to 1998. This market is expected to grow at an
annual rate of 3.0% over the next three years.
STRATEGY
Our healthcare solutions business focuses on creating and delivering new
products and services for the healthcare market, establishing and maintaining a
strong reputation with our customers and developing effective strategic
partnerships by pursuing the following strategies:
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ITEM 1. BUSINESS (CONTINUED)
BRING NEW TECHNOLOGIES AND APPLICATIONS TO TARGETED MARKETS
We have established leadership positions in the patient monitoring,
ultrasound and cardiology markets. We believe we can expand our market
opportunity by moving into new areas of these markets, increasing the market
penetration of our existing products and services and delivering new products
that offer higher performance at lower prices. In particular, we aim to bring
new technologies to the patient monitoring and imaging markets and expand our
coverage in developed countries by delivering cost-effective diagnostic and
therapeutic tools. We are also focused on developing new, low-cost applications
of our existing products to expand our presence in smaller hospitals and
less-developed countries.
TARGET MEDICAL CARE BEYOND THE HOSPITAL
We believe that an increasing proportion of healthcare is being delivered
outside of the hospital in clinics, surgical centers and doctors' offices, as
well as in the workplace and homes. According to data from the National Center
for Health Statistics, the average length of stay at hospitals has declined
17.6% from 1990 to 1996. By contrast, outpatient visits increased 37% between
1990 and 1996. This growth in outpatient services has increased demand for
products that can enable nurses, other clinicians and nonmedical professionals
to provide care outside of the hospital. In 1998, we acquired Heartstream, a
market leader in automatic external defibrillators which enable nonmedical
professionals to deliver defibrillation in settings outside the hospital.
Through internal development efforts, we are also delivering cost-effective
diagnostic and therapeutic tools, which can decrease the cost of diagnosing and
monitoring patients. These tools are targeted at smaller hospitals, mobile
clinics and private offices.
INCREASE PRESENCE IN EMERGING SYSTEMS WORLDWIDE
We believe an opportunity exists in emerging countries with underdeveloped
healthcare systems and infrastructure. We believe the large and growing
populations of these countries will fuel demand for cost-efficient medical
products and services. In order to capitalize on this opportunity, we plan to
expand our global presence by continuing to invest in the development of
low-cost, reliable, high-utility, diagnostic, monitoring and therapy instruments
designed to be easily supported in rural areas. We also work with international
financial organizations, such as the World Bank, to arrange secured financing
services for our customers in these regions.
TAKE ADVANTAGE OF THE RAPID ADOPTION OF INFORMATION TECHNOLOGY, THE INTERNET
AND INDUSTRY STANDARDS
The rapid growth of the Internet is fueling the adoption of Internet-based
healthcare services, medical care by telephone and online self-care. According
to Cyber Dialogue, by the year 2000 an estimated 30 million Americans will use
the Internet to learn about options for treatment, self-care and prevention. To
take advantage of this accelerating trend, we are working with medical
professionals to deploy Internet-based communication systems that link medical
professionals and patients. For example, our CodeRunner Web product allows
healthcare professionals to review a summary of cardiac resuscitation efforts to
ensure that approved procedures were followed in an emergency situation.
Increasingly, our customers are demanding clinical diagnostic information
systems based on open standards for easier and more cost-effective access to
medical data. To proactively participate in the definition of new industry
standards and ensure compliance of our products and technologies, we are
currently leading several industry-wide efforts to create and promulgate
standards for communication and interoperability among disparate healthcare
systems.
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ITEM 1. BUSINESS (CONTINUED)
DEVELOP POINT-OF-CARE TECHNOLOGIES
Point-of-care diagnostic products consist of blood-and-tissue analysis
systems that provide immediate or continuous diagnostic results at the patient's
bedside. These systems include portable, microprocessor-based analyzers that
employ single-use, disposable cartridges to perform simultaneously several of
the most frequently ordered blood tests in a simple 90-second procedure. These
biochemistry-based devices provide accurate and reliable blood test results more
quickly, cost-effectively and simply than most advanced clinical laboratory
equipment. We believe market acceptance of point-of-care diagnostics is
increasing. In 1995, we entered into an agreement with i-STAT Corporation to
enter the point-of-care testing marketplace with critical blood parameters. In
1999, we entered into a worldwide agreement with Diametrics Medical Incorporated
in order to provide both continuous and intermittent blood monitoring
capabilities. These companies' biochemical sensors, when integrated into our
monitoring platforms, enable time-sensitive measurements to be made quickly and
accurately at a patient's bedside for faster diagnosis and therapeutic
intervention. We intend to continue to enhance our patient monitoring
capabilities by developing alliances with other companies.
FOCUS ON THE MANAGEMENT AND TREATMENT OF CHRONIC ILLNESSES
Our products and solutions primarily address the need for the diagnosis and
treatment of non-critical illnesses in a clinical setting. We believe healthcare
expenditures are shifting from acute care in the hospital to ongoing care or
treatment of long-standing conditions, as a result of the dramatic growth in the
elderly population and advances in life-extending medical therapies and
technologies. Therefore, we have recently begun to pursue opportunities focused
on the ongoing management and treatment of chronic illnesses. We introduced our
first product to address the chronic care market, our remote measurement
solution, in late 1999. It is our intention that this solution will assist
clinicians in successfully managing congestive heart failure patients at home.
Studies show that this type of disease management program increases patient
comfort while avoiding costly hospital emergency visits.
PRODUCTS
Our products and services include patient monitoring, imaging systems,
cardiology products and related professional services.
PATIENT MONITORING
According to a 1998 study by Frost & Sullivan, we maintain a leadership
position in the market for patient monitoring and related information management
systems. Our products range from critical-care bedside monitors, fetal
monitoring and remote-measurement systems to central station monitors,
associated clinical decision support systems and critical-care
information-management systems. Our clinical decision support and critical-care
information-management systems are scalable based on department protocols,
severity of patient condition and workflow requirements. Our solutions range
from basic surveillance and centralized alarms to very large system
configurations that provide comprehensive patient information-management
support.
We have supplied over 170,000 units worldwide of our modular Viridia
Component Monitoring System family of patient monitors. The Viridia CMS monitors
support more than 20 different kinds of clinical measurements in critical care,
anesthesia and perinatal care. Our Viridia Information Center is one of the
industry's most advanced real-time, patient data analysis and surveillance
solutions offering data at a central station. It enables clinicians to provide
more effective care through the analysis, integration and management of patient
information. The Viridia Information Center integrates the data management and
review capabilities of a clinical workstation with the features of a central
monitor for
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ITEM 1. BUSINESS (CONTINUED)
increased productivity and improved quality of care. Our CareVue clinical
information system, deployed at the point of care, captures, stores and makes
available data that can be configured for comprehensive reports. CareVue enables
multiple caregivers to analyze patient data in order to improve outcomes,
analyze care protocols and perform research and continuous quality improvements.
We have established a number of strategic relationships to provide us with
certain clinical applications to be used with our existing products and products
under development, including our agreements with Diametrics Medical and i-STAT
Corporation in point-of-care blood chemistry. Continuous and intermittent
monitoring sensors provided by these partners, when integrated into our
monitoring platforms, enable these time-sensitive measurements to be made
quickly and accurately at a patient's bedside for faster diagnosis and
therapeutic intervention.
ULTRASOUND IMAGING
We have a broad range of ultrasound imaging products, which are used by
doctors and technicians in cardiology, radiology, obstetrics, vascular,
emergency and operating departments to diagnose non-invasively a range of
diseases and abnormalities throughout the body. Our U.S. cardiac-ultrasound
business was ranked number one in the industry for overall quality of service
and support by International Marketing Ventures in 1998 for the fourth year in a
row. We offer three major ultrasound platforms: SONOS 5500, SONOS 4500 and
ImagePoint Hx. SONOS 5500 is a premium performance cardiovascular ultrasound
system used for both research and clinical applications, while SONOS 4500 is a
high-performance cardiovascular ultrasound system used primarily in the clinical
environment. ImagePoint Hx is a multispecialty product used in a broad range of
ultrasound applications to address the broad needs of physicians working in
smaller hospitals, mobile clinics and offices.
Our technology differentiates our ultrasound products from products of
competitors. A key component of ultrasound products is the transducer, a complex
electro-mechanical device that transmits sound waves into the body and converts
the returning echoes into electrical signals, providing for the display of high
quality images of human anatomy. We believe our proprietary transducers provide
the widest bandwidth, or range of soundwave frequencies, in the industry,
enabling the ultrasound system to optimize image detail and penetration without
making the operator switch transducers. Another key technology in ultrasound
products, signal processing, takes the electrical signals from the transducers
and converts them into a high quality image. An example is our proprietary
Acoustic Quantification, which automatically measures critical characteristics
of the beating heart, eliminating time-consuming manual measurements. Our
expertise in signal processing has also led to the development of proprietary
ASICs, which have enabled us to provide ultrasound imaging equipment with
enhanced performance for the same or lower cost.
To address the information-management needs of our ultrasound customers, we
have developed EnConcert, which consists of a series of software applications
running on personal computer hardware. EnConcert allows clinicians to review,
measure, manage and archive images, reports and patient data related to their
ultrasound exams. These tools improve doctors' efficiency and allow them to
communicate exam results more rapidly to their colleagues.
CARDIOLOGY PRODUCTS
We develop and manufacture external defibrillators, electrocardiographs and
electrocardiogram information management systems. An external defibrillator is a
device that delivers an electrical charge that can restart a person's heart in
sudden cardiac arrest or restore a heart's correct rhythm in cases of irregular
heartbeat. An electrocardiograph is a diagnostic tool that measures and displays
the
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ITEM 1. BUSINESS (CONTINUED)
characteristics of the heart's electrical activity. An electrocardiogram
management system allows for the digital storage, review and retrieval of
electrocardiograms.
We produce both manual and automatic external defibrillators. Manual
defibrillators are used by highly trained medical personnel, primarily in
hospitals and paramedic units. We believe our CodeMaster manual defibrillator
product line is one of the most extensive in the industry. Our products are
designed for both hospital and out-of-hospital use and are recognized as having
the fastest charge time in the industry. In addition to their reliability and
ease of use, our defibrillation products record the patient data monitored, and
action taken by the caregiver, for review by an emergency medical director or
other responsible parties, to enable monitoring of caregiver performance and
product effectiveness. We also have the industry's first pre-hospital product
with predictive software that provides information used to accelerate assessment
and triage of patients with chest pains so that appropriate therapy can begin
promptly.
Automatic external defibrillators are portable defibrillators that are used
by nonmedical professionals to deliver on-site defibrillation following a
cardiac event. Given the relatively low cost and ease of use, these systems are
well suited for deployment in places where people congregate. Purchasers of our
ForeRunner automatic external defibrillators include American Airlines, Inc.,
Delta Air Lines, Inc., United Air Lines, Inc., Chicago O'Hare International
Airport, Hilton Gaming Corporation and Sundance Ski Resort. The ForeRunner's
competitive advantage is based upon its unique, proprietary, low-energy biphasic
waveform. A biphasic waveform is a form of energy where the electrical current
is reversed midway through the pulse. We believe this technology enables the
ForeRunner to be lighter, less costly, safer, more reliable and the smallest
external defibrillator in the market.
Our electrocardiographs monitor the characteristics of the heart's
electrical activity to enable cardiology professionals to provide accurate
diagnoses and deliver care for cardiac patients. Our electrocardiogram
information management systems allow cardiologists in institutions where large
numbers of electrocardiograms are taken each day to automate the flow of
information efficiently and generate accurate diagnostic reports for referring
physicians. This system is based on industry standard computing platforms and
also provides for remote connectivity and information access using standard
Internet software.
We have also established strategic alliances for our cardiology products
business. For example, we have an agreement with Dr. Harry P. Selker, Chief of
the Division of Clinical Research at the New England Medical Center, to jointly
develop predictive instruments to help accelerate the assessment and triage of
patients who may be having a cardiac event. Dr. Selker provides us with clinical
and technical input and product evaluation by clinical trial, while we provide
software and hardware engineering and development. We also have an agreement
with Zymed, Inc. in electrocardiograms. Zymed's 'EASI 12-lead' technology, when
integrated into our monitoring platforms, provides the ability to more quickly
and easily acquire, process and transmit a derived 12-lead electrocardiogram
using five electrodes instead of the customary 10 used today in the critical
care setting.
CUSTOMERS
We provide products and services to a broad range of customers in the
industry. Within the last 12 months, 91% of the largest 2,000 hospitals in the
United States purchased our equipment and/or services. Outpatient clinics,
doctors' offices and public facilities, travel companies and entertainment
providers are also a growing part of our customer base.
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ITEM 1. BUSINESS (CONTINUED)
A representative list of customers of our healthcare solutions business
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Adventist Health System--Sunbelt Kaiser Foundation Hospitals Scripps Memorial Health
Advocate Health Care Lahey Hitchcock Clinic System
Baptist Health System of South Mayo Foundation Sisters of Providence (WA)
Florida Memorial Healthcare Systems St. John's Health System
Boston Medical Center Nebraska Methodist Health St. Joseph Health System (CA)
Catholic Healthcare West System Stanford Healthcare Services
Columbia/HCA Healthcare The Methodist Hospitals, Inc. Sutter Health California
Corporation Mount Sinai Health System Healthcare Systems
Intermountain Health Care New York Health Hospital Tenet Healthcare Corporation
International Military Medical Promedica Health System Tri-State Health Initiative
Center, Cairo, Egypt Quorum Health Group, Inc. United States Government
</TABLE>
SALES, MARKETING AND SUPPORT
Our products and services are sold through both direct and indirect
channels. We have sales offices in 33 countries and more than 2,400 direct sales
and service personnel. Our sales strategy is to sell to and service our largest
accounts (hospital and corporate business) directly while employing third-party
distributors and manufacturer's representatives for smaller or more
geographically dispersed countries. Electronic commerce is also an integral and
growing element of our sales and distribution strategy. Today, customers can
access product and service information for all our products, and they can
purchase medical supplies and replacement parts on our website.
In select instances we have also established distribution alliances with
complementary medical equipment manufacturers in order to leverage market
strength or bring a broader array of solutions to our customers. Specifically,
Quinton Instruments Company is the United States distributor for our
electrocardiographs and electrocardiogram information-management systems. We
have an agreement with Laerdal Medical Corporation in the area of worldwide
distribution and complementary training products in the emergency medical
services segment. Laerdal sells our CodeMaster and ForeRunner defibrillators in
the pre-hospital market for paramedics and other specifically-trained emergency
medical teams.
We believe that medical equipment sales are heavily influenced by personal
references among clinicians with large medical research facilities serving as
key installations. For this reason, we have sold equipment into what we believe
to be some of the most influential facilities worldwide, including Allgemeines
Krankenhaus (Vienna), Cedars Sinai Medical Center, Cleveland Clinic Foundation,
Duke University Medical Center, Johns Hopkins Hospital, Mayo Foundation, Royal
Brisbane Hospital, Stanford University Hospital and Tokyo General Hospital.
To support our sales efforts we have marketing centers in Hong Kong and
Japan covering Asia; in Germany covering Europe; and in Massachusetts covering
North and Latin America. These centers are responsible for outbound marketing
programs, tradeshows, telesales, call-center operations and distribution
support.
Our professional services offerings include multivendor systems integration,
training and consulting to hospitals, outpatient facilities and doctors'
offices. Our professional services enhance our clients' ability to access and
utilize their data, enabling enhanced clinical decision support and improved
workflow for lower healthcare costs and improved delivery of patient care. We
combine our knowledge of clinical processes and technology with complementary
applications and tools from partners to create information management solutions
required by our customers. For example, our Report Review software product
integrates a patient's clinical reports from multiple information sources to
provide one access point for care planning and treatment.
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ITEM 1. BUSINESS (CONTINUED)
Our technical specialists and clinical application specialists provide
installation, repair and training services to preserve and maximize customer
investments in our solutions. In addition, geographic response centers and
remote on-line support supplement on-site services. Finally, we provide
consulting, project management and technical implementation services to meet
customer needs for networking and integrating our solutions.
MANUFACTURING
The healthcare solutions business has four manufacturing locations:
Massachusetts and Washington in the United States, China and Germany. We
selectively use suppliers to provide manufacturing capabilities outside our core
competencies, such as the manufacture of printed circuit assemblies by
Celestica. We typically complete the final assembly and test of our medical
products and systems internally.
COMPETITION
The markets we address are highly competitive. Our competitors are diverse
and offer a variety of solutions directed at various segments of our medical
products and services markets. Our ability to compete effectively depends upon a
number of factors, including our ability to:
- provide a complete set of high quality products for our customers;
- offer competitive prices;
- provide financing services;
- provide support and training; and
- innovate technologically.
Our competitors with broad product portfolios include GE Marquette Medical
Systems and Siemens Medical Systems, Inc. We also compete with other vendors in
specific markets. Our major competitors in patient monitoring include GE
Marquette Medical, Siemens Medical, Spacelabs Medical, Inc. and the Datex-Ohmeda
division of Instrumentarium Corporation. In the imaging systems business, we
compete with Acuson Corporation, Toshiba Medical Systems, Inc., GE Marquette
Medical, Siemens Medical and the ATL Ultrasound, Inc. division of Philips
Medical Systems International. Our competition in the external defibrillator
market comes primarily from Physio Control Corporation (a subsidiary of
Medtronic Inc.) and Zoll Medical Corporation.
GOVERNMENT REGULATION
The products developed and marketed by our healthcare solutions business are
subject to extensive regulation by the FDA and other regulatory bodies. FDA
regulations govern, among other things, the following product activities:
- design and development;
- testing, including animal and human studies;
- labeling;
- premarket clearance or approval;
- manufacturing;
- storage;
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ITEM 1. BUSINESS (CONTINUED)
- advertising and promotion; and
- sales and distribution.
In the United States, medical devices are classified on the basis of
controls deemed necessary to ensure their safety and effectiveness. Class I
devices are subject to general controls, such as labeling, premarket
notification, and adherence to the FDA's Quality System Regulations, which
incorporate current good manufacturing practices that are applicable to medical
devices. Class II devices are subject to general and special controls. Special
controls include performance standards, postmarket surveillance, patient
registries and FDA guidelines. Most class III devices are controlled through the
premarket approval process to ensure their safety and effectiveness.
Prior to commercialization, premarket notification clearance generally must
be obtained for class I and II devices as well as class III devices for which
the FDA has not called for premarket approval. For most class III devices, a
premarket approval application is required and must be supported by valid
scientific evidence to demonstrate their safety and effectiveness. The
notification or application typically includes:
- results of bench and laboratory tests;
- when appropriate, results of animal tests and clinical studies;
- a detailed description of the methods, facilities and controls used to
manufacture the device; and
- proposed labeling and advertising literature.
Most medical devices marketed by the healthcare solutions business are class
II or "Pre-Amendment" class III devices, which currently require only premarket
clearance. The healthcare solutions business does not market any class III
device requiring premarket approval in the United States, but it may do so in
the future or the FDA may require by regulation that premarket approval
applications be submitted for our existing "Pre-Amendment" class III devices.
Once clearance or approval is obtained, FDA oversight continues. We are
required to demonstrate and maintain compliance with the Quality System
Regulations for all our products. The FDA enforces the Quality System
Regulations through periodic inspections of our manufacturing operations and
those of our contract manufacturers. The Quality System Regulations relate to
product testing and quality assurance, as well as to the maintenance of records
and documentation. We are required to provide information to the FDA on deaths
or serious injuries alleged to have been associated with the use of our medical
devices, as well as on product malfunctions that could contribute to death or
serious injury. The FDA also restricts the promotion of products for unapproved
or off-label uses.
If the FDA believes we are not in compliance with the Federal Food, Drug and
Cosmetic Act or its regulations it can:
- detain or seize our products;
- order or request a recall;
- seek an injunction against future violations;
- assess civil penalties against us; and
- initiate criminal proceedings against us.
Compliance with other regulatory requirements is necessary to market our
medical devices outside the United States. These regulations vary from country
to country.
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ITEM 1. BUSINESS (CONTINUED)
CHEMICAL ANALYSIS
Our chemical analysis business is a leading provider of analytical
instrument systems that enable customers to identify, quantify, analyze and test
the atomic, molecular, physical and biological properties of substances and
products. Our chemical analysis products and services are used by scientists,
engineers and technicians working in research and development, quality
assurance, quality control and manufacturing.
Our four main product lines are chromatography, spectroscopy,
bio-instrumentation and related consumables. We also provide service and
customer support for our products. Chromatographs separate a mixed sample in gas
or liquid form into its component compounds so that these components can be
analyzed individually. Mass spectrometers identify and quantify molecules and
elements within a sample by measuring the mass of atoms. Bio-instrumentation is
used in the analysis of complex compounds, such as DNA.
Our chemical analysis business offers a wide range of products and services
that are sold primarily into the hydrocarbon-processing, environmental,
pharmaceutical and bioscience markets. We are a leading provider of
chromatography and mass spectrometry systems used by research and development
and quality assurance laboratories for the measurement and analysis of chemical
compounds. We believe that we are also a leader in the sale of benchtop
inductively coupled plasma mass spectrometers (ICP-MS), which are generally
acknowledged as the most powerful tools for the detection of minute quantities
of metals.
Some of the uses of our instrument systems are:
- determining octane levels in gasoline;
- analyzing pesticide levels in drinking water;
- ascertaining the quality of compounds in the manufacture of
pharmaceuticals;
- identifying impurities in the manufacture of semiconductors; and
- analyzing DNA for various life science applications.
We employed approximately 3,600 people as of October 31, 1999 in our
chemical analysis business. We have manufacturing and product development
centers in China, Germany, Japan and the United States and marketing centers in
Germany, the United States, and Singapore. Our chemical analysis business
generated revenue of $1.0 billion in fiscal year 1999 and $938 million in fiscal
year 1998.
MARKETS
Strategic Directions International estimates that in 1998, worldwide revenue
in the analytical instrumentation market totaled approximately $15.9 billion.
According to Strategic Directions International, growth of the overall
analytical instrumentation market between 1998 to 2001 is expected to be
approximately 8% annually. The primary markets served by our chemical analysis
business are the hydrocarbon processing, environmental, pharmaceutical and
biopharmaceutical industries. We estimate that our market represents
approximately 30% of the total available analytical instrumentation market that
we serve.
HYDROCARBON PROCESSING
The hydrocarbon processing industry encompasses the natural gas, petroleum
refining, petrochemical and chemical markets. This industry spends approximately
$2.2 billion annually on
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analytical instrumentation. We sell primarily gas chromatographs and gas
chromatography-mass spectrometry products and systems into these markets.
Petroleum refiners use our measurement solutions to analyze crude oil
composition and perform other raw material analysis, verify and improve refining
processes, and ensure the overall quality of gasoline, fuels, lubricants and
other products. Our gas chromatographs are used to monitor consistent quality in
the natural gas delivered to consumers and industry. Petrochemical and chemical
producers use our products to measure and control the quality of their finished
products and to verify the environmental safety of their operations. We expect
growth in these markets to be driven by: (A) migration of measurement and
analysis activities out of the centralized labs and closer to the process,
(B) standardization of measurement processes across companies' worldwide
operations, and (C) technologies that improve analysts' productivity.
ENVIRONMENTAL
We develop and market analytical instrumentation for the environmental
market for applications such as laboratory and field analysis and
characterization of chemical pollutants in air, water, soils, solid waste,
agriculture and food products. Environmental industry customers include all
levels of government, the industrial and manufacturing sectors, engineering and
consulting companies, commercial testing laboratories, colleges and
universities. We expect growth in this market to be driven by: (A) government
legislation, enforcement, site assessment and monitoring, (B) multi-national
trade agreements, (C) concerns about public health and food safety and
(D) technologies that identify new environmental risks. We believe these factors
will lead to more demand for environmental instrumentation in the Asia-Pacific,
Latin America and Eastern Europe regions, as these regions implement new and
stricter environmental regulations.
PHARMACEUTICAL AND BIOPHARMACEUTICAL
Our analytical-instrument solutions are used by pharmaceutical and
biopharmaceutical companies in every phase of the drug development process. This
includes research into the basic causes of disease, identification and
development of new drugs, obtaining regulatory approval, manufacturing and
distribution. Strategic Directions International estimates that these companies
will spend approximately $3.8 billion on analytical instrumentation in 2002.
Drug discovery is extremely costly and involves high risk. The
Pharmaceutical Research Manufacturers' Association indicates that it costs an
average of $500 million to discover and develop a new drug. Therefore,
investment in productivity-enhancing technology, such as analytical instrument
solutions, is critical to reducing the time and cost it takes to bring new drugs
to the consumer.
STRATEGY
In order to maintain our leading position in the analytical instrumentation
market, our strategy is as follows:
TARGET HIGH-GROWTH OPPORTUNITIES IN THE PHARMACEUTICAL AND BIOPHARMACEUTICAL
MARKETS
We believe the pharmaceutical and biopharmaceutical markets represent a
high-growth opportunity for us, as participants in these markets continue to
invest significant resources in research and development. Companies in this
industry are constantly in search of ways to discover and develop new drugs
faster and at lower cost. We continue to invest in developing new instruments
and technologies to address these requirements. For example, through our
strategic relationship with Caliper Technologies Corporation, we have developed
instrumentation that enables chemical analysis procedures to be performed on the
surface of the Caliper LabChip device. We have recently begun marketing the
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ITEM 1. BUSINESS (CONTINUED)
LabChip device, which uses a technology called microfluidics to manipulate
minute quantities of various fluids. The LabChip device is designed to enable
researchers to conduct analysis at a fraction of the time and cost it would take
using conventional techniques.
Pharmaceutical and biopharmaceutical companies are also investing in
bio-instrumentation that increases understanding of the genetic cause of
diseases in order to speed the development and increase the efficacy of new
drugs. We will continue to focus resources on the development of technologies to
address this market segment. For example, we have relationships with Affymetrix,
Rosetta Inpharmatics and Oxford Gene Technology to develop instruments that
enable identification of important genetic information.
FOCUS ON GROWTH OPPORTUNITIES IN CURRENT MARKETS
We will continue to focus resources on growth opportunities in markets we
currently address. We believe that emerging markets, particularly in the Asia
Pacific, Latin America and Eastern Europe regions, represent a growth
opportunity for analytical instrumentation, as investments in basic industries,
infrastructure and environmental protection increase over the coming years. To
address these emerging markets, we are broadening our worldwide distribution
capabilities and developing less complex instrumentation with lower prices.
Additionally, in order to differentiate our product offerings and increase our
market share in developed markets, we intend to continue to grow our portfolio
of services and consumable products, enabling us to offer our customers more
complete solutions. Finally, we continue to develop gas chromatography and mass
spectroscopy products that are smaller and more portable to meet increasing
demand for use of these instruments outside of centralized laboratories.
BRING NEW PRODUCTS AND TECHNOLOGIES TO MARKET FASTER
We seek to bring new products and technologies to market both through
internal development and the strategic acquisition of technologies from third
parties. Internal development of new technology is accomplished through a
combination of discoveries at Agilent Technologies Laboratories and research and
development efforts within our chemical analysis business. Agilent Technologies
Laboratories is primarily focused on basic long-term research, while our
chemical analysis business emphasizes research and development of technology for
more immediate commercialization. We also focus considerable effort on
developing solutions that meet the current and anticipated needs of customers.
For example, we are expanding our programs to offer customers early access to
products under development to ensure that these products are meeting customer
needs. In addition, our development of modular hardware and software platforms
allows us to bring new generations of products to market faster.
In addition to our internal efforts, we consider acquisitions to complement
our current products, solutions and technologies and to accelerate our entry
into strategic markets.
LEVERAGE STRATEGIC RELATIONSHIPS AND ALLIANCES
We intend to build strategic relationships to enable us to develop products
and services that complement existing technologies and products in our target
markets. For example, through our relationship with Caliper Technologies Corp.,
we are conducting joint research and development in microfluidics. This has
resulted in the commercialization of the LabChip technology, which is designed
to increase the speed and accuracy of traditional analytical methods.
In addition, through our strategic alliances, we develop instruments that
work with our partners' products, enabling us to offer our customers a broader
range of products and solutions. These alliances
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ITEM 1. BUSINESS (CONTINUED)
also help our customers to reduce the time and resources needed to integrate
disparate products from separate vendors.
PRODUCTS
A key factor in our target markets is the need for new products that
increase productivity of the end customer. Our chemical analysis products,
systems and services enable our customers to analyze water, air and soil for
monitoring and remediation; to understand the properties of natural and man-
made gases, liquids and chemically-based products; and to advance knowledge of
the genetic basis of disease and enable the development, testing and use of new
drugs. Our four main product lines, chromatography, spectroscopy,
bio-instrumentation and related consumables, are described below.
GAS CHROMATOGRAPHY
Gas chromatographs are used to separate molecules of a gaseous mixture to
determine the quantity and identity of the molecules present. A gas
chromatograph can analyze gas samples as well as solids and liquids that can be
converted to a gaseous state. Most gas chromatographs have the approximate size
and appearance of a large microwave oven.
We are the worldwide market leader in the $1 billion gas chromatograph
industry, according to Strategic Directions International. Our gas
chromatography systems are used in many industries, including pharmaceutical,
hydrocarbon processing, environmental, foods and flavors, forensics and consumer
products. Our instruments are used in laboratories involved in research and
development, quality assurance, quality control and routine testing. We also
produce portable chromatography systems used in the field for performing
on-site, real-time measurements. Our products are used to test the quality and
safety of food, air and water; to develop cleaner-burning fuels and more
effective pharmaceuticals; and to test for alcohol in blood, drugs in urine or
explosive residues in crime scene evidence.
LIQUID CHROMATOGRAPHY
Liquid chromatographs are used to separate molecules of a liquid mixture to
determine the quantity and identity of the molecules present. These instruments
are modular in construction and can be configured to form instruments that
perform specific analyses. Each module is about the size of a home videocassette
recorder.
According to Strategic Directions International, the high-performance liquid
chromatography market is larger than any other analytical instrument market,
exceeding $1.8 billion in 1998 with an estimated annual growth rate of 8% over
the next five years. High-performance liquid chromatographs are an essential
tool in the pharmaceutical industry for basic research, drug development and
clinical trials of new drugs. Other industry groups that utilize
high-performance liquid chromatographs include chemical development and
manufacturing, industry and government testing laboratories for safety, quality
and nutritional content of foods and beverages, athlete monitoring for illegal
drug use and environmental monitoring.
MASS SPECTROSCOPY
Mass spectroscopy systems break molecules into their component parts and
analyze these parts. Our mass spectrometers range in size from that of a small
microwave oven to that of a medium-sized refrigerator.
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ITEM 1. BUSINESS (CONTINUED)
We are a leader in the worldwide mass spectroscopy market, which Strategic
Directions International estimates to have been about $518 million in 1998. Mass
spectroscopy systems are typically used in combination with gas or liquid
chromatographs in the pharmaceutical, semiconductor and environmental
industries. The combined instruments are used to study and refine the chemical
structure of new drugs, to determine the presence of impurities in
semiconductors as they are manufactured, or to research the presence of heavy
metals and other unwanted substances in soil and water.
BIO-INSTRUMENTATION
We have developed relationships with Affymetrix, Rosetta Inpharmatics,
Oxford Gene Technology and Caliper Technologies to address opportunities in the
pharmaceutical and biopharmaceutical industries
In December 1999 we announced the launch of a DNA microarray program for the
life sciences that incorporates technologies from both Rosetta and OGT, among
others. This program is intended to enable researchers to access gene expression
information faster and more cost effectively. This knowledge helps researchers
to determine the impact of a drug on a cell or group of cells, and to
consequently determine the drug's efficacy or toxicity. Knowledge of gene
expression profiles can also help researchers to identify new drug targets. In
addition, our GeneArray system allows a researcher to use GeneChip arrays
designed by Affymetrix to enable high-speed detection and characterization of
large amounts of genetic information. These results are useful in identifying
defects in genes that cause disease.
In addition to our gene analysis system, we are also developing faster ways
to conduct chemical analysis for the pharmaceutical and biopharmaceutical
industries. The new Agilent 2100 bioanalyzer instrument systems that we have
developed through our relationship with Caliper Technologies integrate a large
number of chemical-analysis procedures onto a single chip. We develop and
distribute instrumentation that extracts and analyzes data from the microchip
developed by Caliper Technologies, using advanced microfluidics technology.
Using miniature, integrated chemical-processing systems etched into glass,
silicon, quartz or plastic, the microchip allows the steps customarily performed
in conventional instruments to be done using minute quantities of costly liquids
in a fraction of the usual time. We believe these new systems will speed up
chemical analysis significantly while reducing costs.
CONSUMABLES
We also offer consumable products, including chromatograph columns,
analytical reagents and other accessories and supplies used by our customers
during the analytical experimentation process. Columns are metal or glass tubes
containing various substances that are inserted into chromatographs to assist in
the process of separating compounds into their constituent parts. Reagents are
chemicals used to perform analysis on the resulting constituent parts. Other
accessories and supplies we provide range from rubber rings to syringes to
safety glasses.
Our offerings include both generic consumables, where we seek to distinguish
our products on price, selection and customer loyalty, and proprietary
consumables developed by us, where we offer exclusive technology, performance
and functionality.
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ITEM 1. BUSINESS (CONTINUED)
CUSTOMERS
We sell our products and services to a broad array of customers in each of
the markets we serve. Our top customers by market segment are the following:
<TABLE>
<CAPTION>
HYDROCARBON PROCESSING ENVIRONMENTAL PHARMACEUTICAL
---------------------- ------------- --------------
<S> <C> <C>
Bayer AG Government of Korea AstraZeneca PLC
Boehringer Ingelheim International GmbH State of California Glaxo Wellcome PLC
E. I. du Pont de Nemours and Company State of Georgia Johnson & Johnson
Elf Group State of Texas Merck & Co., Inc.
Exxon Corporation United States Army Novartis AG
Hoechst AG U.S. Federal Pfizer, Inc.
Government
Monsanto Company Pharmacia &
Upjohn, Inc.
Rhone-Poulenc S.A. Roche Holdings, Inc.
Royal Dutch Shell SmithKline Beecham
Clinical
Laboratories, Inc.
</TABLE>
SALES, MARKETING AND SUPPORT
Our sales and support delivery channels are aligned by our key markets to
maximize market coverage and to optimize selling and support delivery
efficiency. We market our products to our customers through our direct sales
force, value-added resellers, manufacturers' representatives and distributors.
We use our direct sales force to market our products to all our
pharmaceutical and biopharmaceutical accounts, large and medium size hydrocarbon
processing customers and all environmental accounts. We supplement our direct
sales force with sales agents to provide broader geographic coverage and to
cover smaller accounts. We also have an active value-added reseller program to
augment our ability to provide more complete solutions to our customers. We sell
our consumable products through distributors, telesales and electronic commerce.
We offer a wide range of startup, operational, educational and compliance
support services for our chemical analysis measurement and data handling
systems. We deliver our support services to customers in a variety of ways,
including on-site assistance, return to us for repair or exchange, telephone
support and self diagnostic services provided over the Internet. Our support
services limit the amount of time an instrument is out of service, provide
increased system productivity, extend the instrument life and offer fast problem
resolution. We also offer special industry-focused service bundles that are
designed to meet the specific needs of hydrocarbon processing, environmental,
pharmaceutical and biopharmaceutical customers to keep instruments fully
operational and compliant with the respective industry requirements.
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ITEM 1. BUSINESS (CONTINUED)
COMPETITION
The markets for analytical instruments in which we compete are characterized
by evolving industry standards and intense competition. Our principal
competitors include EG&G, Inc., PE Biosystems, Shimadzu Corporation, Thermo
Instrument Systems, Inc. and Waters.
Our ability to compete effectively depends upon a number of factors
including our ability to:
- produce high-quality and reliable products;
- introduce new technologies and products in a timely manner;
- provide favorable overall cost of ownership; and
- provide product and service solutions that complement and support our main
product lines.
We believe our analytical instrument solutions compete favorably with
respect to each of the above listed factors.
MANUFACTURING
Our manufacturing strategy supports our diverse product range and
customer-centric focus. We assemble highly configurable products to individual
customer orders and make standard products to stock. We employ advanced
manufacturing techniques and supply chain management systems to reduce costs and
manufacturing cycle times. We selectively use partners to provide manufacturing
capabilities outside our core competencies, such as the manufacture of printed
circuit assemblies and the delivery of shipment logistics. We have manufacturing
facilities in California and Delaware in the United States, China, Germany and
Japan.
GOVERNMENT REGULATION
The chemical analysis product and related consumables marketed by our
chemical analysis business are subject to regulation in the United States by the
Environmental Protection Agency under the Toxic Substances Control Act, and by
government agencies in other countries under similar laws. The Toxic Substances
Control Act regulations govern, among other things, the testing, manufacture,
processing and distribution of chemicals, the testing of regulated chemicals for
their effects on human health and safety and import and export of chemicals. The
act prohibits persons from manufacturing any chemical in the United States that
has not been reviewed by Environmental Protection Agency for its effect on
health and safety, and placed on an Environmental Protection Agency inventory of
chemical substances. If we fail to comply with the notification, record-keeping
and other requirements in the manufacture or distribution of our products, the
Environmental Protection Agency can obtain an order from a court that would
prohibit the further distribution or marketing of a product that contains a
chemical that is out of compliance or can impose fines and penalties.
RESEARCH AND DEVELOPMENT
The process of developing new high-technology products and solutions is
inherently complex and uncertain. It requires, among other things, innovation
and accurate anticipation of customers' changing needs and emerging
technological trends. Without the introduction of new products, services and
enhancements, our products and services are likely to become technologically
obsolete over time, in which case revenue would be materially and adversely
affected. There can be no assurance that such new products and services, if and
when introduced, will achieve market acceptance. After the products
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ITEM 1. BUSINESS (CONTINUED)
and services are developed, we must quickly manufacture and deliver such
products and services in sufficient volumes at acceptable costs to meet demand.
Research and development expenditures were $997 million in fiscal year 1999,
$948 million in fiscal year 1998 and $880 million in fiscal year 1997. We
anticipate that we will continue to have significant research and development
expenditures in order to maintain our competitive position with a continuing
flow of innovative, high-quality products and services.
INTELLECTUAL PROPERTY
Our general policy has been to seek patent and other intellectual property
protection for those inventions and improvements likely to be incorporated into
our products and services or to give us a competitive advantage. While we
believe that our patents and applications have value, in general no single
patent is in itself essential. In addition, we cannot assure you that any of our
proprietary rights will not be challenged, invalidated or circumvented, or that
our rights will provide significant competitive advantages.
INTERNATIONAL OPERATIONS
Our net revenue originating outside the United States, as a percentage of
our total net revenue, was approximately 55.2% in fiscal year 1999, 54.4% in
fiscal year 1998 and 56.3% in fiscal year 1997, the majority of which was from
customers other than foreign governments. Approximately 20% of our international
revenue in the last three years was derived from Japan.
Most of our sales in international markets are made by foreign sales
subsidiaries. In countries with low sales volumes, sales are made through
various representatives and distributors. However, we make certain sales in
international markets directly from the United States.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country's or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements and natural disasters. We are also exposed to
foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales and assets and liabilities denominated in currencies other
than the United States dollar and may also become subject to interest rate risk
inherent in any debt, investment and finance receivable portfolios we incur.
We believe that our international diversification provides stability to our
worldwide operations and reduces the impact on us of adverse economic changes in
any single country. Financial information about our international operations is
contained in Note 15, "Segment Information," of the consolidated financial
statements included in Item 8 of this report.
MATERIALS
Our manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. We believe that the materials and supplies necessary for
our manufacturing operations are presently available in the quantities required.
We purchase materials, supplies and product subassemblies from a substantial
number of vendors. For many of our products, we have existing alternate sources
of supply, or such sources are readily available. In certain instances, however,
we enter into non-cancelable purchase commitments with, or make advance payments
to, certain suppliers to ensure supply. Portions of our manufacturing operations
are dependent on the ability of suppliers to deliver quality components,
subassemblies and completed products in time to meet critical manufacturing and
distribution
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ITEM 1. BUSINESS (CONTINUED)
schedules. The failure of suppliers to deliver these components, subassemblies
and products in a timely manner may adversely affect our operating results until
alternate sources could be developed. In addition, we periodically experience
constrained supply of certain component parts in some product lines as a result
of strong demand in the industry for those parts. Such constraints, if
persistent, may adversely affect our operating results. However, we believe that
alternate suppliers or design solutions could be arranged within a reasonable
time so that material long-term adverse impacts would be minimized.
ENVIRONMENTAL
Our research and development and manufacturing operations involve the use of
hazardous substances and are regulated under international, federal, state and
local laws governing health and safety and the environment. We apply strict
standards for protection of the environment and worker health and safety to
sites inside and outside the United States, even if not subject to regulation
imposed by foreign governments. We believe that our properties and operations at
our facilities comply in all material respects with applicable environmental
laws; however, the risk of environmental liabilities cannot be completely
eliminated and there can be no assurance that the application of environmental
and health and safety laws to our company may not require our company to incur
substantial expenditures. We are also regulated under a number of international,
federal, state and local laws regarding recycling, product packaging and product
content requirements. These laws are gradually becoming more stringent and may
in the future cause us to incur substantial expenditures.
Some of our operations are located on properties that are known to have
subsurface contamination that is undergoing remediation by Hewlett-Packard.
Hewlett-Packard has agreed to retain the liability for the contamination,
perform the required remediation and indemnify us with respect to claims arising
out of the contamination. While we expect that Hewlett-Packard will meet its
remediation and indemnification obligations in this regard, there can be no
guarantee that it will do so. Under our agreement with Hewlett-Packard,
Hewlett-Packard will have access to these properties to perform the remediation.
Hewlett-Packard has agreed to minimize interference with on-site operations at
those properties during the course of the remediation, but there can be no
guarantee that our operations will not be interrupted or that we will not be
required to incur unexpected expenses associated with the remediation.
In addition, some of these properties are undergoing remediation by
Hewlett-Packard under an order of an agency of the state in which the property
is located. Although Hewlett-Packard has agreed to indemnify us with respect to
that subsurface contamination, it is possible that one or more of the
governmental agencies will require us to be named on any of these orders. The
naming of our company will not affect Hewlett-Packard's obligation to indemnify
us with regard to these matters.
We are liable and are indemnifying Hewlett-Packard for any contamination
found at all facilities being transferred to us excluding the properties
undergoing remediation. In addition, we are indemnifying Hewlett-Packard for any
liability associated with past non-compliance with environmental laws regulating
ongoing operations at all properties to be transferred by Hewlett-Packard to us,
as well as at sold or discontinued businesses that related to our businesses.
While we are not aware of any material liabilities associated with such
indemnified matters, there is no guarantee that such contamination or regulatory
non-compliance does not exist, and will not expose us to material liability in
the future.
We are being indemnified by Hewlett-Packard with respect to all
environmental liabilities for which Hewlett-Packard accrued a reserve and we are
not aware of any material and probable environmental liabilities being assumed
by us which are not subject to the indemnity.
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ITEM 1. BUSINESS (CONTINUED)
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers, and their ages, titles and biographies
as of December 31, 1999, appear below. All officers are elected for one-year
terms.
EXECUTIVE OFFICERS:
EDWARD W. BARNHOLT, 56, has served as our President and Chief Executive
Officer and as a director since May 1999. Before being named our Chief Executive
Officer, Mr. Barnholt served as General Manager of Hewlett-Packard's Measurement
Organization from 1998 to 1999, which included Hewlett-Packard's Electronic
Instrument Group, the Microwave and Communications Group, the Communications
Test Solutions Group, the Automated Test Group, the Chemical Analysis Group, the
Components Group and the Medical Products Group. From 1990 to 1998, he served as
General Manager of Hewlett-Packard's Test and Measurement Organization. He was
elected a Senior Vice President of Hewlett-Packard in 1993 and an Executive Vice
President in 1996. He is a director of KLA-Tencor Corporation.
BYRON ANDERSON, 56, has served as our Senior Vice President, Electronic
Products and Solutions since August 1999. Prior to assuming that position,
Mr. Anderson served as a vice president of Hewlett-Packard since November 1995
and General Manager of the Microwave and Communications Group since
September 1997. In January 1991, Mr. Anderson was named General Manager of
Hewlett-Packard's Communications Test Business Unit, which become the Test
Solutions Group in 1994.
WILLIAM R. HAHN, 48, has served as our Senior Vice President, Strategic
Programs since August 1999. Since October 1997, Mr. Hahn served as the Sector
Controller of Hewlett-Packard's Measurement Organization. From September 1995 to
October 1997, he served as Operations Manager for Hewlett-Packard's interactive
broadband program. From May 1993 to September 1995, Mr. Hahn served as Vice
President of Finance and Manufacturing and Chief Financial Officer at Aspect
Communications.
JEAN M. HALLORAN, 47, has served as our Senior Vice President, Human
Resources since August 1999. Since 1997, Ms. Halloran served as Director of
Corporate Education and Development for Hewlett-Packard. Prior to assuming this
position, from 1993 to 1997, Ms. Halloran acted as personnel manager for
Hewlett-Packard's Measurement Systems Organization. From 1990 to 1993, she acted
as group Personnel Manager for Hewlett-Packard's Medical Products Group.
Ms. Halloran joined Hewlett-Packard in 1980 in the Medical Products Group, where
she held a variety of positions in human resources, manufacturing and strategic
planning.
RICHARD D. KNISS, 59, has served as our Senior Vice President, Chemical
Analysis Group since August 1999. Prior to assuming that position, since
May 1995, Mr. Kniss was General Manager of Hewlett-Packard's Chemical Analysis
Group and was named a Vice President of Hewlett-Packard in June 1997. He served
as General Manager of the Optical Communication Division from 1984 to 1995.
D. CRAIG NORDLUND, 50, was named our Senior Vice President, General Counsel
and Secretary in May 1999. Mr. Nordlund has served as Associate General Counsel
and Secretary of Hewlett-Packard since 1987. He has served as an officer or
director for a variety of Hewlett-Packard's subsidiaries and affiliates. He
currently serves as Chairman of the National American Society of Corporate
Secretaries organization.
STEPHEN H. RUSCKOWSKI, 42, has served as our Senior Vice President,
Healthcare Solutions since October 1999. Prior to assuming that position,
Mr. Rusckowski held a number of positions at Hewlett-Packard. He served as
General Manager of the Cardiology Products Division from 1997 to 1999,
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ITEM 1. BUSINESS (CONTINUED)
General Manager of the Healthcare Information Management Division from 1996 to
1997 and General Manager of the Clinical Information Systems Division from 1994
to 1995. Mr. Rusckowski joined Hewlett-Packard in 1984.
THOMAS A. SAPONAS, 50, has served as our Senior Vice President and Chief
Technology Officer since August 1999. Prior to being named Chief Technology
Officer, from June 1998 to April 1999, Mr. Saponas was Vice President and
General Manager of Hewlett-Packard's Electronic Instruments Group. Mr. Saponas
has held a number of positions since the time he joined Hewlett-Packard.
Mr. Saponas served as General Manager of the Lake Stevens Division from
August 1997 to June 1998 and General Manager of the Colorado Springs Division
from August 1989 to August 1997. In 1986, he was a White House Fellow in
Washington, D.C.
JOHN E. SCRUGGS, 58, has served as our Senior Vice President, Automated Test
since August 1999. Prior to assuming that position, since January 1992,
Mr. Scruggs was General Manager of the Automated Test Group of Hewlett-Packard
within the Test and Measurement Organization. He was elected a Vice President of
Hewlett-Packard in November 1996.
WILLIAM P. SULLIVAN, 50, has served as our Senior Vice President,
Semiconductor Products since August 1999. Prior to assuming that position, since
February 1998, he served as Vice President and General Manager of
Hewlett-Packard's Components Group. In 1997, Mr. Sullivan became General Manager
of the Communication Semiconductor Solutions Division. From 1995 to 1997, he was
General Manager of the Optical Communication Division. From April 1991 to
February 1995, Mr. Sullivan served as Research and Development Manager for the
Optical Communication Division.
ROBERT R. WALKER, 49, has served as our Senior Vice President and Chief
Financial Officer since May 1999. During 1997 and 1998, Mr. Walker served as
Vice President and General Manager of Hewlett-Packard's Professional Services
Business Unit. From 1993 to 1997, he led Hewlett-Packard's information systems
function. He became Chief Information Officer in 1995 and served in that
position until 1997. Mr. Walker was named a Vice President of Hewlett-Packard in
1995. From 1975 to 1993, Mr. Walker held a variety of financial positions in
Hewlett-Packard.
THOMAS WHITE, 42, has served as our Senior Vice President, Communications
Solutions since August 1999. From 1997 to August 1999, Mr. White served as Vice
President and General Manager of the Communications Solutions Group of
Hewlett-Packard. From 1996 to 1997, he served as General Manager of the Computer
Peripherals Bristol Division and, in 1994, he served as General Manager for the
Telecommunications Systems Division, South Queensferry, Scotland.
DOROTHY D. HAYES, 49, has served as our Vice President and Controller since
August 1999. Prior to assuming that position, since October 1989, Ms. Hayes held
a number of positions at Hewlett-Packard. She served as Transition General
Manager from March to July 1999, Director of Internal Audit from July 1997 to
June 1999, Measurement Systems Organization Controller from February 1994 to
July 1997, Components Group Controller from September 1993 to February 1996 and
Corporate Financial Reporting Manager from October 1989 to September 1993.
ITEM 2. PROPERTIES.
Our principal executive offices are located in Palo Alto, California. We
plan to move our headquarters to another location in Palo Alto, California in
May 2000. We operate Agilent Technologies Laboratories in Palo Alto, California,
and 35 manufacturing sites, including ten primary sites. Of the primary sites,
five are located in the United States, and an additional five sites are located
in Germany, Japan, Malaysia, Scotland and Singapore. Information about each of
our businesses appears below:
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ITEM 2. PROPERTIES. (CONTINUED)
TEST AND MEASUREMENT. Our test and measurement business has manufacturing
and research and development facilities in Australia, Canada, China, Germany,
Japan, Korea, Malaysia, Singapore, the United Kingdom and the United States, and
regional sales and customer support centers in Hong Kong, the Netherlands and
the United States.
SEMICONDUCTOR PRODUCTS. Our semiconductor products business operates eight
manufacturing sites located in California and Colorado in the United States,
Malaysia, Singapore and the United Kingdom. The majority of our silicon and
gallium arsenide wafer fabrication is done in the United States and Singapore,
while our assembly and test operations are in Malaysia, Singapore and the United
Kingdom. We have regional sales and customer support centers in Germany, Hong
Kong, Japan, Singapore, the United Kingdom and the United States.
HEALTHCARE SOLUTIONS. Our healthcare solutions has four manufacturing
locations sited in Massachusetts and Washington in the United States, China and
Germany. We have marketing centers in Hong Kong, Japan, Germany and
Massachusetts, and sales offices in 33 countries.
CHEMICAL ANALYSIS. Our chemical analysis business has manufacturing
facilities in California and Delaware in the United States, China, Germany and
Japan. We have marketing centers in Germany, the United States and Singapore.
ITEM 3. LEGAL PROCEEDINGS.
The Environmental Protection Agency initiated a civil enforcement proceeding
against Hewlett-Packard in 1998 that alleged four violations of the Toxic
Substances Control Act, one of which was directed at operations of our chemical
analysis business. The proceeding was settled in November 1999 by a consent
agreement providing for a ten month post-enforcement audit by a third party of
certain operations for compliance with the Toxic Substances Control Act. The
audit will include facilities operated by our chemical analysis business. The
consent agreement also obligates Hewlett-Packard and Agilent to pay a combined
total of up to $600,000 in civil penalties depending on audit findings.
We are involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no matters pending that we expect to be
material in relation to our business, consolidated financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1999, we submitted several matters to
Hewlett-Packard, our sole stockholder at the time, for stockholder approval. On
September 17, 1999, Hewlett-Packard approved our 1999 Stock Plan, an employee
incentive plan authorizing grants of incentive stock options to our employees,
including officer and employee directors, and grants of nonstatutory stock
options, stock appreciation rights, stock awards and cash awards to our
employees, directors and consultants. On October 22, 1999, Hewlett-Packard
approved our 1999 Non-Employee Director Stock Plan, a plan providing for stock
option grants to our non-employee directors. On November 10, 1999, Hewlett-
Packard approved our Employee Stock Purchase Plan, a plan intended to encourage
employee stock ownership by permitting participants to purchase our common stock
through payroll deductions. On each occasion, Hewlett-Packard voted, through
giving its written consent, all of its shares of our common stock in favor of
the relevant plan. Because Hewlett-Packard was our sole stockholder at the time,
there were no votes cast against or withheld, and there were no abstentions or
broker non-votes as to each matter.
44
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Our common stock is listed on the New York Stock Exchange with the ticker
symbol 'A.' Trading in our common stock began on November 18, 1999; as a result,
there is no historical stock price data for our 1999 fiscal year. As of
December 31, 1999, there were 325 stockholders of record of common stock. On
November 23, 1999, we paid Hewlett-Packard a dividend of the net proceeds of our
initial public offering of $2.1 billion. We currently intend to retain any
future earnings to fund the development and growth of our business and, going
forward, we do not anticipate paying any cash dividends in the foreseeable
future.
In connection with incorporation and organization, on July 30, 1999, we
issued 10,000,000 shares of common stock to Hewlett-Packard for an aggregate of
$10,000,000. We believe this issuance of shares was exempt from registration
under Section 4(2) of the Securities Act as a transaction not involving any
public offering. On October 21, 1999, our board of directors declared and paid a
stock dividend of 37 shares for each on share outstanding as of October 1, 1999.
This stock dividend increased Hewlett-Packard's ownership to 380,000,000 shares.
We completed our initial public offering in November 1999. We registered and
sold shares of our common stock, par value $0.01 per share. The registration
statement under the Securities Act (Reg. No. 333-85249) for the offering became
effective on November 18, 1999. The offering began on November 18, 1999 and was
completed on November 23, 1999. Morgan Stanley Dean Witter and Goldman Sachs &
Co. were the lead manager and co-leader manager, respectively, for the offering.
We registered 72,000,000 shares at a total proposed offering price of
$2,016,000,000. We sold 72,000,000 shares at a total public offering price of
$2,160,000,000. There were no selling stockholders. Underwriting discounts and
commissions were $91,800,000. Our reasonable estimate of the total other
expenses relating to the offering is $7,500,000, broken down as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 478,911
NASD filing fee............................................. 30,500
NYSE original listing fee................................... 504,600
Blue Sky qualification fees and expenses.................... 5,000
Legal fees and expenses..................................... 2,500,000
Accounting fees and expenses................................ 3,000,000
Transfer agent and registrar fees........................... 25,000
Printing and engraving expenses............................. 500,000
Miscellaneous expenses...................................... 455,989
----------
Total....................................................... $7,500,000
==========
</TABLE>
Hewlett-Packard generally agreed to pay these costs and expenses. The net
offering proceeds to us were approximately $2.1 billion. On November 23, 1999,
we paid all of those net offering proceeds as a dividend to Hewlett-Packard, an
affiliate and holder of more than 10% of our common stock.
45
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ----------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS DATA(1,3):
Net revenue...................................... $8,331 $7,952 $7,785 $7,379 $6,595
Earnings from operations......................... $ 741 $ 442 $ 870 $ 875 $ 841
Net earnings..................................... $ 512 $ 257 $ 543 $ 542 $ 499
Basic and diluted net earnings per share......... $ 1.35 $ .68 $ 1.43 $ 1.43 $ 1.31
Average shares used in computing basic and
diluted net earnings per share................. 380 380 380 380 380
Unaudited pro forma net earnings per share(2):
Basic.......................................... $ 1.13
Diluted........................................ $ 1.11
Average shares used in computing unaudited pro
forma net earnings per share(2):
Basic.......................................... 452
Diluted........................................ 460
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------------- -------- --------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data(1):
Working capital.................................. $1,857 $1,476 $1,408 $1,449 $1,388
Total assets..................................... $5,444 $4,987 $5,006 $4,720 $4,454
Stockholder's equity............................. $3,382 $3,022 $3,110 $2,998 $2,829
</TABLE>
(1) The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
(2) See Note 2, "Summary of Significant Accounting Policies--Unaudited pro forma
net earnings per share," of the consolidated financial statements included
in this report for an explanation of the calculation of unaudited pro forma
net earnings per share.
(3) Statement of earnings data for the year ended October 31, 1998 include
pre-tax restructuring charges of approximately $163 million.
ITEM 7. 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 ANNUAL REPORT
ON FORM 10-K. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES", "BELIEVES",
"PLANS", "EXPECTS", "FUTURE", "INTENDS", "MAY", "WILL", "SHOULD", "ESTIMATES",
"PREDICTS", "POTENTIAL", "CONTINUE" AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE
RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN FACTORS,
INCLUDING THOSE DISCUSSED BELOW IN "FACTORS THAT MAY AFFECT FUTURE RESULTS" AND
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.
46
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
OVERVIEW
SEPARATION FROM HEWLETT-PACKARD
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company, subsequently named Agilent Technologies, that comprised
Hewlett-Packard's test and measurement, semiconductor products, healthcare
solutions and chemical analysis businesses, related portions of Hewlett-Packard
Laboratories, and associated infrastructure. After the completion of our initial
public offering in November 1999, Hewlett-Packard owns approximately 84.1% of
our outstanding common stock. Hewlett-Packard has also announced its intention
to distribute to its stockholders all of its remaining interest in us by the
middle of calendar year 2000 (the distribution). Hewlett-Packard and we have
entered into various agreements related to certain interim and ongoing
relationships between the two companies. For a brief description of these
agreements, see Note 11, 'Transactions with Hewlett-Packard,' of the
consolidated financial statements included in this report.
AGILENT TECHNOLOGIES' BUSINESSES
We were incorporated in Delaware in May 1999 as a wholly owned subsidiary of
Hewlett-Packard. Our businesses historically have been operated as internal
units of Hewlett-Packard. In November 1999, Hewlett-Packard transferred to us a
majority of the assets and liabilities relating to our businesses and also
provided us with cash funding of approximately $1.1 billion. Hewlett-Packard
retained some of our assets and liabilities including our accounts receivable
and accounts payable, accrued payroll and related items and taxes payable,
except deferred taxes, and transferred to us some of the assets and liabilities
related to its business, including some of the accounts receivable, accounts
payable and other liabilities of Hewlett-Packard Japan. In addition,
Hewlett-Packard transferred to us approximately $.5 billion to fund our
acquisition of Yokogawa's 25% minority equity ownership of Hewlett-Packard
Japan. The effects of these transactions were an increase to cash of
approximately $1.6 billion, a decrease to net assets, excluding cash, of
approximately $.8 billion and an increase to paid-in capital of approximately
$.8 billion. In December 1999, Hewlett-Packard provided us with final cash
funding of approximately $.2 billion based on our and Hewlett-Packard's balance
sheets as of October 31, 1999.
We have entered into agreements with Hewlett-Packard under which
Hewlett-Packard will provide services to us during a transition period beginning
November 1, 1999 (the separation). The agreements relate primarily to building
services, information technology services and accounting and finance services.
Under these agreements, we will reimburse Hewlett-Packard for its cost of the
service plus 5%. The transition period varies depending on the agreement but is
generally less than two years. Some of the agreements, including those for
building services and information technology services, may be extended beyond
the initial transition period. If these agreements are extended, we will
reimburse Hewlett-Packard at its cost plus 10% for information technology
services and most other services and at negotiated market rates for building
services. The agreements do not necessarily reflect the costs of obtaining the
services from unrelated third parties or of our providing the applicable
services ourselves. However, we believe that purchasing these services from
Hewlett-Packard provides us with an efficient means of obtaining these services
during the transition period. In addition, we will provide some transition
services to Hewlett-Packard, for which we will be reimbursed at our cost plus
5%.
We must also negotiate new agreements on or before the distribution with
various third parties as a separate, stand-alone entity. There can be no
assurance that the terms we will be able to negotiate for these agreements will
be as favorable as those we enjoyed as part of Hewlett-Packard. In addition, as
part of Hewlett-Packard, we benefited from various economies of scale including
shared global
47
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
administrative functions, facilities and volume purchase discounts. We expect
that our costs and expenses will increase significantly as a result of the loss
of these economies of scale.
Hewlett-Packard has been and is expected to continue to be a significant
customer. In 1999, sales to Hewlett-Packard represented approximately 10% of our
total net revenue and approximately 37% of the net revenue of our semiconductor
products business.
BASIS OF PRESENTATION
Our consolidated financial statements have been carved out from the
consolidated financial statements of Hewlett-Packard using the historical
results of operations and historical bases of the assets and liabilities of the
Hewlett-Packard businesses that our company comprises. The consolidated
financial statements also include allocations to us of certain Hewlett-Packard
corporate assets, including pension assets; liabilities, including profit
sharing, pension and non-qualified deferred compensation obligations; and
expenses, including centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other Hewlett-Packard corporate and infrastructure costs.
The expense allocations have been determined on bases that Hewlett-Packard and
we considered to be a reasonable reflection of the utilization of the services
provided to us or the benefit received by us. The expense allocation methods
included relative sales, headcount, square footage, transaction processing
costs, adjusted operating expenses and others.
The financial information presented in this Annual Report on Form 10-K is
not indicative of our financial position, results of operations or cash flows in
the future nor is it necessarily indicative of what our financial position,
results of operations or cash flows would have been had we been a separate,
stand-alone entity for the periods presented. The financial information
presented in this Annual Report on Form 10-K does not reflect the many
significant changes that will occur in our funding and operations as a result of
our becoming a stand-alone entity, our initial public offering and the
distribution.
1998 RESTRUCTURING
During 1998, we committed to transfer the production of eight-inch
semiconductor wafers to a third party contractor. A major factor in our decision
to transfer this production was our desire to avoid significant and escalating
future investments required to remain state-of-the-art in semiconductor
manufacturing. We also undertook employee reductions through voluntary severance
programs related to this transfer as well as consolidation of some operations
and general employee reductions in each of our four business segments.
Approximately 1,650 employees accepted the voluntary severance incentive
packages by the October 31, 1998 deadline. Of these employees, approximately 80%
were in manufacturing or other positions included in cost of products and
services. We recorded pre-tax charges of approximately $163 million related to
these restructuring actions. Of this amount, $138 million was included in cost
of products, $7 million was included in research and development expense and
$18 million was included in selling, general and administrative expense in the
1998 consolidated statement of earnings. The restructuring costs included
approximately $78 million related to employee severance under the voluntary
severance incentive plans, of which we had paid approximately $69 million as of
October 31, 1999. The restructuring costs also included $85 million related to
non-cash asset impairments primarily for equipment. Of the equipment impairment
charge, $39 million was attributable to equipment abandoned at the time of the
charge, which was written down to its net realizable value. An additional $46
million was attributable to equipment that remained in service for a transition
period to facilitate the transfer to the third party contractor. This equipment
was written
48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
down to its estimated fair value, including depreciation expense for the value
of using the equipment during the transition period and the estimated amount to
be realized upon the sale of the used equipment at the end of the transition
period.
In 1999, benefits from the restructuring, which totaled approximately $80
million, were reflected primarily in cost of products and, to a lesser extent,
in operating expenses. We believe that future benefits from the restructuring
will be more than offset by additional costs that we will incur as we begin to
operate as a separate, stand-alone entity.
CYCLICAL BUSINESS
Many of the industries and markets into which we sell our products and
services are cyclical, causing a corresponding impact on our financial results.
Shifts in the semiconductor market, electronics industry and computer industry,
as well as rapidly shifting global economic conditions, have had significant
impacts on our businesses. Additionally, as a capital equipment provider, our
revenue is driven by the capital expenditure budgets and spending patterns of
our customers who often delay or accelerate purchases in reaction to variations
in their business. We expect some portions of our businesses to remain cyclical
in the future. Given that a high proportion of our costs are fixed, variability
in revenue as a result of these business cycles could disproportionately affect
our quarterly and annual results.
ECONOMIC CONDITIONS IN ASIA
Beginning in the second half of 1998 and continuing into the first half of
1999, our revenue and operating results declined as a result of the downturn in
Asian economies, particularly Korea and Japan. Many of our major customers,
particularly those in the semiconductor and electronics industries, delayed or
canceled purchases of our products. This had a significant impact on us,
particularly our test and measurement business. These conditions began to
improve in the second half of 1999 and, accordingly, our revenue and operating
results have improved.
IMPACT OF FOREIGN CURRENCIES
We sell our products in many countries and a substantial portion of our
sales and a portion of our costs and expenses are denominated in foreign
currencies, especially in the Japanese yen and the German mark. In 1999 compared
to 1998, the U.S. dollar weakened against the Japanese yen, which had a
favorable impact on our net revenue growth and an adverse effect on our
operating expense growth; the U.S. dollar strengthened against the German mark,
which had an adverse effect on our net revenue growth and a favorable impact on
our operating expense growth. In 1998 compared to 1997, the U.S. dollar
strengthened against the Japanese yen and the German mark. Our currency
exposures historically have been hedged as part of Hewlett-Packard's global
hedging program, which is designed to minimize exposure to foreign currency
fluctuations. We implemented a similar hedging program upon our separation from
Hewlett-Packard.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as assets or liabilities in our balance sheet and measurement of those
instruments at fair value. The statement is effective for fiscal years beginning
after June 15, 2000. We will adopt the
49
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
standard no later than the first quarter of fiscal year 2001 and we are in the
process of determining the impact that adoption will have on our consolidated
financial statements.
RESULTS OF OPERATIONS
Our results of operations for the years ended October 31, 1999, 1998 and
1997 in dollars and as a percentage of total net revenue follow.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------------------------------------
AS A PERCENTAGE OF
DOLLARS TOTAL NET REVENUE
------------- ------------------------------
1999 1998 1997 1999 1998 1997
-------- ------------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Products.................................. $7,025 $6,794 $6,754 84.3 85.4% 86.8%
Services.................................. 1,306 1,158 1,031 15.7 14.6 13.2
------ ------ ------ ----- ----- -----
Total net revenue....................... 8,331 7,952 7,785 100.0 100.0 100.0
------ ------ ------ ----- ----- -----
Costs and expenses:
Cost of products.......................... 3,582 3,807 3,455 43.0 47.9 44.4
Cost of services.......................... 806 705 671 9.7 8.8 8.6
Research and development.................. 997 948 880 12.0 11.9 11.3
Selling, general and administrative....... 2,205 2,050 1,909 26.4 25.8 24.5
------ ------ ------ ----- ----- -----
Total costs and expenses................ 7,590 7,510 6,915 91.1 94.4 88.8
------ ------ ------ ----- ----- -----
Earnings from operations.................... 741 442 870 8.9 5.6 11.2
Other income (expense), net................. 46 (46) (47) .5 (.6) (.6)
------ ------ ------ ----- ----- -----
Earnings before taxes....................... 787 396 823 9.4 5.0 10.6
Provision for taxes......................... 275 139 280 3.3 1.8 3.6
------ ------ ------ ----- ----- -----
Net earnings................................ $ 512 $ 257 $ 543 6.1% 3.2% 7.0%
====== ====== ====== ===== ===== =====
Cost of products as a percentage of products
revenue................................... 51.0% 56.0% 51.2%
Cost of services as a percentage of services
revenue................................... 61.7% 60.9% 65.1%
</TABLE>
NET REVENUE
Our total net revenue increased 4.8% in 1999 from 1998 and 2.1% in 1998 from
1997. The increase in 1999 from 1998 was the result of a number of factors,
including growth in revenue from the communications market, improvement in
economic conditions in Asia and strengthening in the semiconductor industry in
general. The increase in 1998 from 1997 reflects improvements from our
semiconductor products, healthcare solutions and chemical analysis businesses,
substantially offset by decreased revenue in our test and measurement business.
United States revenue increased 3.1% to $3.7 billion in 1999 and 6.6% to
$3.6 billion in 1998. International revenue increased 6.2% to $4.6 billion in
1999 and decreased 1.3% to $4.3 billion in 1998. In the last three quarters of
1998 and the first quarter of 1999, economic conditions in Asia adversely
affected revenue from sales of our products and services to customers in Japan
and Korea. This situation also reduced revenue from other parts of the world. In
addition, the global weakness in the
50
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
semiconductor industry caused our product revenue to decline in 1998 and into
the first half of 1999. These conditions began to improve in the second half of
1999 and, accordingly, our revenue has improved, both within the United States
and internationally. In 1999 compared to 1998, revenue from products increased
3.4% while revenue from services increased 12.8%. Product revenue was
essentially unchanged in 1998 from 1997 and service revenue grew 12.3% as a
result of increases in our installed base, primarily in test and measurement.
Although service revenue has grown faster than product revenue during the past
two years, we do not anticipate that this trend will continue in future periods,
as we expect improving economic conditions and a strengthening semiconductor
industry to result in stronger growth in product revenue.
We anticipate that our net revenue will grow at a significantly higher rate
in 2000 than the 4.8% revenue growth we achieved in 1999. In addition, we expect
revenue levels will normally fluctuate from quarter to quarter with lower levels
of revenue anticipated in the first half of 2000 when compared to the second
half of 1999. We expect revenue growth in the first half of 2000 to be stronger
than revenue growth in the second half of 2000 when compared to the same periods
of 1999. This is due in part to the relatively low revenue level in the first
half of 1999 which was caused by the economic conditions in Asia and the
downturn in the semiconductor industry and the correspondingly higher revenue
levels we achieved in the second half of 1999 when these factors improved.
EARNINGS FROM OPERATIONS
Earnings from operations increased 67.6% in 1999 from 1998 and decreased
49.2% in 1998 from 1997. The increase in 1999 was due to higher net revenue
combined with cost savings of approximately $80 million as a result of the 1998
restructuring. In 1998, slightly higher net revenue as compared to 1997 was
offset by significantly higher costs and expenses, including the charges related
to the 1998 restructuring.
As a percentage of net revenue, cost of products and services decreased 4.0
percentage points in 1999 from 1998 and increased 3.7 percentage points in 1998
from 1997. In 1999, all four of our business segments recorded improvement in
cost of products and services as a percentage of net revenue with semiconductor
products accounting for the most significant improvement due primarily to cost
improvements resulting from the 1998 restructuring. The increase in 1998 was a
result of lower volumes and less profitable product mix in the test and
measurement business and costs associated with the 1998 restructuring.
Operating expenses as a percentage of net revenue increased .7 percentage
points in 1999 from 1998 and 1.9 percentage points in 1998 from 1997. In 1999,
the increase was due to higher expenses, including advertising and product
branding expenses related to our becoming an independent company, partially
offset by higher net revenue. The increase in 1998 reflects higher expenses
partially offset by higher net revenue.
Research and development expenses increased 5.2% in 1999 compared to 1998
and 7.7% in 1998 compared to 1997. The increases reflect ongoing investments in
developing new products and new technologies, primarily in test and measurement
and semiconductor products. Selling, general and administrative expenses
increased 7.6% in 1999 from 1998 and 7.4% in 1998 from 1997. In 1999, expense
reductions resulting from the 1998 restructuring and other cost containment
measures were offset by costs, including advertising and product branding
expenses, related to our becoming a separate, stand-alone entity. The increase
in 1998 reflects the acquisition of Heartstream, as well as increased selling
costs related to revenue growth and increased marketing program costs associated
with our continued introduction of new products and the expansion of our support
capabilities. The growth
51
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
rate in operating expenses, exclusive of the 1998 restructuring costs, decreased
significantly in the second half of 1998 due to our cost reduction programs that
reduced certain variable costs such as travel and discretionary marketing
programs.
Costs related to our operating as a separate, stand-alone entity will
include significant incremental expenditures related to advertising and product
branding that are expected to continue over the next year. In addition, we
expect operating expenses, primarily infrastructure costs, to increase as a
result of our separation from Hewlett-Packard. We anticipate that the combined
incremental advertising, product branding and infrastructure costs will result
in an increase in our operating expenses as a percentage of revenue of at least
1.5 percentage points in 2000 compared to 1999.
OTHER INCOME (EXPENSE), NET
Other income (expense), net, increased $92 million to income of $46 million
in 1999 from expense of $46 million in 1998. Included in 1999 were gains of $54
million related to the divestiture of several portions of our businesses in
1999. Included in 1998 was a charge of $37 million related to the write-down of
an investment in convertible preferred stock of a medical products company to
its fair value because we concluded its impairment was not temporary. This
conclusion was based on the medical products company's continuing poor financial
performance and recent equity transactions by the company with a third party.
PROVISION FOR TAXES
Our effective tax rate was 35.0% in 1999 and 1998 and 34.0% in 1997. The
rate is based on estimates of our earnings before taxes in the various tax
jurisdictions in which we operate throughout the world. While changes in our mix
of earnings before taxes in these tax jurisdictions can cause our effective tax
rate to fluctuate, we currently expect our effective tax rate to remain at 35%
in 2000.
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue................................................. $4,082 $4,100 $4,203
Earnings from operations.................................... 377 348 674
As a percentage of net revenue............................ 9.2% 8.5% 16.0%
</TABLE>
NET REVENUE
Net revenue from our test and measurement business was lower in the first
half of 1999 and grew in the second half of 1999, compared to the same periods
of 1998, and remained essentially unchanged from the full year of 1998. Net
revenue decreased 2.5% in 1998 from 1997. Results in 1998 and the first half of
1999 reflected weak economic conditions in Asia, which represented approximately
31% of test and measurement's total net revenue in 1999 and 1998 compared to
approximately 36% in 1997. A slowdown in the semiconductor industry in mid-1998,
which was partially caused by the economic conditions in Asia, also reduced our
revenue growth. Competitive pressure increased because of these conditions and,
in some cases, we granted higher than normal pricing discounts and allowances in
1998 and the first half of 1999. These revenue trends were partially offset by
increased sales of communications products and products for development and
deployment of higher bandwidth and
52
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
optical networks, particularly in the second half of 1999. In addition, service
revenue increased 12.0% in 1999 from 1998 and 18.6% in 1998 from 1997.
EARNINGS FROM OPERATIONS
Earnings from operations from our test and measurement business increased
8.3% in 1999 from 1998 and decreased 48.4% in 1998 from 1997. In 1999, the
increase resulted from lower cost of products and services partially offset by
higher operating expenses. The decrease in 1998 from 1997 reflects a combination
of lower net revenue and higher costs and expenses, including the costs of the
1998 restructuring.
Cost of products and services as a percentage of net revenue decreased 2.0
percentage points in 1999 from 1998 and increased 3.3 percentage points in 1998
from 1997. The decrease in 1999 was due to cost savings resulting from the 1998
restructuring. This decrease was partially offset by the effect of lower volumes
of products sold, primarily wireless communication test equipment and automated
test equipment, and higher services revenue and the associated higher cost of
this revenue. The increase in 1998 was substantially attributable to lower
volumes and less profitable product mix, primarily in wireless communications
products and automated test equipment. Cost of products in 1998 included
restructuring charges for employee severance and higher excess inventory
write-offs across all product lines, as a result of the weak economic conditions
in Asia and the timing of new product introductions. These charges increased
cost of products and services by 1.1 percentage points.
Operating expenses as a percentage of net revenue increased 1.2 percentage
points in 1999 from 1998 and 4.3 percentage points in 1998 from 1997. The
increase in 1999 from 1998 was due to slightly lower net revenue combined with
higher levels of expense. The increase in 1998 from 1997 was due to a
combination of lower net revenue and higher expenses. In 1999, continued savings
from cost reduction programs initiated in the second half of 1998 resulted in
significant decreases in some components of both research and development and
selling, general and administrative expenses. However, these savings were fully
offset by costs incurred as part of becoming a separate, stand-alone entity,
particularly costs related to advertising and product branding.
Research and development expense was unchanged in 1999 compared to 1998 and
increased 10.0% in 1998 from 1997. The increase in 1998 from 1997 reflects our
ongoing investment in new products. Selling, general and administrative expense
increased 3.4% in 1999 from 1998 and increased 7.4% in 1998 from 1997. In 1998,
our cost reduction programs slowed overall expense growth and significantly
decreased some variable operating costs. However, this was partially offset by
1998 restructuring charges for employee severance costs.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue................................................. $1,722 $1,574 $1,479
Earnings (loss) from operations............................. 133 (106) 57
As a percentage of net revenue............................ 7.7% (6.7)% 3.9%
</TABLE>
NET REVENUE
Net revenue from our semiconductor products business increased 9.4% in 1999
from 1998 and 6.4% in 1998 from 1997. The increase in 1999 was achieved despite
the sale of the power amplifier
53
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
business in late 1998. If net revenue in 1998 were adjusted to exclude revenue
of the power amplifier business, net revenue would have increased by 15.2% in
1999 over 1998. Net revenue growth in 1999 primarily reflects increased
shipments of fiber optic products, application specific integrated circuits
(ASICs), motion control products, wireless semiconductor products, and
high-speed networking products. In 1998, shipments of fiber optics and
high-speed networking products grew strongly. In addition, shipments in 1998 of
integrated circuits increased significantly over 1997 due to increased sales to
Hewlett-Packard. In the second half of 1998, revenue growth slowed due to
customer anticipation of the divestiture of the power amplifier business and the
decline in the wireless communications semiconductor business in Asia. As a
percentage of net revenue for the semiconductor products business, revenue from
sales to Hewlett-Packard, consisting primarily of ASICs and motion control
products, was 37.0% in 1999, 34.5% in 1998 and 34.2% in 1997.
We expect projected annual net revenue from sales of precision
architecture-reduced instruction set computing (PA-RISC) microprocessors to
Hewlett-Packard to decline by approximately $46 million from 1999 to 2000 as
Hewlett-Packard purchases these products from an alternate supplier. We
currently do not expect to incur any incremental costs related to winding down
the microprocessor business. Although we expect that the loss of the revenue
associated with the microprocessor business will have a negative impact on our
net revenue growth rates in the short term, we believe this negative impact will
not have a material effect on our consolidated results of operations.
In November 1999, we expanded our existing joint venture relationship with
Royal Philips Electronics, N.V and transferred a portion of our light-emitting
diode (LED) business into the joint venture. LEDs are used for various lighting
and display purposes. Since we do not have a majority ownership interest in the
joint venture, the revenue, costs and expenses of the business transferred to
the joint venture will no longer be consolidated in our results. Instead, we
will record our portion of the joint venture's net earnings or loss in other
income (expense), net.
EARNINGS FROM OPERATIONS
Earnings from operations from our semiconductor products business increased
225.5% in 1999 from 1998 and decreased 286.0% in 1998 from 1997. The increase in
1999 resulted from higher revenue and cost savings from the 1998 restructuring.
The decrease in 1998 from 1997 occurred despite growth in net revenue and was
primarily due to costs incurred for the 1998 restructuring.
Cost of products as a percentage of net revenue decreased 13.5 percentage
points in 1999 from 1998 and increased 9.7 percentage points in 1998 from 1997.
A substantial portion of the improvement in 1999 was the result of the 1998
restructuring. Decreases in cost of products also resulted from increased
volumes in the ASIC business and a more profitable product mix, specifically
higher volumes of fiber optic communications products, motion control devices
and microprocessors. These improvements were partially offset by a $51 million
charge in the third quarter of 1999 related to the write-down of a building that
was under construction for the intended purpose of housing manufacturing
operations for eight-inch semiconductor wafers. We committed to outsource
eight-inch semiconductor wafer production to a third-party contractor in
October 1998. The building shell was completed at the time construction was
stopped. We sought a semiconductor manufacturing partner to utilize the building
for its initial intended use. During 1999, we exhausted these efforts without
success. Accordingly, we concluded that the highest fair value for this building
is based on selling it for use as an office or general use facility. Therefore,
we have written down the carrying value of the facility to the estimated amount
to be realized upon the sale of the building shell. The increase in cost of
products as a percentage of net revenue in 1998 includes $116 million of
restructuring charges. Without
54
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
these charges, cost of products as a percentage of net revenue compared to 1997
would have increased primarily as a result of lower ASIC volumes in the second
half of 1998.
Operating expenses as a percentage of net revenue decreased 1.0 percentage
point in 1999 from 1998 and increased 1.0 percentage point in 1998 from 1997.
The decrease in 1999 was primarily the result of higher revenue. The increase in
1998 from 1997 was due to higher expenses, including amounts related to the 1998
restructuring, partially offset by the growth in net revenue.
Research and development expense increased 10.5% in 1999 from 1998 and 13.7%
in 1998 from 1997. The increase in 1999 reflects increased investments in the
fast growing fiber optics, high-speed networking, and image and position sensor
businesses. Research and development expense increased in 1998 primarily as a
result of our efforts to develop high-speed networking products and advanced
technology ASICs. Selling, general and administrative expenses were unchanged in
1999 from 1998. Selling, general and administrative expense increased 8.5% in
1998 from 1997, 1.5 percentage points of which reflects the restructuring
charge. The remainder of the increase was primarily related to higher sales and
marketing expenses.
We expect future research and development efforts to focus on the areas of
wired/wireless communications and imaging. Although we have had significant
research and development expenses related to semiconductor process technologies
in recent years, we expect to conduct future efforts through joint venture
partnering arrangements and through third-party agreements, thereby reducing our
research and development expenses in this area.
HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue................................................. $1,501 $1,340 $1,208
Earnings from operations.................................... 125 62 30
As a percentage of revenue................................ 8.3% 4.6% 2.5%
</TABLE>
NET REVENUE
Net revenue from our healthcare solutions business increased 12.0% in 1999
from 1998 and 10.9% in 1998 from 1997. The increase in 1999 was primarily
related to strong sales in the second half of 1999. Growth in net revenue from
cardiology products and patient monitoring products was moderated by a decline
in net revenue from ultrasound imaging products. In the first half of 1999,
internal production constraints resulting from our transition to a new
enterprise resource planning system in November 1998 at our Andover,
Massachusetts facility contributed to the decline in revenue from the ultrasound
imaging products and also affected the growth rate in patient monitoring
revenue. The implementation of the new enterprise resource planning system is
now complete, and we do not anticipate further problems. In addition, service
revenue grew 11.7% in 1999 from 1998. The increase in 1998 from 1997 was driven
by strong sales of new patient monitoring systems and cardiology ultrasound
imaging products, which were introduced in the second half of 1997. The net
revenue growth in 1998 from 1997 was achieved despite the negative impact from
international revenue resulting from economic weakness in certain markets in
Asia as well as lower healthcare system spending in parts of Europe.
55
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
EARNINGS FROM OPERATIONS
Earnings from operations from our healthcare solutions business increased
101.6% in 1999 from 1998 and 106.7% in 1998 from 1997. The increases in both
periods were primarily due to higher net revenue, partially offset by higher
costs and expenses.
Cost of products and services as a percentage of net revenue decreased by
1.9 percentage points in 1999 from 1998 and .9 percentage points in 1998 from
1997. The decrease in 1999 was primarily due to lower overhead, lower product
installation costs and a more profitable product mix. The decrease in 1998 from
1997 was primarily a result of higher volumes, as product transition issues and
manufacturing quality control issues encountered in 1997 were resolved. The
effect of higher volumes was partially offset by increased spending related to
the implementation of a new worldwide quality system and the development of a
new enterprise resource planning system.
Operating expenses as a percentage of net revenue decreased 1.8 percentage
points in 1999 from 1998 and 1.2 percentage points in 1998 from 1997. In 1999,
the decrease was due to higher net revenue partially offset by higher expenses.
The decrease in 1998 from 1997 resulted primarily from higher revenue, partially
offset by increased expenses from the inclusion of Heartstream's operations.
Without the acquisition of Heartstream, operating expenses as a percentage of
net revenue would have decreased 2.9 percentage points in 1998 from 1997.
Research and development expense increased 7.0% in 1999 from 1998 and
decreased 3.0% in 1998 from 1997. The 1999 increase was largely a result of our
efforts to develop new automatic external defibrillator products. In 1998,
research and development expense exclusive of Heartstream decreased
significantly due to the lower spending levels required to complete customer
commitments after our divestiture of the healthcare information management
business. This decrease was partially offset by investments in the development
of Heartstream's automatic external defibrillators. Selling, general and
administrative expense increased 7.3% in 1999 from 1998 and 11.1% in 1998 from
1997. Costs related to our becoming a separate, stand-alone entity, including
advertising and product branding expenses, accounted for approximately half of
the increase in 1999 from 1998. Most of the remainder of the increase in 1999
was due to amortization of goodwill associated with the Heartstream acquisition.
Approximately half of the increase in 1998 from 1997 was due to the acquisition
of Heartstream, which resulted in increased headcount in the sales organization
and higher goodwill amortization. The remainder was due to increased selling and
marketing expenses.
CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue............................................ $1,026 $938 $895
Earnings from operations............................... 112 75 77
As a percentage of revenue........................... 10.9% 8.0% 8.6%
</TABLE>
NET REVENUE
Net revenue from our chemical analysis business increased 9.4% in 1999 from
1998 and 4.8% in 1998 from 1997. In 1999, the net revenue increase was generated
by growth across all product lines and included a 15.2% increase in service
revenue. Demand within the pharmaceutical industry was especially strong,
leading to increased sales of our liquid chromatography products. In addition,
sales to our customers in Asia in the second half of 1999 increased as economic
conditions in the region
56
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
continue to improve. The increase in 1998 resulted from strong growth in mass
spectroscopy, liquid chromatography and consumables, such as columns and
supplies. Growth in 1998 was achieved despite decreased revenue from products
and services sold to customers in Asia as a whole and Japan in particular as a
result of the economic conditions in that region. In 1998, pricing pressures
increased as some competitors cut prices worldwide.
EARNINGS FROM OPERATIONS
Earnings from operations from our chemical analysis business increased 49.3%
in 1999 from 1998 and decreased 2.6% in 1998 from 1997. The increase in 1999 was
due primarily to higher net revenue, partially offset by higher costs and
expenses. The decrease in 1998 from 1997 reflects higher operating expenses
partially offset by higher revenue.
Cost of products and services as a percentage of net revenue decreased by
3.6 percentage points in 1999 from 1998 and .7 percentage points in 1998 from
1997. In 1999, the improvement was driven by higher volumes, greater
manufacturing efficiencies in our mass spectrometer and liquid chromatography
product lines and lower warranty costs as a result of improved product
reliability. In addition, greater efficiency within the services business
accounted for .8 percentage points of the improvement. The improvement in 1998
was due to revenue growth and higher volumes. In addition, cost structure
improvements were achieved as we moved some production processes to contract
manufacturers.
Operating expenses as a percentage of net revenue increased .6 percentage
points in 1999 from 1998 and 1.3 percentage points in 1998 from 1997. The
increases in both years resulted from greater growth in expenses than in net
revenue.
Research and development expense increased 13.9% in 1999 from 1998 and 9.7%
in 1998 from 1997. The increase in 1999 reflects increased investment in our
microfluidics program. Microfluidics is the manipulation of minute quantities of
fluids. In 1998, research and development investments increased primarily due to
joint development efforts in the bio-instrumentation and microfluidics areas.
Selling, general and administrative expense increased 10.6% in 1999 from 1998
and 8.2% in 1998 from 1997. The increase in both years was primarily due to
higher marketing and field selling costs. The increase in 1999 also reflects the
costs related to our operating as a separate, stand-alone entity, particularly
advertising and product branding expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Hewlett-Packard has managed cash on a centralized basis. Cash
receipts associated with our businesses have been transferred to Hewlett-Packard
on a daily basis and Hewlett-Packard has provided funds to cover our
disbursements. Accordingly, we have reported no cash or cash equivalents at
October 31, 1999 and 1998.
In November and December 1999, Hewlett-Packard made cash payments to us
totaling $1.3 billion to fund our working capital and other needs for the first
few months of our operations as a separate, stand-alone entity. In addition,
Hewlett-Packard transferred approximately $.5 billion to fund our acquisition of
Yokogawa's 25% minority equity ownership of Hewlett-Packard Japan. In accordance
with our separation agreement with Hewlett-Packard, Hewlett-Packard retained
some of our assets and liabilities and Hewlett-Packard transferred to us some of
the assets and liabilities related to its business. We expect that our cash
balance will initially decline until we begin to collect newly generated
accounts receivable. The net proceeds of our initial public offering of $2.1
billion were received in November 1999 and distributed to Hewlett-Packard as a
dividend.
57
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
We generated cash from operations of $461 million in 1999 compared to $751
million in 1998 and $965 million in 1997. In all periods, cash from operations
is primarily a result of net earnings adjusted for non-cash charges for
depreciation and amortization. In addition, lower cash from operations in 1999
resulted from a significant increase in accounts receivable due to particularly
strong shipments in October 1999.
Capital expenditures for property, plant and equipment constituted
substantially all of our cash used in investing activities in 1999, 1998 and
1997. The amounts expended were partially offset by proceeds from divestitures
and the disposal of excess, unused or retired assets. The high level of capital
expenditures in 1997 reflected our investment in our semiconductor products
business integrated circuit fabrication capability, which was subsequently
replaced with a joint venture arrangement. In addition, we used cash in each
period to acquire several small companies. We expect to continue to acquire
complementary products or businesses in the future.
On July 6, 1999, Hewlett-Packard entered into an agreement with Yokogawa
Electric Corporation (Yokogawa) to acquire Yokogawa's 25% minority equity
ownership of Hewlett-Packard Japan for approximately $521 million. Under the
terms of the agreement, Hewlett-Packard will acquire Yokogawa's shares through a
series of purchase transactions beginning in January 2000. Under the terms of
the Master Separation and Distribution Agreement, we assumed Hewlett-Packard's
obligations under the agreement with Yokogawa. In the initial step, which will
occur on or before January 31, 2000, we will purchase 10.4% of Hewlett-Packard
Japan's shares from Yokogawa. In the second step, which will occur on or before
April 30, 2000, we will purchase 10.4% of Hewlett-Packard Japan's shares from
Yokogawa. We will purchase the remaining 4.2% of Hewlett-Packard Japan's shares
owned by Yokogawa prior to March 31, 2003. In November 1999, Hewlett-Packard
provided the funding for this transaction.
An independent valuation has been performed, which we used to determine the
portion of the transaction's purchase price attributable to our businesses and
the remaining Hewlett-Packard business and to allocate the purchase price to
identifiable assets and liabilities. Of the total purchase price, $375 million
is attributable to us, with the remainder attributable to Hewlett-Packard's
business; $302 million of the purchase price will be recorded as goodwill, which
will be amortized over 10 years.
Our commitments consist primarily of future minimum lease payments under
noncancelable lease agreements, our obligations under the transaction with
Yokogawa described above and cash capital contributions required under the terms
of a joint venture agreement. In addition, we have entered into agreements with
Hewlett-Packard under which Hewlett-Packard will provide services to us during a
transition period after the separation.
Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
uncertainties related to global economies. We believe that the cash funding we
received from Hewlett-Packard together with cash generated from operations and
our unused lines of credit, which total $500 million, will be sufficient to
satisfy our working capital, capital expenditure and research and development
requirements for the foreseeable future. However, we may require or choose to
obtain additional debt or equity financing in the future. We cannot assure that
additional financing, if needed, will be available on favorable terms.
58
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
FACTORS THAT MAY AFFECT FUTURE RESULTS
IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER, OUR
PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING RESULTS WILL
SUFFER.
We sell our products in several industries that are characterized by rapid
technological changes, frequent new product and service introductions and
evolving industry standards. Without the timely introduction of new products,
services and enhancements, our products and services will likely become
technologically obsolete over time, in which case our revenue and operating
results would suffer. The success of our new product and service offerings will
depend on several factors, including our ability to:
- properly identify customer needs;
- price our products competitively;
- innovate and develop new technologies and applications;
- successfully commercialize new technologies in a timely manner;
- manufacture and deliver our products in sufficient volumes on time; and
- differentiate our offerings from our competitors' offerings.
Many of our products are used by our customers to develop, test and
manufacture their new products. We therefore must anticipate industry trends and
develop products in advance of the commercialization of our customers' products.
Development of new products generally requires a substantial investment before
we can determine the commercial viability of these innovations. If we fail to
adequately predict our customers' needs and future activities, we may invest
heavily in research and development of products and services that do not lead to
significant revenue. For example, the cellular phone industry, which is served
by our test and measurement and semiconductor products businesses, currently has
several competing communications standards. We may suffer competitive harm if we
dedicate resources to developing products and technologies to support a standard
that does not achieve broad market acceptance. Our other businesses will
encounter similar challenges. In our healthcare business, new technologies that
we develop may not be quickly accepted because of industry-specific factors such
as the need for regulatory clearance, entrenched patterns of clinical practice,
uncertainty over third- party reimbursement and clinicians' fears of malpractice
suits. We would suffer competitive harm if we dedicate a significant amount of
resources to the development of products and technologies that do not achieve
broad market acceptance.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, PARTICULARLY IN KOREA AND JAPAN, COULD ADVERSELY AFFECT OUR
SALES.
Since we sell our products worldwide, our businesses are subject to risks
associated with doing business internationally. Our net revenue originating
outside the United States, as a percentage of our total net revenue, was 55.2%
in 1999, 54.4% in 1998 and 56.3% in 1997. We anticipate that revenue from
international operations will continue to represent a substantial portion of our
total revenue. In addition, many of our manufacturing facilities and suppliers
are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
59
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- differing protection of intellectual property; and
- unexpected changes in regulatory requirements.
We do a substantial portion of our businesses in Korea and Japan, which have
been subject to increased economic instability in recent years. Our businesses
declined in 1998 when Korea and Japan experienced economic difficulties. The
recurrence of weakness in these economies or weakness in other international
economies could have a significant negative effect on our future operating
results.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Given the nature of the markets in which we participate, we cannot reliably
predict future revenue and profitability, and unexpected changes may cause us to
adjust our operations. A high proportion of our costs are fixed, due in part to
our significant sales, research and development and manufacturing costs. Thus,
small declines in revenue could disproportionately affect our operating results
in a quarter. For example, when our revenue declined in 1998 as a result of the
financial crisis in Asia, it caused significant negative fluctuations in our
operating results. Other factors that could affect our quarterly operating
results include:
- demand for and market acceptance of our products;
- competitive pressures resulting in lower selling prices;
- adverse changes in the level of economic activity in the United States and
other major regions in which we do business;
- adverse changes in industries, such as semiconductors and electronics, on
which we are particularly dependent;
- changes in the relative portion of our revenue represented by our various
products and customers;
- unanticipated delays or problems in the introduction of new products;
- our competitors' announcements of new products, services or technological
innovations;
- increased costs of raw materials or supplies;
- changes in the timing of product orders; and
- our inability to forecast revenue in a given quarter from large system
sales.
60
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
THE CURRENT TECHNOLOGY LABOR MARKET IS VERY COMPETITIVE, AND OUR BUSINESSES
WILL SUFFER IF WE ARE NOT ABLE TO HIRE AND RETAIN SUFFICIENT PERSONNEL.
Our future success depends partly on the continued service of our key
research, engineering, sales, marketing, manufacturing, executive and
administrative personnel. If we fail to retain and hire a sufficient number of
these personnel, we will not be able to maintain and expand our businesses.
Competition for qualified personnel in the technology area is intense, and we
operate in several geographic locations where labor markets are particularly
competitive, including the Silicon Valley region of Northern California where
our headquarters and central research and development laboratories are located.
Although we believe we offer competitive salaries and benefits, certain of our
businesses have had to increase spending in order to retain personnel. We also
believe we have benefited from Hewlett-Packard's name and reputation as an
employer in the past. To the extent we do not obtain similar popular
recognition, our ability to attract and retain personnel could be harmed. In
addition, some employees of Hewlett-Packard who worked in our businesses in the
past may have chosen, or may choose, to remain with Hewlett- Packard in other
positions. Until 30 days prior to Hewlett-Packard's distribution of our stock,
our employees are generally eligible to apply for and move to positions at
Hewlett-Packard without losing their Hewlett-Packard tenure.
OUR OPERATING RESULTS COULD BE HARMED IF THE INDUSTRIES INTO WHICH WE SELL
OUR PRODUCTS ARE IN DOWNWARD CYCLES.
Many of the industries and markets into which we sell our products are
cyclical. For example, in 1998 the operating results of our test and measurement
and semiconductor products businesses were harmed by downturns in the
semiconductor market. From time to time, the electronics industry has also
experienced significant downturns, often in connection with, or in anticipation
of, maturing product cycles and declines in general economic conditions. In
addition, the computer industry is subject to seasonal and cyclical fluctuations
in demand for its products. These industry downturns have been characterized by
diminished product demand, excess manufacturing capacity and subsequent
accelerated erosion of average selling prices. In addition, the healthcare
industry has experienced a significant increase in cost pressures resulting from
hospital consolidation and the trend by insurance companies to reduce payments
to healthcare providers. Any significant downturn in our customers' markets or
in general economic conditions would likely result in a reduction in demand for
our products and services and could harm our businesses.
AS A SEPARATE COMPANY FROM HEWLETT-PACKARD, WE MAY EXPERIENCE INCREASED
COSTS RESULTING FROM DECREASED PURCHASING POWER WHICH COULD DECREASE OUR
PROFITABILITY.
Prior to our separation from Hewlett-Packard, our businesses were able to
take advantage of Hewlett-Packard's size and purchasing power in procuring
goods, services and technology, such as computer software licenses. As a
separate, stand-alone entity, we may be unable to obtain goods, services and
technology at prices and on terms as favorable as those we obtained prior to the
separation. In addition, our patent cross-license agreement with Hewlett-
Packard gives us the right to sublicense only a portion of Hewlett-Packard's
intellectual property portfolio. As a result, in negotiating patent cross-
license agreements with third parties, we may be unable to obtain agreements on
terms as favorable as we may have been able to obtain if we had access to
Hewlett-Packard's entire intellectual property portfolio.
61
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
OUR SEMICONDUCTOR TECHNOLOGY LICENSING AND SUPPLY ARRANGEMENTS WITH
HEWLETT-PACKARD LIMIT OUR ABILITY TO SELL TO OTHER COMPANIES AND COULD
RESTRICT OUR ABILITY TO EXPAND OUR BUSINESSES.
We do not have a license under Hewlett-Packard's patents, patent
applications and invention disclosures for, with some exceptions, inkjet
products, printer products (including printer supplies, accessories and
components), document scanners and computing products. In addition, our ICBD
Technology Ownership and License Agreement, which generally covers integrated
circuit technology that is used in integrated circuits for Hewlett Packard's
printers, scanners and computers, provides that for a period of three years in
some cases and 10 years in other cases we are prohibited, with some exceptions,
from using this integrated circuit technology for the development and sale of
integrated circuits for use in inkjet products, printer products (including
printer supplies, accessories and components), document scanners and computing
products to third parties other than Hewlett-Packard.
Although we have entered into a supply agreement for the sale to
Hewlett-Packard of these kinds of integrated circuits, the supply agreement does
not require Hewlett-Packard to purchase a minimum amount of product from us. In
the event that Hewlett-Packard reduces its purchase of our integrated circuits,
we would be unable to address this reduction through sales of these kinds of
integrated circuits for these types of products to other customers.
IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER PRODUCTS
DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER, OUR
SEMICONDUCTOR PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.
Historically, some of our businesses have sold products to Hewlett-Packard
and have engaged in product development efforts with divisions of
Hewlett-Packard. In 1999, Hewlett-Packard accounted for 10% of our total net
revenue and 37% of our semiconductor products business' net revenue.
OUR ABILITY TO COMPETE FOR HEWLETT-PACKARD'S BUSINESS MAY SUFFER AS A RESULT
OF OUR SEPARATION DUE TO DECREASED ACCESS TO HEWLETT-PACKARD'S RESEARCH AND
DEVELOPMENT STRATEGY, TECHNOLOGY PLANS, FUTURE PRODUCT FEATURES AND PRODUCT
SUPPLY NEEDS.
In the past, we have benefited from our access to Hewlett-Packard's research
and development strategy, technology plans, future product features and product
supply needs in competing for Hewlett-Packard's business. If our competitors
were to gain better access to Hewlett-Packard as a result of our separation, our
competitors may be able to develop products that better meet the future needs of
Hewlett-Packard, decreasing the competitiveness of our products. In addition, we
have taken advantage of collaborative relationships with some of
Hewlett-Packard's businesses. We may not continue to enjoy all of the benefits
of these collaborative relationships, particularly if our patent cross-license
is not renewed.
WE FACE AGGRESSIVE COMPETITION IN ALL AREAS OF OUR BUSINESSES, AND IF WE DO
NOT COMPETE EFFECTIVELY, OUR BUSINESSES WILL BE HARMED.
We encounter aggressive competition in all areas of our businesses. Our
competitors are numerous, ranging from some of the world's largest corporations,
such as General Electric Company, International Business Machines Corporation,
Lucent Technologies, Inc. and Siemens AG, to many highly specialized firms, such
as Anritsu Corporation, PE Biosystems, Teradyne, Inc. and Waters Corporation, as
well as many smaller technology startups. We may not be able to compete
effectively with all of these competitors. To remain competitive, we will need
to develop new products and periodically enhance our existing products in a
timely manner. We anticipate that we may have to adjust prices of many of our
products to stay competitive, and we will have to manage financial returns
effectively. In addition, new
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
competitors may emerge, and entire product lines may be threatened by new
technologies or market trends which reduce the value of these product lines.
WE MAY FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND REGULATIONS
IN THE MANUFACTURE, PROCESSING AND DISTRIBUTION OF CHEMICALS, AND, IF WE
FAIL TO COMPLY, WE COULD BE SUBJECT TO CIVIL OR CRIMINAL PENALTIES OR BE
PROHIBITED FROM DISTRIBUTING OUR PRODUCTS.
Some of our chemical analysis business' products are used in conjunction
with chemicals whose manufacture, processing and distribution are regulated by
the United States Environmental Protection Agency under the Toxic Substances
Control Act, and by regulatory bodies in other countries with laws similar to
the Toxic Substances Control Act. We must conform the manufacture, processing
and distribution of these chemicals to these laws, and adapt to regulatory
requirements in all countries as these requirements change. If we fail to comply
with these requirements in the manufacture or distribution of our products, then
we could be made to pay civil penalties, face criminal prosecution and, in some
cases, be prohibited from distributing our products in commerce until the
products or component substances are brought into compliance.
IF WE FAIL TO MAINTAIN SATISFACTORY COMPLIANCE WITH THE FOOD AND DRUG
ADMINISTRATION'S REGULATIONS, WE MAY BE FORCED TO RECALL PRODUCTS AND CEASE
THEIR MANUFACTURE AND DISTRIBUTION, AND WE COULD BE SUBJECT TO CIVIL OR
CRIMINAL PENALTIES.
The medical device products produced by our healthcare solutions business
are subject to regulation by the United States Food and Drug Administration
(FDA) and similar international agencies. Their regulations govern a wide
variety of product activities from design and development to labeling,
manufacturing, promotion, sales and distribution. For example, we received a
warning letter from the FDA in 1996 alleging non-compliance with the FDA's
quality system regulations at one of our facilities. The FDA's quality systems
regulation includes elaborate design, testing, control, documentation and other
quality assurance requirements. We had to apply considerable resources to
address the FDA's concerns. We believe we have resolved the issues identified in
the FDA's letter and the FDA has concurred with our assessment, but we cannot
assure you that the FDA will not identify other areas of noncompliance. If we
fail to maintain satisfactory compliance with the FDA's quality system and other
regulations, we may have to recall products and cease their manufacture and
distribution. In addition, we could be subject to fines or criminal prosecution.
In addition, our chemical analysis products are used in the drug design and
production processes to test compliance with the Toxic Substances Control Act,
the Federal Food, Drug and Cosmetic Act and similar regulations. Therefore, we
must continually adapt our chemical analysis products to changing regulations.
COST CONTAINMENT MEASURES IN THE HEALTHCARE INDUSTRY AND THE EFFECT OF ANY
HEALTHCARE REFORM COULD HARM OUR PROFITABILITY.
Our healthcare customers rely on third-party payors, such as government
programs and private health insurance plans, to reimburse some or all of the
cost of the procedures in which our products are used. The continuing efforts of
government, insurance companies and other payors of healthcare costs to contain
or reduce those costs could lead our customers to reduce or eliminate purchases
of our products. Likewise, legislative proposals to reform healthcare or reduce
government programs could result in lower prices for or rejection of our
products. The cost containment measures that healthcare
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
providers are instituting and the effect of any healthcare reform, both in the
United States and internationally, could harm our ability to operate profitably.
ENVIRONMENTAL CONTAMINATION FROM PAST OPERATIONS COULD SUBJECT US TO
UNREIMBURSED COSTS AND COULD HARM ON-SITE OPERATIONS AND THE FUTURE USE AND
VALUE OF THE PROPERTIES INVOLVED.
Some of our properties are undergoing remediation by Hewlett-Packard for
known subsurface contamination. Hewlett-Packard has agreed to retain the
liability for all known subsurface contamination, perform the required
remediation and indemnify us with respect to claims arising out of that
contamination. The determination of the existence and cost of any additional
contamination caused by us could involve costly and time-consuming negotiations
and litigation. In addition, Hewlett-Packard will have access to our properties
to perform remediation. While Hewlett-Packard has agreed to minimize
interference with on-site operations at those properties, remediation activities
and subsurface contamination may require us to incur unreimbursed costs and
could harm on-site operations and the future use and value of the properties. We
cannot assure you that Hewlett-Packard will fulfill its indemnification or
remediation obligations.
We are indemnifying Hewlett-Packard for any liability associated with
contamination from past operations at all other properties to be transferred
from Hewlett-Packard to us other than those properties currently undergoing
remediation by Hewlett-Packard. While we are not aware of any material
liabilities associated with existing subsurface contamination at any of those
properties, subsurface contamination may exist, and we may be exposed to
material liability as a result of the existence of that contamination.
ENVIRONMENTAL CONTAMINATION CAUSED BY ONGOING OPERATIONS COULD SUBJECT US TO
SUBSTANTIAL LIABILITIES IN THE FUTURE.
We will be responsible for any contamination to our properties arising out
of our operations following the separation. Our semiconductor and other
manufacturing processes involve the use of substances regulated under various
international, federal, state and local laws governing the environment. We may
be subject to liabilities for environmental contamination, and these liabilities
may be substantial. Although our policy is to apply strict standards for
environmental protection at our sites inside and outside the United States, even
if not subject to regulations imposed by foreign governments, we may not be
aware of all conditions that could subject us to liability.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND
OUR FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT
CONTRACTS COULD HARM OUR BUSINESSES.
We have agreements relating to the sale of our products to government
entities and as a result we are subject to various statutes and regulations that
apply to companies doing business with the government. The laws governing
government contracts differ from the laws governing private contracts. For
example, many government contracts contain pricing terms and conditions that are
not applicable to private contracts. We are also subject to investigation for
compliance with the terms of government contracts. We have received and are
complying with formal requests for information by the government regarding our
sales of products to some of the government agencies with which we have
contracted. Based on our review to date, we have not found that there are any
violations of the pertinent laws or regulations relating to these contracts.
However, these requests may result in legal proceedings against us or liability.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS OTHER GOVERNMENTAL REGULATIONS,
AND WE MAY INCUR SIGNIFICANT EXPENSES TO COMPLY WITH THESE REGULATIONS AND
DEVELOP OUR PRODUCTS TO BE COMPATIBLE WITH THESE REGULATIONS.
Several of our product lines are subject to other significant international,
federal, state and local, health and safety, packaging, product content and
labor regulations. These regulations are complex, change frequently and have
tended to become more stringent over time. We may be required to incur
significant expenses to comply with these regulations or remedy past violations
of these regulations. Any failure by us to comply with applicable government
regulations could also result in cessation of portions or all of our operations,
impositions of fines and restrictions on our ability to carry on or expand our
operations. In addition, because many of our products are regulated or sold into
regulated industries, we must comply with additional regulations in marketing
our products.
Our products and operations are also often subject to the rules of
industrial standards bodies, like the International Standards Organization, as
well as regulation of other agencies such as the United States Federal
Communications Commission. We also must comply with work safety rules. If we
fail to adequately address any of these regulations, our businesses will be
harmed.
THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND
WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED
FROM SELLING PRODUCTS.
Third parties may claim that we are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights.
While we do not believe that any of our products infringe the valid intellectual
property rights of third parties, we may be unaware of intellectual property
rights of others that may cover some of our technology, products and services.
Moreover, in connection with future intellectual property infringement claims,
we will only have the benefit of asserting counterclaims based on
Hewlett-Packard's intellectual property portfolio in limited circumstances, and
we will only be able to offer licenses to Hewlett- Packard's intellectual
property in order to resolve claims in limited circumstances.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming, and divert our management and key personnel from our
business operations. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. However, we may not be able to obtain royalty or
license agreements on terms acceptable to us, or at all. We also may be subject
to significant damages or injunctions against development and sale of certain of
our products.
We often rely on licenses of intellectual property useful for our
businesses. We cannot assure you that these licenses will be available in the
future on favorable terms or at all. In addition, our position with respect to
the negotiation of licenses may change as a result of our separation from
Hewlett-Packard.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks and trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our proprietary rights. If we fail to successfully enforce our intellectual
property rights, our competitive position could suffer, which could harm our
operating results.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these patent
applications or trademark registrations. In addition, our patents may not
provide us a significant competitive advantage.
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and may
lose competitive position in the market before we do so. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture market share.
IF OUR FACTORIES OR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE TO
EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.
Several of our facilities could be subject to a catastrophic loss caused by
earthquake due to their location. We have significant facilities in areas with
above average seismic activity, such as our production facilities, headquarters
and Agilent Technologies Laboratories in California and our production
facilities in Washington and Japan. If any of these facilities were to
experience a catastrophic loss, it could disrupt our operations, delay
production, shipments and revenue, and result in large expenses to repair or
replace the facility. Hewlett-Packard does not carry catastrophic insurance
policies which cover potential losses caused by earthquakes. After the
distribution, we do not expect to obtain insurance to cover potential losses
resulting from earthquakes.
OUR NEW NAME IS NOT YET RECOGNIZED AS A BRAND IN THE MARKETPLACE, AND AS A
RESULT OUR PRODUCT SALES COULD SUFFER.
The loss of the "Hewlett-Packard" brand name may hinder our ability to
establish new relationships. In addition, our current customers, suppliers and
partners may react negatively to the separation. In connection with our
separation from Hewlett-Packard, we will change the brand name and most of the
trademarks and trade names under which we conduct our businesses. This
transition to our new name will occur rapidly in the case of some products and
over specified periods of time in the case of other products. We believe that
sales of our products have benefited from the use of the 'Hewlett-Packard' brand
name. In addition, although we believe we have all necessary rights to use the
new brand name, our rights to use it may be challenged by others.
WE CURRENTLY USE HEWLETT-PACKARD'S INFORMATION SYSTEMS, AND WE MUST DEVELOP
OUR OWN INFORMATION SYSTEMS COST-EFFECTIVELY.
We currently use Hewlett-Packard's systems to support our operations,
including systems to manage inventory, order processing, human resources,
shipping and accounting. We have an agreement with Hewlett-Packard for
Hewlett-Packard to continue to provide information services to us for up to the
next two years. During this time period, while we are developing our own
systems, we will be dependent on Hewlett-Packard for the provision of these
information technology services that are critical to running our businesses.
Many of the systems we currently use are proprietary to Hewlett-Packard and are
very complex. These systems have been modified, and are in the process of being
further modified, to enable Hewlett-Packard to separately track items related to
our businesses. These modifications, however, may result in unexpected system
failures or the loss or corruption of data.
We are in the process of creating our own information systems to eventually
replace Hewlett-Packard's systems. We may not be successful in implementing
these systems and transitioning data from Hewlett-Packard's systems to ours. We
are currently in the process of implementing new enterprise
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
resource planning software applications to manage some of our information
systems. Our chemical analysis and healthcare solutions businesses have each
migrated to new enterprise resource planning software, and each experienced
disruptions during the transition process that negatively affected their
operating results for the period in which the transition occurred.
Any failure or significant downtime in Hewlett-Packard's or our own
information systems could prevent us from taking customer orders, shipping
products or billing customers and could harm our businesses. In addition,
Hewlett-Packard's and our information systems require the services of employees
with extensive knowledge of these information systems and the business
environment in which we operate. In order to successfully implement and operate
our systems, we must be able to attract and retain a significant number of
current Hewlett-Packard employees to our company. If we fail to attract and
retain the highly skilled personnel required to implement, maintain, and operate
our information systems, our businesses could suffer.
THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY HEWLETT-PACKARD MAY NOT BE
SUFFICIENT TO MEET OUR NEEDS, AND WE MAY PAY INCREASED COSTS TO REPLACE
THESE SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD EXPIRE.
Hewlett-Packard has agreed to provide certain transitional services to us,
including services related to:
- information technology systems;
- buildings and facilities; and
- finance and accounting.
These services may not be provided at the same level as when we were part of
Hewlett-Packard, and we may not be able to obtain the same benefits. We will
also lease and sublease certain office and manufacturing facilities from
Hewlett-Packard. These transitional service and leasing arrangements generally
have a term of less than two years following the separation. After the
expiration of these various arrangements, we may not be able to replace the
transitional services or enter into appropriate leases in a timely manner or on
terms and conditions, including cost, as favorable as those we will receive from
Hewlett-Packard.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Hewlett-Packard. As a result, some of these agreements may have terms and
conditions that are less specific than some agreements that are negotiated at
arms-length. The prices charged to us under these agreements may be different
from the prices that we may be required to pay third parties for similar
services or the costs of similar services if we undertake them ourselves.
SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Hewlett-Packard has announced that it intends to distribute the
approximately 380,000,000 shares of common stock it owns to Hewlett-Packard
stockholders by the middle of calendar year 2000. Substantially all of these
shares would be eligible for immediate resale in the public market. We are
unable to predict whether significant amounts of common stock will be sold in
the open market in anticipation of, or following, this distribution. We are also
unable to predict whether a sufficient number of buyers would be in the market
at that time.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
A portion of Hewlett-Packard's common stock is held by index funds tied to
the Standard & Poor's 500 Index, the Dow Jones Industrial Average or other stock
indices. If we are not in these indices at the time of Hewlett-Packard's
distribution of our common stock, these index funds will be required to sell our
stock. Similarly, other institutional stockholders are not allowed by their
charters to hold the stock of companies that do not pay dividends. Since we
currently do not intend to pay dividends, we expect that these stockholders will
sell the shares of our common stock distributed to them. Any sales of
substantial amounts of common stock in the public market, or the perception that
such sales might occur, whether as a result of this distribution or otherwise,
could harm the market price of our common stock.
OUR BUSINESSES MAY SUFFER IF HEWLETT-PACKARD DOES NOT COMPLETE ITS
DISTRIBUTION OF OUR COMMON STOCK.
Hewlett-Packard has announced that it intends to distribute to its
stockholders all of our common stock that it owns by the middle of calendar year
2000, although it is not obligated to do so. This distribution may not occur by
that time or at all. We may not obtain the benefits we expect as a result of
this distribution, including greater strategic focus, increased agility and
speed, greater access to capital markets, better incentives for employees, more
accountable management and the other benefits. In addition, until this
distribution occurs, the risks discussed below relating to Hewlett-Packard's
control of us and the potential business conflicts of interest between
Hewlett-Packard and us will continue to be relevant to our stockholders.
WE WILL BE CONTROLLED BY HEWLETT-PACKARD AS LONG AS IT OWNS A MAJORITY OF
OUR COMMON STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE
OUTCOME OF STOCKHOLDER VOTING DURING SUCH TIME.
After the completion of our initial public offering, Hewlett-Packard owns
approximately 84.1% of our outstanding common stock. As long as Hewlett-Packard
owns a majority of our outstanding common stock, Hewlett-Packard will continue
to be able to elect our entire board of directors and to remove any director,
with or without cause, without calling a special meeting. Investors in our
initial public offering will not be able to affect the outcome of any
stockholder vote prior to the planned distribution of our stock to the
Hewlett-Packard stockholders. As a result, Hewlett-Packard will control all
matters affecting Agilent Technologies, including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- the allocation of business opportunities that may be suitable for us and
Hewlett-Packard;
- any determinations with respect to mergers or other business combinations;
- our acquisition or disposition of assets;
- our financing;
- changes to the agreements providing for our separation from
Hewlett-Packard;
- the payment of dividends on our common stock; and
- determinations with respect to our tax returns.
Hewlett-Packard is not prohibited from selling a controlling interest in us
to a third party.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR
RESULTS AS A SEPARATE COMPANY.
The historical financial information we have included has been carved out
from Hewlett-Packard's consolidated financial statements and does not reflect
what our financial position, results of operations and cash flows would have
been, had we been a separate, stand-alone entity during the periods presented.
Hewlett-Packard did not account for us as, and we were not operated as, a single
stand-alone entity for the periods presented. In addition, the historical
information is not necessarily indicative of what our results of operations,
financial position and cash flows will be in the future. We have not made
adjustments to reflect many significant changes that will occur in our cost
structure, funding and operations as a result of our separation from
Hewlett-Packard, including changes in our employee base, changes in our tax
structure, increased costs associated with reduced economies of scale, increased
marketing expenses related to establishing a new brand identity and increased
costs associated with being a public, stand-alone company.
For additional information, see our historical consolidated financial
statements included in this report and notes thereto.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH HEWLETT-PACKARD
WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR
BUSINESS OPERATIONS.
Conflicts of interest may arise between Hewlett-Packard and us in a number
of areas relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Hewlett-Packard;
- intellectual property matters;
- employee retention and recruiting;
- major business combinations involving us;
- sales or distributions by Hewlett-Packard of all or any portion of its
ownership interest in us;
- the nature, quality and pricing of transitional services Hewlett-Packard
has agreed to provide us; and
- business opportunities that may be attractive to both Hewlett-Packard and
us.
Nothing restricts Hewlett-Packard from competing with us other than some
restrictions on the use of patents licensed to Hewlett-Packard by us.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we have entered into with Hewlett-Packard may
be amended upon agreement between the parties. While we are controlled by
Hewlett-Packard, Hewlett-Packard may be able to require us to agree to
amendments to these agreements that may be less favorable to us than the current
terms of the agreement.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE
OF THEIR OWNERSHIP OF HEWLETT-PACKARD COMMON STOCK.
Many of our directors and executive officers have a substantial amount of
their personal financial portfolios in Hewlett-Packard common stock and options
to purchase Hewlett-Packard common stock. Ownership of Hewlett-Packard common
stock by our directors and officers after our separation from
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
Hewlett- Packard could create, or appear to create, potential conflicts of
interest when directors and officers are faced with decisions that could have
different implications for Hewlett-Packard and us.
YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
JANUARY 2000 UPDATE
Through the first week of the year 2000, our operations around the world are
fully functioning and have not experienced any significant issues associated
with the Year 2000 problem (as described below). Our customer-support operations
continue to communicate to us that our customers have not reported any
consequential Year 2000 incidents. The number of Year 2000-related telephone
calls from customers into our response centers and customer-care centers has
been much lower than anticipated. At our sites worldwide, we have not
experienced any significant Year 2000-related issue that would affect our
ability to manufacture, ship, sell or service our products. While we are
encouraged by the success of our Year 2000 efforts and that of our customers and
partners, we will continue to offer Year 2000 support to customers and monitor
our own operations.
YEAR 2000 READINESS OVERVIEW
The Year 2000 problem arises from the use of a two-digit field to identify
years in computer programs, e.g., 85=1985, and the assumption of a single
century, the 1900s. Any program so created may read, or attempt to read, "00" as
the year 1900. There are two other related issues that could also lead to
incorrect calculations or failure: some systems' programming assigns special
meaning to certain dates and the year 2000 is a leap year. Accordingly, some
computer hardware and software, including programs embedded within machinery and
parts, will need to be modified prior to the year 2000 to remain functional. Our
Year 2000 initiatives are focusing primarily on four areas of potential impact:
internal information technology (IT) systems; internal non-IT systems and
processes, including services and embedded chips (controllers); our products and
services; and the readiness of significant third parties with whom we have
material business relationships. In 1997, Hewlett-Packard established a Year
2000 Program Office to coordinate these programs for all of its businesses
across the enterprise and to provide a single point of contact for information
about Year 2000 programs. The Year 2000 efforts in these areas are led by the
Year 2000 general manager who reports directly to Hewlett-Packard's senior
management, including Agilent Technologies' chief executive officer.
The costs associated with our IT internal readiness actions are a
combination of incremental external spending and use of existing internal
resources. We estimate that over the life of our IT internal readiness effort,
we will have spent a total of approximately $90 million over a multi-year
period. Based on current estimates, we do not believe that the costs associated
with these actions will have a material adverse effect on our results of
operations, cash flows or financial condition. However, the costs of these
actions may vary from quarter to quarter. There can be no assurance, however,
that there will not be a delay in, or increased costs associated with the
implementation of these changes. In addition, failure to achieve Year 2000
readiness for our internal systems and processes could delay our ability to
manufacture and ship products and deliver services, disrupt our customer service
and technical support facilities and interrupt customer access to our online
products and services. Our inability to perform these functions could have an
adverse effect on our future results of operations, cash flows or financial
condition.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INTERNAL IT SYSTEMS
Hewlett-Packard established a dedicated Year 2000 IT Internal Readiness
Program organization to oversee the worldwide Year 2000 internal IT application
and infrastructure readiness activities for all its businesses. The IT Internal
Readiness Program organization has provided monthly progress reports to
Hewlett-Packard's senior management, including Agilent Technologies' chief
executive officer. The IT Internal Readiness Program organization was charged
with raising awareness throughout Hewlett-Packard and Agilent Technologies,
developing tools and methodologies for addressing the Year 2000 issue,
monitoring the development and implementation of business and infrastructure
plans to bring non-compliant applications into compliance on a timely basis and
identifying and helping resolve high-risk issues.
We, in conjunction with the Hewlett-Packard Program, approached our Year
2000 IT Internal Readiness Program in four phases: (1) assessment,
(2) planning, (3) preparation and (4) implementation. The assessment phase
involved taking an inventory of our internal IT applications to prioritize risk,
identifying failure dates, defining a solution strategy, estimating repair costs
and communicating across and within business units regarding the magnitude of
the problem and the need to address Year 2000 issues. The planning phase
consisted of identifying the tasks necessary to ensure readiness, scheduling
remediation plans for applications and infrastructure and determining resource
requirements and allocations. The third phase, preparation, involved readying
the development and testing environments and piloting the remediation process.
Implementation, the last phase, consisted of executing the plans to fix, test
and implement critical applications and associated infrastructure, and putting
in place contingency plans for processes that have a high impact on our
businesses. As of October 31, 1999, the implementation phase was virtually
complete.
INTERNAL NON-IT SYSTEMS AND PROCESSES
Non-IT systems include, but are not limited to, those systems that are not
commonly thought of as IT systems, such as telephone/PBX systems; fax machines;
facilities systems regulating alarms, building access and sprinklers;
manufacturing, assembly and distribution equipment; and other miscellaneous
systems and processes. Year 2000 readiness for these internal non-IT systems is
the responsibility of our worldwide operating units and their respective
functions and operations, e.g., facilities, research and development,
manufacturing, distribution, logistics, sales and customer support.
The Year 2000 Program Office developed a comprehensive process to ensure all
operations and global business units used a structured and standardized
methodology to organize, plan and implement their Year 2000 readiness.
Hewlett-Packard has also established a Year 2000 Council to coordinate its
overall internal readiness and its business continuity planning efforts. The
Council is composed of representatives from the major business units within
Hewlett-Packard and Agilent Technologies and the critical corporate and
infrastructure functions that support them. The Council is chaired by the Year
2000 general manager and has initiated a comprehensive program to ensure timely
and consistent business continuity planning by all of Hewlett-Packard's and
Agilent Technologies' business units. As of October 31, 1999, virtually all Year
2000 testing, internal mitigation and remediation activities, and business
contingency plans have been finished.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
PRODUCT AND CUSTOMER READINESS
Our newly introduced products are Year 2000 compliant. However, some
hardware and software products currently installed at customer sites will
require upgrade or other remediation. Some of these products are used in
critical applications in which the impact of non-performance to these customers
and other parties could be significant. While we believe our customers are
responsible for the Year 2000 readiness of their IT and business environments,
we are taking significant steps to enable customers to achieve their readiness
goals, thereby preserving our customers' satisfaction and our brand reputation.
In 1997, Hewlett-Packard established a dedicated Year 2000 Product Compliance
Program Office to coordinate worldwide Year 2000 product compliance activities
for all its businesses including Agilent Technologies. The Product Compliance
Program Office is charged with developing and overseeing implementation of plans
to identify all standard products delivered since January 1, 1995; to test those
products for compliance; to identify an appropriate path to compliance for
non-compliant standard products; and to communicate the status and necessary
customer action for non-compliant standard products.
Agilent Technologies has an Internet website dedicated to communicating Year
2000 issues to a broad customer base. This website includes a product compliance
search page that allows customers to look up the status of Agilent Technologies'
products they have installed. Most of our key business groups have complementary
Internet websites dedicated to similar communication to their specific
customers. We are taking additional steps to identify affected customers, raise
customer awareness related to non-compliance of some products and help customers
to assess their risks.
All of these efforts are coordinated by the Hewlett-Packard Year 2000
Products and Customers Board of Directors (Board), which is composed of
representatives from all of Hewlett-Packard's and Agilent Technologies' product
and service business units. The Board works in conjunction with the Product
Compliance Program Office to develop and implement Hewlett-Packard's and Agilent
Technologies' Year 2000 policies for products and services. The Year 2000
general manager chairs the Board.
The costs of the readiness program for products are primarily costs of
existing internal resources largely absorbed within existing engineering
spending levels. These costs were incurred primarily in 1998 and earlier years
and were not broken out from other product engineering costs. Past Year 2000
customer satisfaction costs have not been material. Future product readiness
costs, including those for customer satisfaction, are not anticipated to be
material. We are aware of the potential for legal claims against us and other
companies for damages arising from products that are not Year 2000 compliant. We
believe that we have taken sufficient communication and customer satisfaction
steps so that any claims would not result in material liability for us.
It is unknown how year 2000 issues may have affected or could affect
customer spending patterns. As customers focused their attention and capital
budgets on preparing their own businesses for the year 2000, they may have
either delayed or accelerated purchases of new applications, services and
systems from us. Many of our products run custom software or connect to other
systems or peripheral products that may be adversely affected by operating
system or hardware upgrades. Although it is possible that these factors may
increase or change the timing of demand for certain of our products and
services, the increase may be offset by the softening in demand for other
offerings. As a result, these events may affect our future revenue and revenue
patterns.
72
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
MATERIAL THIRD-PARTY RELATIONSHIPS
We developed a Year 2000 process for dealing with our key suppliers,
contract manufacturers, distributors, vendors and partners. The process
generally involved the following steps: (1) initial supplier survey; (2) risk
assessment and contingency planning; (3) follow-up supplier reviews and
escalation, if necessary; and where relevant, (4) testing. We received formal
responses from substantially all of our critical suppliers. Most of them
responded that they expected to address all their significant Year 2000 issues
on a timely basis. We regularly reviewed and monitored the suppliers' Year 2000
readiness plans and performance. Based on our risk assessment, selective on-site
reviews were performed. Risk analysis was completed with our base of suppliers
and contingency plans were developed and tested. All critical surveys and
testing efforts were completed by June 1, 1999. In some cases, to meet Year 2000
readiness, we have replaced suppliers or eliminated suppliers from consideration
for new business. Where efforts to work with critical suppliers have not been
successful, contingency planning generally emphasizes the identification of
substitute and second-source suppliers, or in certain situations includes a
planned increase in the level of inventory held (e.g., in the case of sole
sources). We also contracted with multiple transportation companies to provide
product delivery alternatives and we conducted all Electronic Data Interchange
(EDI) migration and testing with our supply base.
We identified and analyzed the most reasonably likely worst-case scenarios
for third-party relationships affected by Year 2000. These scenarios included
possible infrastructure collapse, the failure of power and water supplies, major
transportation disruptions, unforeseen product shortages due to hoarding of
products and sub-assemblies and failures of communications and financial
systems. Any one of these scenarios could have had a major and material effect
on our ability to build our products and deliver services to our customers.
While we have contingency plans in place to address most issues under our
control, an infrastructure problem outside of our control or some combination of
several of these problems could have resulted in a delay in product shipments
depending on the nature and severity of the problems. We expected that most
utilities and service providers would be able to restore service within days
although more pervasive system problems involving multiple providers could have
lasted two to four weeks or more depending on the complexity of the systems and
the effectiveness of their contingency plans.
Although we have been dedicating substantial resources towards attaining
Year 2000 readiness, we cannot assure you that we can successfully identify and
address all Year 2000 issues. Even though we are confident we have acted in a
timely manner to complete all of our assessments; to identify, develop and
implement remediation plans believed to be adequate; and to develop contingency
plans believed to be adequate, some problems may not be identified or corrected
in time to prevent material adverse consequences to us.
The discussion above regarding estimated completion dates, costs, risks and
other forward-looking statements regarding Year 2000 is based on our best
estimates given information that is currently available and is subject to
change. As we conclude our Year 2000 initiatives during the remainder of this
year, we may discover that actual results will differ materially from these
estimates.
ADOPTION OF THE EURO
Hewlett-Packard established a dedicated task force to address the issues
raised for all of its businesses, including Agilent Technologies, with the
introduction of a European single currency, the Euro. The Euro's initial
implementation was effective as of January 1, 1999 and the transition period
73
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
will continue through January 1, 2002. Beginning January 1, 1999, product prices
in local currencies were converted to Euros as required.
The introduction and use of the Euro has not materially affected our foreign
exchange and hedging activities or our use of derivative instruments. While we
will continue to evaluate the impact of the Euro over time, based on currently
available information, we do not believe that the introduction of the Euro
currency will have a material adverse impact on our consolidated financial
condition, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to foreign currency exchange rate risks inherent in our sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the United States dollar. Historically, our exposure to
exchange rate risks has been managed on an enterprise-wide basis as part of
Hewlett-Packard's risk management strategy. This strategy has utilized
derivative financial instruments, including forwards, swaps and purchased
options, to hedge certain foreign currency exposures, with the intent of
offsetting gains and losses that occur on the underlying exposures with gains
and losses on the derivative contracts hedging them. We do not currently and do
not intend to utilize derivative financial instruments for trading purposes.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates to the hedging contracts and the underlying
exposures described above. As of October 31, 1999, the analysis indicated that
these hypothetical market movements would not have a material effect on our
consolidated financial position, results of operations or cash flows. Prior to
the fourth quarter of 1999, we had no specifically identified hedging contracts
and, accordingly, it was not practicable to perform a similar analysis on only
our exposures. The sensitivity analysis described above was performed by
Hewlett-Packard during the prior year and indicated that a hypothetical 10%
movement in foreign exchange rates would not have a material effect on
Hewlett-Packard's consolidated financial position, results of operations or cash
flows. It is unlikely that the results of such an analysis on our exposures as
of October 31, 1998 would indicate a material impact on our consolidated
financial position, results of operations or cash flows.
As of October 31, 1999, all debt has been retained by Hewlett-Packard.
Therefore, no debt has been directly attributed to us. Accordingly, we have not
been exposed to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements appear in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
74
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding our directors appears under "Election of Directors" on
pages 5-7 of our Notice of Annual Meeting of Stockholders and Proxy Statement,
dated January 13, 2000 (the "Proxy Statement"). Those pages are incorporated by
reference into this report. Information regarding our executive officers appears
in Item I of this report under "Executive Officers of the Registrant."
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information about compliance with Section 16(a) of the Securities Exchange
Act of 1934 appears at page 12 of the Proxy Statement. That page is incorporated
by reference into this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information about compensation of our named executive officers is contained
on pages 13-16 of the Proxy Statement. Information about compensation of our
directors is contained on page 5 of the Proxy Statement. Those pages are
incorporated by reference into this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information about security ownership of certain beneficial owners and
management is contained on pages 11-12 of the Proxy Statement. Those pages are
incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
contained on pages 17-27 of the Proxy Statement. Those pages are incorporated by
reference into this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
(a) The following documents are filed as part of this
report:
1. FINANCIAL STATEMENTS
Page
Statement of Management Responsibility F-1
Report of Independent Accountants F-2
Consolidated Balance Sheet at October 31, 1999 and 1998 F-3
Consolidated Statement of Earnings for the three years
ended October 31, 1999 F-4
Consolidated Statement of Cash Flows for the three years
ended October 31, 1999 F-5
Consolidated Statement of Stockholder's Equity for the
three years ended October 31, 1999 F-6
Notes of Consolidated Financial Statements F-7
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
See Index to Exhibits. The Exhibits listed in the
accompanying Index to Exhibits are filed as part of
this report.
(b) REPORTS ON FORM 8-K
None
</TABLE>
75
<PAGE>
STATEMENT OF MANAGEMENT RESPONSIBILITY
Agilent Technologies' management is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. The accompanying consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and reflect the effects of certain estimates and judgments
made by management.
Management maintains an effective system of internal control that is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management review
and by internal auditors who conduct an extensive program of audits throughout
the company. We select and train qualified people who are provided with and
expected to adhere to Agilent Technologies' standards of business conduct. These
standards, which set forth the highest principles of business ethics and
conduct, are a key element of our control system.
Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Their audits were conducted
in accordance with generally accepted auditing standards, and included a review
of financial controls and tests of accounting records and procedures as they
considered necessary in the circumstances.
The Audit Committee of the Board of Directors, which consists of outside
directors, meets regularly with management, the internal auditors and the
independent accountants to review accounting, reporting, auditing and internal
control matters. The committee has direct and private access to both internal
and external auditors.
Edward W. Barnholt
Robert R. Walker
President and
Senior Vice President and
Chief Executive Officer
Chief Financial Officer
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, cash flows and stockholder's equity present
fairly, in all material respects, the financial position of Agilent
Technologies, Inc. and its subsidiaries at October 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
November 23, 1999
F-2
<PAGE>
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable....................................... 1,635 1,215
Inventory................................................. 1,499 1,485
Other current assets...................................... 404 375
------- -------
Total current assets.................................... 3,538 3,075
Property, plant and equipment, net.......................... 1,387 1,481
Other assets................................................ 519 431
------- -------
Total assets................................................ $ 5,444 $ 4,987
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 510 $ 435
Employee compensation and benefits........................ 550 574
Deferred revenue.......................................... 241 205
Other accrued liabilities................................. 380 385
------- -------
Total current liabilities............................... 1,681 1,599
Other liabilities........................................... 381 366
Commitments and contingencies
Stockholder's equity:
Preferred stock; $.01 par value; 125,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock; $.01 par value; 2,000,000,000 shares
authorized; 380,000,000 shares issued and outstanding in
1999.................................................... 4 --
Additional paid-in capital................................ 3,378 --
Stockholder's net investment.............................. -- 3,022
------- -------
Total stockholder's equity.............................. 3,382 3,022
------- -------
Total liabilities and stockholder's equity.................. $ 5,444 $ 4,987
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Products.................................................. $6,193 $6,098 $6,114
Products to Hewlett-Packard............................... 832 696 640
Services.................................................. 1,306 1,158 1,031
------ ------ ------
Total net revenue....................................... 8,331 7,952 7,785
------ ------ ------
Costs and expenses:
Cost of products.......................................... 3,582 3,807 3,455
Cost of services.......................................... 806 705 671
Research and development.................................. 997 948 880
Selling, general and administrative....................... 2,205 2,050 1,909
------ ------ ------
Total costs and expenses................................ 7,590 7,510 6,915
------ ------ ------
Earnings from operations.................................... 741 442 870
Other income (expense), net................................. 46 (46) (47)
------ ------ ------
Earnings before taxes....................................... 787 396 823
Provision for taxes......................................... 275 139 280
------ ------ ------
Net earnings................................................ $ 512 $ 257 $ 543
====== ====== ======
Basic and diluted net earnings per share.................... $ 1.35 $ .68 $ 1.43
====== ====== ======
Average shares used in computing basic and diluted net
earnings per share........................................ 380 380 380
====== ====== ======
Unaudited pro forma net earnings per share:
Basic..................................................... $ 1.13
======
Diluted................................................... $ 1.11
======
Average shares used in computing unaudited pro forma net
earnings per share:
Basic..................................................... 452
======
Diluted................................................... 460
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 512 $ 257 $ 543
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 475 477 409
Deferred taxes on earnings.............................. (12) (140) (26)
Non-cash restructuring and asset impairment charges..... 51 85 --
Write-down of investments............................... -- 37 --
Gains on divestitures................................... (54) (21) --
Changes in assets and liabilities:
Accounts receivable................................... (431) 18 (20)
Inventory............................................. (40) (67) (57)
Accounts payable...................................... 75 (60) 72
Other current assets and liabilities.................. (52) 130 57
Other, net............................................ (63) 35 (13)
----- ----- -----
Net cash provided by operating activities................... 461 751 965
----- ----- -----
Cash flows from investing activities:
Investments in property, plant and equipment.............. (434) (410) (582)
Dispositions of property, plant and equipment............. 74 78 81
Acquisitions, net of cash acquired........................ (55) (2) (9)
Cash proceeds of divestitures............................. 100 57 --
Other, net................................................ 6 5 (5)
----- ----- -----
Net cash used in investing activities....................... (309) (272) (515)
----- ----- -----
Net cash transfers to Hewlett-Packard Company............... (152) (479) (450)
----- ----- -----
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents at beginning of year.............. -- -- --
----- ----- -----
Cash and cash equivalents at end of year.................... $ -- $ -- $ --
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONAL STOCKHOLDER'S TOTAL
COMMON PAID-IN NET STOCKHOLDER'S
STOCK CAPITAL INVESTMENT EQUITY
-------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, October 31, 1996......................... $ -- $ -- $ 2,998 $2,998
Net earnings...................................... -- -- 543 543
Transfer of net assets from Hewlett-Packard
Company related to an immaterial acquisition.... -- -- 19 19
Net cash transfers to Hewlett-Packard Company..... -- -- (450) (450)
---- ------ ------- ------
Balance, October 31, 1997......................... -- -- 3,110 3,110
Net earnings...................................... -- -- 257 257
Transfer of net assets from Hewlett-Packard
Company related to the Heartstream
acquisition..................................... -- -- 134 134
Net cash transfers to Hewlett-Packard Company..... -- -- (479) (479)
---- ------ ------- ------
Balance, October 31, 1998......................... -- -- 3,022 3,022
Net earnings...................................... -- -- 512 512
Net cash transfers to Hewlett-Packard Company..... -- -- (152) (152)
Transfer to common stock and additional paid-in
capital......................................... 4 3,378 (3,382) --
---- ------ ------- ------
Balance, October 31, 1999......................... $ 4 $3,378 $ -- $3,382
==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION
On March 2, 1999, Hewlett-Packard Company (HP) announced a plan to create a
separate company, subsequently named Agilent Technologies, Inc. (Agilent
Technologies), comprised of HP's test and measurement, semiconductor products,
healthcare solutions and chemical analysis businesses, related portions of
Hewlett-Packard Laboratories and associated infrastructure. HP also announced
its intention to distribute all of the shares of Agilent Technologies' common
stock that HP owns to HP's stockholders by the middle of calendar year 2000 (the
distribution date).
Agilent Technologies was incorporated in Delaware in May 1999 as a
wholly-owned subsidiary of HP. Agilent Technologies authorized 125,000,000
shares of $.01 par value preferred stock and 2,000,000,000 shares of $.01 par
value common stock and issued 10,000,000 shares of common stock to HP. There are
no shares of preferred stock issued and outstanding.
Effective October 21, 1999, Agilent Technologies' Board of Directors
declared a 38-for-one stock split in the form of a stock dividend. As of result
of the stock split, common stock issued and outstanding increased to 380,000,000
shares. Shares outstanding and net earnings per share amounts have been adjusted
for all periods.
On November 18, 1999, Agilent Technologies launched its initial public
offering of 72,000,000 shares of common stock at $30 per share. The net proceeds
of the offering of $2.1 billion have been paid to HP as a dividend on
November 23, 1999. After the completion of the offering, HP owns 84.1% of
Agilent Technologies' outstanding common stock.
HP and Agilent Technologies have entered into a Master Separation and
Distribution Agreement (the separation agreement) under which HP transferred to
Agilent Technologies, in November 1999, a majority of the assets and liabilities
relating to Agilent Technologies' businesses and also provided to Agilent
Technologies cash funding of approximately $1.1 billion. HP retained some of
Agilent Technologies' assets and liabilities including accounts receivable and
accounts payable, accrued payroll and related items and taxes payable, except
deferred taxes, and transferred some of its assets and liabilities, including
some of the accounts receivable, accounts payable and other liabilities of
Hewlett-Packard Japan. In addition, HP transferred to Agilent Technologies
approximately $.5 billion to fund the acquisition of Yokogawa's 25% minority
equity ownership of Hewlett-Packard Japan. The effects of these transactions
were an increase to cash of approximately $1.6 billion, a decrease to net
assets, excluding cash, of approximately $.8 billion and an increase to paid-in
capital of approximately $.8 billion.
The consolidated financial statements include the assets, liabilities,
operating results and cash flows of Agilent Technologies and have been prepared
using HP's historical bases in the assets and liabilities and the historical
results of operations of Agilent Technologies. Changes in stockholder's equity
represent HP's transfer of its net investment in Agilent Technologies, after
giving effect to the net earnings of Agilent Technologies plus net cash
transfers to HP and other transfers from HP. Agilent Technologies began
accumulating retained earnings on November 1, 1999.
The consolidated financial statements include allocations of certain HP
corporate expenses, including centralized research and development, legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other HP corporate and infrastructure costs.
The expense allocations were determined on bases that HP and Agilent
Technologies considered to be a reasonable reflection of the utilization of
services provided or the benefit received by Agilent Technologies. However, the
financial information included herein may not reflect the consolidated financial
position, operating results, cash flows and changes in stockholder's equity of
Agilent
F-7
<PAGE>
1. OVERVIEW AND BASIS OF PRESENTATION (CONTINUED)
Technologies in the future or what they would have been had Agilent Technologies
been operating as a separate, stand-alone entity during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Agilent Technologies and its wholly- and majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in Agilent
Technologies' consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
REVENUE RECOGNITION. Revenue from product sales, net of trade discounts and
allowances, is recognized at the time the product is shipped or upon
installation and customer acceptance, if the acceptance criteria are
substantive. Provisions are established for estimated costs that may be incurred
for product warranties and post-sales support. Revenue from services, including
operating leases, is recognized over the contractual period or as services are
rendered and accepted by the customer.
ADVERTISING. Advertising costs are expensed as incurred and amounted to
$130 million in 1999, $94 million in 1998 and $98 million in 1997.
TAXES ON EARNINGS. Agilent Technologies' operating results historically
have been included in HP's consolidated U.S. and state income tax returns and in
tax returns of certain HP foreign subsidiaries. The provision for income taxes
in Agilent Technologies' consolidated financial statements has been determined
on a separate-return basis. Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax bases
of assets and liabilities and their reported amounts.
NET EARNINGS PER SHARE. Basic and diluted net earnings per share have been
computed by dividing the net earnings for each period presented by the
380,000,000 common shares outstanding.
UNAUDITED PRO FORMA NET EARNINGS PER SHARE. Unaudited pro forma basic net
earnings per share has been computed by dividing the net earnings for 1999 by
the sum of the 380,000,000 common shares outstanding plus the 72,000,000 shares
issued in Agilent Technologies' initial public offering, as the proceeds of the
offering were distributed to HP. Unaudited pro forma diluted net earnings per
share has been computed by dividing the net earnings for 1999 by the sum of the
380,000,000 common shares outstanding plus the 72,000,000 shares issued in the
initial public offering plus 7,900,000 shares related to the estimated effect of
dilutive stock options and other employee stock plans. The number of dilutive
stock options was computed using the treasury stock method and the initial
public offering price of $30.00 per share.
It is currently unknown how many HP options held by Agilent Technologies
employees will be assumed by Agilent Technologies. The estimated number of
dilutive stock options assumes that 50% of the outstanding HP options held by
Agilent Technologies employees are assumed by Agilent Technologies. The actual
number of HP options assumed by Agilent Technologies will not be determined
until individual employees make an election to amend their HP options in
January 2000. See Note 9, "Employee Stock Plans," for a description of the
election to be made by employees. In 1999, unaudited pro forma diluted earnings
per common share would be $1.10 if 100% of the outstanding HP options were
assumed and $1.13 if 0% of the outstanding HP options were assumed.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS. Historically, HP has managed cash and cash
equivalents on a centralized basis. Cash receipts associated with Agilent
Technologies' businesses have been transferred to HP on a daily basis and HP has
funded Agilent Technologies' disbursements.
INVENTORY. Inventory is valued at standard cost that approximates actual
cost computed on a first-in, first-out basis, not in excess of market value.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Additions, improvements and major renewals are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred. Depreciation is provided
using accelerated methods, principally over 15 to 40 years for buildings and
improvements and 3 to 10 years for machinery and equipment, including equipment
leased to customers under operating leases. Depreciation of leasehold
improvements is provided using the straight-line method over the life of the
lease or the asset, whichever is shorter.
IMPAIRMENT OF LONG-LIVED ASSETS. Agilent Technologies continually monitors
events and changes in circumstances that could indicate carrying amounts of
long-lived assets, including intangible assets, may not be recoverable. When
such events or changes in circumstances are present, Agilent Technologies
assesses the recoverability of long-lived assets by determining whether the
carrying value of such assets will be recovered through undiscounted expected
future cash flows. If the total of the future cash flows is less than the
carrying amount of those assets, Agilent Technologies recognizes an impairment
loss based on the excess of the carrying amount over the fair value of the
assets.
FOREIGN CURRENCY TRANSLATION. Agilent Technologies uses the U.S. dollar as
its functional currency. Foreign currency assets and liabilities are remeasured
into U.S. dollars at end-of-period exchange rates except for inventory,
property, plant and equipment, other assets and deferred revenue, which are
remeasured at historical exchange rates.
Revenue and expenses are remeasured at average exchange rates in effect
during each period, except for those expenses related to balance sheet amounts
that are remeasured at historical exchange rates. Gains or losses from foreign
currency remeasurement are included in net earnings. Because Agilent
Technologies' consolidated balance sheets include no cash or cash equivalents,
foreign currency exchange rate fluctuations have had no material effect on
Agilent Technologies' cash flows.
COMPREHENSIVE EARNINGS. Agilent Technologies has no material components of
other comprehensive earnings. Accordingly, comprehensive earnings are the same
as net earnings for all periods presented.
RECENT PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The statement is effective for fiscal years beginning after June 15,
2000. Agilent Technologies will adopt the standard no later than the first
quarter of fiscal year 2001 and is in the process of determining the impact that
adoption will have on its consolidated financial statements.
3. ACQUISITIONS AND DIVESTITURES
In March 1998, Agilent Technologies acquired all of the outstanding stock of
Heartstream, Inc. for approximately 2.1 million shares of HP stock with a fair
market value of approximately $134 million. Heartstream develops and markets
automatic external defibrillators. During 1999, 1998 and 1997,
F-9
<PAGE>
3. ACQUISITIONS AND DIVESTITURES (CONTINUED)
Agilent Technologies acquired several additional companies that were not
significant to its financial position, results of operations or cash flows. All
of these acquisitions were accounted for under the purchase method. Under the
purchase method, the results of operations of the acquired companies were
included prospectively from the date of acquisition and the acquisition cost was
allocated to the acquired tangible and identifiable intangible assets and
liabilities based on fair market values at the date of acquisition. Residual
amounts were recorded as goodwill. In-process research and development
write-offs have not been significant. Goodwill is amortized on a straight-line
basis over its estimated economic life, generally three to five years. The net
book value of goodwill associated with acquisitions was $142 million at
October 31, 1999 and $126 million at October 31, 1998.
In 1999 and 1998, Agilent Technologies sold assets related to portions of
its businesses to third parties. Gross proceeds from these divestitures were
$121 million in 1999 and $57 million in 1998. Gains from the divestitures are
included in other income (expense), net, in the consolidated statement of
earnings and totaled $54 million in 1999 and $21 million in 1998.
Unaudited pro forma statement of earnings information has not been presented
because the effects of these acquisitions and divestitures were not material on
either an individual or aggregated basis.
4. FINANCIAL INSTRUMENTS
OFF-BALANCE-SHEET FOREIGN EXCHANGE RISK. Foreign exchange contracts,
primarily forwards and purchased options, are entered into to hedge against
exposures to changes in foreign currency exchange rates. These contracts are
designated at inception to the related foreign currency exposures being hedged,
which include committed and anticipated sales by subsidiaries and assets and
liabilities that are denominated in currencies other than the U.S. dollar. To
achieve hedge accounting, contracts must reduce the foreign currency exchange
rate risk otherwise inherent in the amount and duration of the hedged exposures
and comply with established risk management policies. Hedging contracts
generally mature within six months.
When hedging sales-related exposure, foreign exchange contract expirations
are set so as to occur in the same month the hedged shipments occur, allowing
realized gains and losses on the contracts to be recognized in net revenue in
the same periods in which the related revenues are recognized. When hedging
balance sheet exposure, realized gains and losses on foreign exchange contracts
are recognized in other income and expense in the same period as the realized
gains and losses on remeasurement of the foreign currency denominated assets and
liabilities occur. The gains and losses, which have not been material, are
included in cash flows from operating activities in the consolidated statement
of cash flows.
Agilent Technologies' exposures to foreign currency exchange rate
fluctuations are netted with those of other HP businesses and hedged, as
described above, on a combined basis. As of October 31, 1998, there were no
specifically identified contracts for Agilent Technologies' foreign exchange
exposures. A portion of the gains and losses related to foreign exchange
contracts has been allocated to Agilent Technologies based on the proportion of
its foreign currency exposures to HP's total foreign currency exposures.
Beginning in the fourth quarter of 1999, Agilent Technologies has entered into
foreign exchange contracts, primarily with HP, which represent the portion of
the HP contracts related to Agilent Technologies' foreign currency exposures. As
of October 31, 1999, the notional amount of foreign exchange contracts
outstanding that are specific to Agilent Technologies was $2.5 billion and
hedged exposures in approximately 20 foreign currencies. The notional amount
represents the future cash flows under contracts to both purchase and sell
foreign currencies. Unrealized gains and losses
F-10
<PAGE>
4. FINANCIAL INSTRUMENTS (CONTINUED)
attributable to Agilent Technologies on hedging contracts deferred under the
company's hedge accounting polices amounted to $81 million and $16 million,
respectively, at October 31, 1999. Unamortized premiums and realized gains
deferred under currency options were not material.
CONCENTRATIONS OF CREDIT RISK. Agilent Technologies sells the majority of
its products through its direct sales force. No single customer accounted for
10% or more of the combined accounts receivable balance at October 31, 1999 and
1998. Credit risk with respect to accounts receivable is generally diversified
due to the large number of entities comprising Agilent Technologies' customer
base and their dispersion across many different industries and geographies.
Agilent Technologies performs ongoing credit evaluations of its customers'
financial condition, and requires collateral, such as letters of credit and bank
guarantees, in certain circumstances.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of Agilent
Technologies' financial instruments, including accounts receivable, accounts
payable and other accrued liabilities, approximate their fair value due to their
short maturities. The estimated fair values may not be representative of actual
values of the financial instruments that could have been realized as of year end
or that will be realized in the future.
The estimated fair value for foreign exchange contracts is primarily based
on quoted market prices for the same or similar instruments, adjusted where
necessary for maturity differences. At October 31, 1999, the estimated fair
value of foreign exchange contracts amounted to $65 million.
5. INVENTORY
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Finished goods.............................................. $ 639 $ 617
Purchased parts and fabricated assemblies................... 860 868
------ ------
$1,499 $1,485
====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Land........................................................ $ 91 $ 93
Buildings and leasehold improvements........................ 1,492 1,442
Machinery and equipment..................................... 2,074 1,997
------- -------
3,657 3,532
Accumulated depreciation.................................... (2,270) (2,051)
------- -------
$ 1,387 $ 1,481
======= =======
</TABLE>
Agilent Technologies leases certain of its products to customers under
operating leases. Equipment on operating leases was $219 million at October 31,
1999 and $193 million at October 31, 1998 and is included in machinery and
equipment. Accumulated depreciation on equipment on operating leases was $73
million at October 31, 1999 and $68 million at October 31, 1998. At October 31,
1999, minimum
F-11
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
future rentals on noncancelable operating leases with original terms of one year
or longer are $102 million in 2000, $38 million in 2001, $15 million in 2002, $4
million in 2003 and $2 million in 2004.
7. TAXES ON EARNINGS
The provision for income taxes is comprised of:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. federal taxes:
Current.............................................. $ 92 $ 161 $ 236
Deferred............................................. (15) (133) (42)
Non-U.S. taxes
Current.............................................. 189 115 65
Deferred............................................. 3 (8) 17
State taxes............................................ 6 4 4
---- ----- -----
$275 $ 139 $ 280
==== ===== =====
</TABLE>
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included on the consolidated
balance sheet are:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Inventory....................................... $134 $ 4 $ 96 $ 3
Property, plant and equipment................... 34 7 13 15
Warranty........................................ 21 -- 29 --
Employee and retiree benefits................... 261 85 215 56
Intracompany sales.............................. -- -- 77 --
Unremitted earnings of foreign subsidiaries..... -- 119 -- 89
Other........................................... 106 15 65 19
---- ---- ---- ----
$556 $230 $495 $182
==== ==== ==== ====
</TABLE>
The current portion of the net deferred tax asset is $232 million at
October 31, 1999 and $260 million at October 31, 1998 and is included in other
current assets.
F-12
<PAGE>
7. TAXES ON EARNINGS (CONTINUED)
The differences between U.S. federal statutory income tax rate and Agilent
Technologies' effective tax rate are:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. federal statutory income tax rate.................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit............ 0.7 0.9 0.5
Lower rates in other jurisdictions, net................... (3.4) (1.4) (2.2)
Other, net................................................ 2.7 0.5 0.7
---- ---- ----
35.0% 35.0% 34.0%
==== ==== ====
</TABLE>
The domestic and foreign components of earnings before taxes are:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
U.S. operations......................................... $204 $ 78 $543
Non-U.S. operations..................................... 583 318 280
---- ---- ----
$787 $396 $823
==== ==== ====
</TABLE>
As a result of certain employment and capital investment actions undertaken
by Agilent Technologies, income from manufacturing activities in certain
countries is subject to reduced tax rates, and in some cases is wholly exempt
from taxes, for years through 2007. The income tax benefits attributable to the
tax status of these subsidiaries are estimated to be $31 million in 1999, $21
million in 1998 and $23 million in 1997.
Agilent Technologies has not provided for U.S. federal income and foreign
withholding taxes on $617 million of non-U.S. subsidiaries' undistributed
earnings as of October 31, 1999 because these earnings are intended to be
reinvested indefinitely. Where excess cash has accumulated in Agilent
Technologies' non-U.S. subsidiaries and it is advantageous for tax or foreign
exchange reasons, subsidiary earnings are remitted.
See Note 11, "Transactions with Hewlett-Packard," for a description of the
Tax Sharing Agreement between Agilent Technologies and HP.
F-13
<PAGE>
8. RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES
In 1999, Agilent Technologies recognized an impairment loss of $51 million
related to a building that was under construction for the intended purpose of
housing manufacturing operations for eight-inch semiconductor wafers. The
building shell was completed at the time construction was stopped. Management
sought a semiconductor manufacturing partner to utilize the building for its
initial intended use. Agilent Technologies exhausted these efforts without
success. Accordingly, management concluded that the highest fair value for this
building is based on selling it for use as an office or general use facility.
Agilent Technologies has written down the carrying value of the facility to the
estimated amount to be realized upon the sale of the building shell.
During 1998, management committed to transfer the production of eight-inch
semiconductor wafers to a third-party contractor. Management also undertook
employee reductions through voluntary severance programs related to this
transfer, as well as consolidation of some operations and general employee
reductions in each of the four business segments. Approximately 1,650 employees
accepted the voluntary severance incentive packages by the October 31, 1998
deadline. Of these employees, approximately 80% were in manufacturing or other
positions included in cost of products and services. Agilent Technologies
recorded pre-tax charges of approximately $163 million related to these
restructuring actions. Of this amount, $138 million was included in cost of
products, $7 million was included in research and development expense and $18
million was included in selling, general and administrative expense in the 1998
consolidated statement of earnings. The restructuring costs included
approximately $78 million related to employee severance under the voluntary
severance incentive plans, of which approximately $69 million had been paid as
of October 31, 1999. The restructuring costs also included $85 million related
to non-cash asset impairments primarily for equipment. Of the equipment
impairment charge, $39 million was attributable to equipment abandoned at the
time of the charge and written down to its net realizable value. An additional
$46 million was attributable to equipment that remained in service for a
transition period to facilitate the transfer to the third party contractor. This
equipment was written down to its estimated fair value, including depreciation
expense for the value of using the equipment during the transition period and
the estimated amount to be realized upon the sale of the used equipment at the
end of the transition period.
In 1998, other income (expense), net, included a charge of $37 million
related to the write-down of an investment in convertible preferred stock of a
medical products company to its fair value because Agilent Technologies
concluded that its impairment was not temporary.
9. EMPLOYEE STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN. Eligible Agilent Technologies employees have
generally been able to contribute up to 10 percent of their base compensation to
the quarterly purchase of shares of HP's common stock under the HP Stock
Purchase Plan. Under this plan, employee contributions to purchase shares are
partially matched with shares contributed by HP. These matching shares generally
vest over two years. Compensation expense, measured using the fair market value
of HP shares on the date of purchase by HP, is recognized over the two-year
vesting period. The allocated portion of compensation expense attributable to
Agilent Technologies employees was $44 million in 1999, $33 million in 1998 and
$32 million in 1997. On the distribution date, all unvested shares of HP stock
held by Agilent Technologies employees under the HP Stock Purchase Plan,
together with any shares of Agilent Technologies common stock issued with
respect to the HP shares in connection with the distribution, will be forfeited.
Agilent Technologies intends to provide replacement Agilent Technologies
unvested shares with a value comparable to the value of the forfeited HP
unvested matching shares and associated Agilent Technologies shares issued in
connection with the distribution. The replacement shares will maintain the
original vesting terms based on the employee's continued employment with Agilent
Technologies. Agilent Technologies has adopted an Employee Stock Purchase Plan,
with terms substantially similar to the HP Stock Purchase Plan. This plan will
be effective in February 2000.
F-14
<PAGE>
9. EMPLOYEE STOCK PLANS (CONTINUED)
INCENTIVE COMPENSATION PLANS. Eligible Agilent Technologies employees
participate in HP's four principal stock option plans, which were adopted in
1979, 1985, 1990 and 1995. Options are generally granted as non-qualified
options although all plans permit the granting of options that qualify as
"Incentive Stock Options" under the Internal Revenue Code. The exercise price of
a stock option is generally equal to the fair market value of HP's common stock
on the date the option is granted and its term is generally ten years. Under the
1990 and 1995 Incentive Stock Plans, HP's Compensation Committee, in certain
cases, may choose to establish a discounted exercise price at no less than 75
percent of fair market value on the grant date. The allocated portion of stock
compensation expense related to Agilent Technologies employees' discounted
options was not material in 1999, 1998 and 1997. Options, other than discounted
options, generally vest at a rate of 25 percent per year over a period of four
years from the date of grant. Discounted options generally vest fully on the
third or fifth anniversary of the date of grant.
Under the existing terms of the stock option plans, substantially all HP
options held by Agilent Technologies employees on the distribution date will be
fully vested, and if not exercised, will expire in 90 days. Agilent Technologies
employees may elect to amend their HP options to waive the vesting acceleration
and have the resulting options assumed by Agilent Technologies. This election
will be made in January 2000. The conversion of HP options into Agilent
Technologies options will be done in such a manner that (1) the aggregate
intrinsic value of the options immediately before and after the exchange are the
same, (2) the ratio of the exercise price per option to the market value per
option is not reduced, and (3) the vesting provisions and option period of the
replacement Agilent Technologies options are the same as the original vesting
terms and option period of the HP options. It is currently unknown how many HP
options held by Agilent Technologies employees will be converted into Agilent
Technologies options.
In October 1999, Agilent Technologies adopted various 1999 stock plans and
reserved 68,704,000 shares for issuance under these plans. These 1999 plans have
terms similar to the comparable HP incentive compensation plans. There were no
options outstanding under these plans at October 31, 1999. Concurrent with its
initial public offering, Agilent Technologies granted options to purchase
7,425,152 shares of its common stock at the initial public offering price of $30
per share, including options to purchase 3,003,217 shares of common stock issued
to replace HP restricted stock as a result of the election described below.
Under the HP 1985 Incentive Compensation Plan and the 1990 and 1995
Incentive Stock Plans, certain key employees may be granted cash or restricted
stock awards. The majority of the shares of restricted stock outstanding at
October 31, 1999 are subject to forfeiture if employment terminates prior to
three years from the date of grant. During the restricted period, ownership of
the shares cannot be transferred. Restricted stock has the same dividend and
voting rights as other common stock and is considered to be currently issued and
outstanding. The cost of the awards, determined to be the fair market value of
the shares at the date of grant, is expensed ratably over the period the
restrictions lapse. This expense was not material in 1999, 1998 and 1997.
Restricted shares held by Agilent Technologies employees will be forfeited on or
before the distribution date. In October 1999, Agilent Technologies employees
elected to receive either replacement options to purchase Agilent Technologies
stock granted on the effective date of the initial public offering at an
exercise price equal to the initial public offering price or replacement Agilent
Technologies restricted shares to be granted on or before the distribution date,
in either case with the same vesting as before.
PRO FORMA INFORMATION. Agilent Technologies applies the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock options granted to Agilent
Technologies employees. Accordingly, compensation expense is recognized only
when options are granted with a discounted exercise price. Any
F-15
<PAGE>
9. EMPLOYEE STOCK PLANS (CONTINUED)
compensation expense is recognized ratably over the associated service period,
which is generally the option vesting term.
Pro forma net earnings and net earnings per share information, as required
by SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined
as if HP had accounted for employee stock options granted to Agilent
Technologies employees under SFAS 123's fair value method. The fair value of
these options was estimated at grant date using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free interest rates
of 5.53 percent in 1999, 5.38 percent in 1998 and 6.21 percent in 1997; dividend
yield of 1.0 percent in all years; expected option life of 7 years in 1999 and
1998 and 6 years in 1997; and volatility of 30 percent in all years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the four-year average vesting period of the
options. The pro forma effect of recognizing compensation expense in accordance
with SFAS No. 123 would have been to reduce Agilent Technologies' reported net
earnings by $38 million in 1999, $20 million in 1998 and $11 million in 1997.
Had compensation expense been recorded by Agilent Technologies in accordance
with SFAS No. 123, the effect would be to reduce unaudited pro forma diluted net
earnings per share by $.08 in 1999. These pro forma amounts include amortized
fair values attributable to options granted after October 31, 1995 only, and
therefore are not representative of future pro forma amounts.
10. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS
At the date of distribution by HP of its investment in Agilent Technologies
to the stockholders of HP, Agilent Technologies will assume responsibility for
pension, deferred profit sharing and other post-employment benefits for current
and former employees whose last work assignment prior to the distribution was
with Agilent Technologies. These current and former employees are collectively
referred to as "Agilent Technologies Employees." Until the distribution, the
expense for these programs associated with Agilent Technologies Employees will
be assigned to Agilent Technologies.
PENSION AND DEFERRED PROFIT-SHARING PLANS. Substantially all of Agilent
Technologies' employees are covered under various HP defined benefit and
deferred profit-sharing plans. Worldwide retirement costs were $142 million in
1999, $123 million in 1998 and $115 million in 1997.
U.S. employees who meet eligibility criteria are provided benefits under
HP's Retirement Plan. Defined benefits are generally based on an employee's
average pay and length of service. For eligible service through October 31,
1993, the benefit payable under the defined benefit plan is reduced by any
amounts due to the eligible employee under HP's fixed and frozen defined
contribution deferred profit-sharing plan (DPSP), which has been closed to new
participants.
The combined status of the defined benefit plan and DPSP for U.S. employees
allocated to Agilent Technologies follows.
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Fair value of plan assets................................... $1,907 $1,356
Retirement benefit obligation............................... $1,864 $1,423
</TABLE>
Eligible employees outside the U.S. generally receive retirement benefits
under various retirement plans based upon factors such as years of service and
employee compensation levels. Eligibility is generally determined in accordance
with local statutory requirements.
RETIREE MEDICAL PLAN. In addition to receiving pension benefits, Agilent
Technologies Employees may participate in HP's medical plan which provides
defined benefits to U.S. retired employees.
F-16
<PAGE>
10. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS (CONTINUED)
Substantially all of Agilent Technologies' current U.S. employees could become
eligible for these benefits, and the existing benefit obligation relates
primarily to those employees. Once participating in the plan, retirees may
choose from managed-care and indemnity options, with their contributions
dependent on options chosen and length of service.
401(K) PLAN. Agilent Technologies' U.S. eligible employees may participate
in HP's 401(k) plan, the Tax Savings Capital Accumulation Plan (TAXCAP), which
was established as a supplemental retirement program. Beginning February 1,
1998, enrollment in the TAXCAP became automatic for employees who met
eligibility requirements unless they declined participation. Under the TAXCAP
program, HP matches contributions by employees up to a maximum of 4 percent of
an employee's annual compensation. The maximum combined contribution to the
Employee Stock Purchase Plan and TAXCAP is 25 percent of an employee's annual
base compensation subject to certain regulatory and plan limitations. Agilent
Technologies' expense related to TAXCAP was $49 million in 1999, $47 million in
1998 and $40 million in 1997.
Upon the distribution, Agilent Technologies will establish separate defined
benefit pension, deferred profit-sharing, retiree medical and 401(k) plans for
its current and former employees. An allocable share of the defined benefit plan
assets will be transferred from the HP pension trust in each country to a newly
established Agilent Technologies pension trust. In addition, an allocable share
of the U.S. retiree medical plan trust will be transferred to a newly
established Agilent Technologies retiree medical plan trust. Subject to local
law, it is anticipated that the share of assets allocated to Agilent
Technologies will be in the same proportion as the projected benefit obligation
of Agilent Technologies Employees to the total projected benefit obligation of
HP. The deferred profit sharing plan assets attributable to Agilent Technologies
will also be transferred to Agilent Technologies. Included in the consolidated
balance sheet are estimates as of October 31, 1999 and 1998 of the assets and
pension obligations to be transferred to Agilent Technologies. Actual amounts to
be transferred will be measured at the distribution date, using the same
methodology, and will likely be different from these estimates.
The tables below set forth the estimated net periodic cost and funded status
of the HP pension and retiree medical plans allocable to Agilent Technologies
based on the allocation methodology described above, as well as the actuarial
assumptions on which those amounts are based.
NET PERIODIC COST. For the years ended October 31, 1999, 1998 and 1997, net
pension and retiree medical costs allocated to Agilent Technologies are
comprised of:
<TABLE>
<CAPTION>
PENSIONS
--------------------------------------------------------------- U.S. RETIREE MEDICAL
U.S. PLANS NON-U.S. PLANS PLAN
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned
during the period............ $ 72 $ 69 $ 58 $ 54 $ 40 $ 36 $ 10 $ 10 $ 9
Interest cost on benefit
obligation................... 25 20 15 38 33 30 14 13 13
Expected return on plan
assets....................... (30) (25) (17) (57) (41) (35) (17) (15) (13)
Amortization and deferrals:
Actuarial (gain) loss........ 3 -- -- (4) (11) (5) (6) (4) (3)
Transition obligation
(asset).................... (3) (3) (3) -- -- -- -- -- --
Prior service cost........... 2 2 2 1 1 2 (3) (4) (4)
---- ---- ---- ---- ---- ---- ---- ---- ----
Net plan costs................. $ 69 $ 63 $ 55 $ 32 $ 22 $ 28 $ (2) $ -- $ 2
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
F-17
<PAGE>
10. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS (CONTINUED)
FUNDED STATUS. As of October 31, 1999 and 1998, the estimated funded status
of the defined benefit and retiree medical plans allocated to Agilent
Technologies is:
<TABLE>
<CAPTION>
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
NON-U.S. DEFINED
U.S. DEFINED U.S. RETIREE
BENEFIT PLANS BENEFIT PLANS MEDICAL PLAN
------------------- ------------------- -------------------
(IN MILLIONS)
Change in fair value of plan assets:
Fair value--beginning of year..................... $343 $269 $705 $578 $ 189 $ 168
Addition of plans................................. -- -- 7 -- -- --
Actual return on plan assets...................... 152 33 48 89 79 21
Employer contributions............................ 60 50 65 22 1 3
Participants' contributions....................... -- -- 8 8 4 3
Change in population estimate..................... (60) -- (100) -- 40 --
Benefits paid..................................... (18) (9) (15) (11) (7) (6)
Currency impact................................... -- -- (12) 19 -- --
---- ---- ---- ---- ----- -----
Fair value--end of year........................... 477 343 706 705 306 189
---- ---- ---- ---- ----- -----
Change in benefit obligation:
Benefit obligation--beginning of year............. 420 292 750 545 204 179
Addition of plans................................. -- -- 6 -- -- --
Service cost...................................... 72 69 54 40 10 10
Interest cost..................................... 25 20 38 33 14 13
Participants' contributions....................... -- -- -- -- 4 3
Change in population estimate..................... (40) -- (99) -- 31 --
Actuarial (gain) loss............................. (25) 48 35 98 (18) 5
Benefits paid..................................... (18) (9) (15) (11) (7) (6)
Currency impact................................... -- -- 4 45 -- --
---- ---- ---- ---- ----- -----
Benefit obligation--end of year................... 434 420 773 750 238 204
---- ---- ---- ---- ----- -----
Plan assets in excess of (less than) benefit
obligation........................................ 43 (77) (67) (45) 68 (15)
Unrecognized net actuarial (gain) loss.............. (97) 28 105 50 (199) (96)
Unrecognized prior service cost (benefit) related to
plan changes...................................... 11 14 10 13 (58) (54)
Unrecognized net transition asset*.................. (3) (5) (1) (1) -- --
---- ---- ---- ---- ----- -----
Net prepaid (accrued) costs......................... $(46) $(40) $ 47 $ 17 $(189) $(165)
==== ==== ==== ==== ===== =====
</TABLE>
- ------------------------
* Amortized over 15 years for the U.S. plan and over periods ranging from 10
to 22 years for the non-U.S. plans.
Plan assets consist primarily of listed stocks and bonds. These costs are
funded to the extent they are tax-deductible.
F-18
<PAGE>
10. RETIREMENT PLANS AND RETIREE MEDICAL BENEFITS (CONTINUED)
Defined benefit plans whose benefit obligations are in excess of the fair
value of the plan assets are:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NON-U.S. DEFINED
U.S. DEFINED
BENEFIT PLANS BENEFIT PLANS
------------------- -------------------
(IN MILLIONS)
Aggregate benefit obligation.................... $(22) $(420) $(681) $(423)
Aggregate fair value of plan assets............. -- 343 608 327
</TABLE>
The non-current portion of the liability for retirement plans and the
retiree medical plan is included in other liabilities and totaled $239 million
at October 31, 1999 and $206 million at October 31, 1998.
ASSUMPTIONS. The assumptions used to measure the benefit obligations and to
compute the expected long-term return on assets for Agilent Technologies'
defined benefit and retiree medical plans are:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. defined benefit plan:
Discount rate............................................. 7.25% 6.5% 7.0%
Average increase in compensation levels................... 5.0% 5.0% 5.5%
Expected long-term return on assets....................... 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate............................................. 3.3-6.0% 3.0-6.5% 3.5-8.0%
Average increase in compensation levels................... 3.5-5.3% 3.75-5.0% 3.5-5.5%
Expected long-term return on assets....................... 6.1-8.5% 6.5-8.5% 6.0-9.0%
U.S. retiree medical plan:
Discount rate............................................. 7.25% 6.5% 7.0%
Expected long-term return on assets....................... 9.0% 9.0% 9.0%
Current medical cost trend rate........................... 8.2% 8.65% 9.6%
Ultimate medical cost trend rate.......................... 5.5% 5.5% 6.0%
Medical cost trend rate decreases to ultimate rate in
year.................................................... 2007 2007 2007
</TABLE>
Assumed health care trend rates could have a significant effect on the
amounts reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates for the year ended October 31, 1999 would
have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Effect on total service and interest cost
components...................................... $ 6 $ (5)
Effect on postretirement benefit obligations...... 44 (33)
</TABLE>
F-19
<PAGE>
11. TRANSACTIONS WITH HEWLETT-PACKARD
Agilent Technologies' revenue from sales of products to HP was $832 million
in 1999, $696 million in 1998 and $640 million in 1997.
Agilent Technologies has purchased products from HP, at a price that
management believes approximates the price an unrelated third party would pay,
for inclusion in its products sold to third parties. These purchases from HP
totaled $61 million in 1999, $86 million in 1998 and $99 million in 1997.
Agilent Technologies also purchases products from HP at cost for internal use.
Purchases at cost were $99 million in 1999, $65 million in 1998 and $63 million
in 1997.
Agilent Technologies' costs and expenses include allocations from HP for
centralized research and development, legal, accounting, employee benefits, real
estate, insurance services, information technology services, treasury and other
HP corporate and infrastructure costs. These allocations have been determined on
bases that HP and Agilent Technologies considered to be a reasonable reflection
of the utilization of services provided or the benefit received by Agilent
Technologies. The allocation methods include relative sales, headcount, square
footage, transaction processing costs, adjusted operating expenses and others.
Allocated costs included in the accompanying consolidated statement of earnings
follow.
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Costs of products and services.......................... $188 $197 $152
Research and development................................ 150 143 140
Selling, general and administrative..................... 432 440 430
</TABLE>
For purposes of governing certain of the ongoing relationships between
Agilent Technologies and HP at and after the separation and to provide for an
orderly transition, Agilent Technologies and HP have entered into various
agreements. A brief description of each of the agreements follows.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT. The separation agreement
contains the key provisions relating to the separation, Agilent Technologies'
initial funding, initial public offering and the distribution. The agreement
lists the documents and items that the parties must deliver in order to
accomplish the transfer of assets and liabilities from HP to Agilent
Technologies, effective on the separation date. The agreement also contains
conditions that must occur prior to the initial public offering and the
distribution. The parties also entered into ongoing covenants that survive the
transactions, including covenants to establish interim service level agreements,
exchange information, notify each other of changes in their accounting
principles and resolve disputes in particular ways.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT. The General Assignment and
Assumption Agreement identifies the assets that HP transferred to Agilent
Technologies and the liabilities that Agilent Technologies assumed from HP in
the separation. In general, the assets that were transferred and the liabilities
that were assumed are those that appear on the consolidated balance sheet, after
adjustment for certain assets and liabilities that were retained by HP.
HP retained most of Agilent Technologies' accounts receivable and accounts
payable, accrued payroll and related items and tax-related amounts, except
deferred taxes. In addition, HP transferred to Agilent Technologies some of the
assets and liabilities related to HP's business including its liability related
to the purchase of Yokogawa Electric Corporation's (Yokogawa) 25% interest in
Hewlett-Packard Japan (see Note 13, "Commitments") and some of the accounts
receivable, accounts payable and other liabilities of Hewlett-Packard Japan.
F-20
<PAGE>
11. TRANSACTIONS WITH HEWLETT-PACKARD (CONTINUED)
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Effective as of the
separation date, Agilent Technologies and HP each released the other from any
liabilities arising from events occurring on or before the separation date. The
agreement also contains provisions governing indemnification. In general,
Agilent Technologies and HP will each indemnify the other from all liabilities
arising from its business, any of its liabilities, any of its contracts or a
breach of the separation agreement. In addition, HP and Agilent Technologies
will each indemnify the other against liability for specified environmental
matters. Agilent Technologies will reimburse HP for the cost of any insurance
coverage from the separation date to the distribution date.
EMPLOYEE MATTERS AGREEMENT. The Employee Matters Agreement outlines how HP
and Agilent Technologies plan to allocate responsibility for, and liability
related to, the employment of those employees of HP who will become Agilent
Technologies employees. The agreement also contains provisions describing
Agilent Technologies' benefit and equity plans. On or before the distribution
date, Agilent Technologies expects to establish employee benefit plans
comparable to those of HP for its active, inactive and former employees.
However, in certain cases, certain of its employees will continue to participate
in the HP benefit plans. The transfer to Agilent Technologies of employees at
certain of HP's international operations, and of certain pension and employee
benefit plans, may not take place until Agilent Technologies receives consents
or approvals or has satisfied other applicable requirements.
TAX SHARING AGREEMENT. The tax sharing agreement provides for HP's and
Agilent Technologies' obligations concerning various tax liabilities. The tax
sharing agreement provides that HP generally will pay, and indemnify Agilent
Technologies if necessary, with respect to all federal, state, local and foreign
taxes relating to Agilent Technologies' business for any taxable period ending
prior to Agilent Technologies' initial public offering. In addition, the tax
sharing agreement provides that HP and Agilent Technologies will make payments
between them such that the amount of taxes to be paid by HP and Agilent
Technologies will be determined, subject to specified adjustments, as if HP and
Agilent Technologies and each of their subsidiaries included in HP's
consolidated tax returns had filed their own consolidated, combined or unitary
tax return.
The tax sharing agreement allocates responsibility for various taxes arising
from restructurings related to the spinoff between HP and Agilent Technologies.
In addition, Agilent Technologies will bear 18% of unanticipated taxes related
to the distribution where neither party is at fault.
In addition, the tax sharing agreement provides that Agilent Technologies
will indemnify HP for any taxes arising out of the failure of the distribution
or certain of the transactions related to it to qualify as tax free as a result
of actions taken, or the failure to take required actions, by Agilent
Technologies. Specifically, Agilent Technologies is required under the tax
sharing agreement to comply with the representations made to the Internal
Revenue Service, or the IRS, in connection with the private letter ruling that
has been issued to HP from the IRS regarding the tax-free nature of the
distribution of Agilent Technologies' stock by HP to HP's stockholders.
The tax sharing agreement further provides for cooperation with respect to
certain tax matters, the exchange of information and the retention of records
which may affect the income tax liability of either party.
REAL ESTATE MATTERS AGREEMENT. The Real Estate Matters Agreement addresses
real estate matters relating to the HP leased and owned properties that HP
transferred to or shares with Agilent Technologies. The agreement describes the
manner in which HP transferred to or shares with Agilent Technologies various
leased and owned properties. The Real Estate Matters Agreement also provided
that all costs required to effect the transfers, including landlord consent
fees, landlord attorneys' fees, title insurance fees and transfer taxes, were
paid by HP.
F-21
<PAGE>
11. TRANSACTIONS WITH HEWLETT-PACKARD (CONTINUED)
MASTER IT SERVICE LEVEL AGREEMENT. The Master IT Service Level Agreement
governs the provision of information technology services by HP and Agilent
Technologies to each other, on an interim basis, until November 1, 2001, unless
extended for specific services or otherwise indicated in the agreement. The
services include data processing and telecommunications services, such as voice
telecommunications and data transmission, and corporate support services,
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, human resources administration, procurement, real estate
management and other administrative functions. Specified charges for such
services are generally intended to allow the providing company to recover the
direct and indirect costs of providing the services, plus 5% until November 1,
2001 and such costs plus 10% thereafter. The Master IT Service Level Agreement
also covers the provision of certain additional information technology services
identified from time to time after the separation date that were inadvertently
or unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the separation agreement, so long as the
provision of such services would not significantly disrupt the providing
company's operations or significantly increase the scope of the agreement.
In addition, the Master IT Service Level Agreement will provide for the
replication of some computer systems, including hardware, software, data storage
or maintenance and support components. Generally, the party needing the
replicated system bears the costs and expenses of replication. Generally, the
party purchasing new hardware or licensing new software bears the costs and
expenses of purchasing the new hardware or obtaining the new software licenses.
INTELLECTUAL PROPERTY AGREEMENTS. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement, the Master
Trademark Ownership and License Agreement and the ICBD Technology Ownership and
License Agreement together are referred to as the Intellectual Property
Agreements. Under the Intellectual Property Agreements, HP transferred to
Agilent Technologies its rights in specified patents, specified trademarks and
other intellectual property related to Agilent Technologies' current business
and research and development efforts. HP and Agilent Technologies each are
licensed under the other's patents issued on patent applications with effective
filing dates before November 1, 2004, subject to field restrictions. HP and
Agilent Technologies are also licensed to use technology that has been disclosed
to such licensed company or that is in the licensed company's possession as of
the separation date, with certain limitations. The agreements include certain
rights to sublicense for both parties. Agilent Technologies is licensed to use
some HP trademarks, and this license is royalty-bearing after five years.
ENVIRONMENTAL MATTERS AGREEMENT. HP has agreed to retain and indemnify
Agilent Technologies for liabilities associated with properties transferred to
Agilent Technologies which are undergoing environmental investigation and
remediation and for which HP has accrued a reserve. The purpose of the
environmental Matters Agreement is to address, in a general way, HP's and
Agilent Technologies' rights and obligations with respect to that investigation
and remediation.
12. LINES OF CREDIT
On November 8, 1999, Agilent Technologies executed two revolving credit
agreements totaling $500 million, with $250 million expiring in one year and
$250 million expiring in five years. Interest is based on the Citicorp base
rate, a margin over LIBOR, or a fixed rate based on competitive bids. Under the
agreements, Agilent Technologies must not exceed a defined debt to earnings
ratio.
F-22
<PAGE>
13. COMMITMENTS
OPERATING LEASE COMMITMENTS. Agilent Technologies leases certain real and
personal property from unrelated third parties under noncancelable operating
leases. Future minimum lease payments under these leases at October 31, 1999
were $62 million for 2000, $39 million for 2001, $26 million for 2002, $19
million for 2003, $17 million for 2004 and $85 million thereafter. Certain
leases require Agilent Technologies to pay property taxes, insurance and routine
maintenance, and include escalation clauses. Rent expense was $107 million in
1999, $111 million in 1998 and $92 million in 1997.
TRANSITION SERVICE AGREEMENTS. Beginning in November 1999, Agilent
Technologies obtains various services from HP. See Note 11, "Transactions with
Hewlett-Packard."
HEWLETT-PACKARD JAPAN. On July 6, 1999, HP entered into an agreement with
Yokogawa to acquire Yokogawa's 25% minority equity ownership of Hewlett-Packard
Japan (HPJ) for approximately $521 million. Under the terms of the agreement, HP
will acquire Yokogawa's shares through a series of purchase transactions
beginning in January 2000. Under the terms of the separation agreement, Agilent
Technologies assumed HP's obligations under the terms of the agreement. In the
initial step, which will occur on or before January 31, 2000, Agilent
Technologies will purchase approximately 10.4% of HPJ shares from Yokogawa. In
the second step, which will occur on or before April 30, 2000, Agilent
Technologies will purchase approximately 10.4% of HPJ shares from Yokogawa.
Agilent Technologies will purchase the remaining 4.2% of HPJ shares owned by
Yokogawa prior to March 31, 2003. HP provided the funding for this transaction.
An independent valuation has been performed to determine the portion of the
purchase price attributable to Agilent Technologies' business and the remaining
HP business and to allocate the purchase price to identifiable assets and
liabilities. Of the total purchase price, $375 million is attributable to
Agilent Technologies' business, of which approximately $302 million will be
recorded as goodwill and amortized over 10 years.
JOINT VENTURE FUNDING. Under the terms of the agreement with one of its
joint venture partners, Agilent Technologies is required to make cash capital
contributions to the joint venture at various times through the first quarter of
fiscal 2001. These amounts total $85 million in 2000 and $12 million in 2001.
14. CONTINGENCIES
Agilent Technologies is involved in lawsuits, claims, investigations and
proceedings, including patent, commercial and environmental matters, that arise
in the ordinary course of business. There are no such matters pending that
Agilent Technologies expects to be material in relation to its business,
consolidated financial condition, results of operations or cash flows. See Note
11, "Transactions with Hewlett-Packard," for a discussion of Agilent
Technologies' indemnification agreement with HP.
15. SEGMENT INFORMATION
DESCRIPTION OF SEGMENTS. Agilent Technologies is a diversified technology
company that provides enabling solutions to high growth markets within the
communications, electronics, life sciences and healthcare industries. Agilent
Technologies designs and manufactures test, measurement and monitoring
instruments, systems and solutions and semiconductors and optical components.
Agilent Technologies organizes its business operations into four major
groups--test and measurement, semiconductor products, healthcare solutions and
chemical analysis, each of which comprises a reportable segment. The segments
were determined based primarily on how management views and evaluates Agilent
Technologies' operations. Other factors, including customer base,
F-23
<PAGE>
15. SEGMENT INFORMATION (CONTINUED)
homogeneity of products, technology and delivery channels, were also considered
in determining Agilent Technologies' reportable segments. Agilent Technologies
measures segment performance based on earnings from operations.
Agilent Technologies includes the following businesses:
- test and measurement, which provides test instruments, standard and
customized test, measurement and monitoring systems for the design,
manufacture and support of electronic and communication devices, and
software for the design of high-frequency electronic and communication
devices. The test and measurement business includes operating segments
that have been aggregated based on the similarity of the nature of their
products and services, their production processes, their class of
customers, their distribution methods and their economic characteristics;
- semiconductor products, which provides fiber optic communications devices
and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronics and image
sensors;
- healthcare solutions, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
- chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
SEGMENT REVENUE AND PROFIT. The accounting policies used to derive
reportable segment results are generally the same as those described in Note 2,
"Summary of Significant Accounting Policies." Internal revenue and earnings from
operations include transactions between segments that are intended to reflect an
arm's length transfer at the best price available for comparable external
customers.
A significant portion of the segments' expenses arise from shared services
and infrastructure that HP has historically provided to the segments in order to
realize economies of scale and to efficiently use resources. These expenses
include costs of centralized research and development, legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other HP corporate and infrastructure costs. These
expenses are allocated to the segments and the allocations have been determined
on bases that HP and Agilent Technologies considered to be a reasonable
reflection of the utilization of services provided to or benefits received by
the segments. A different result could be arrived at for any segment if costs
were specifically identified to each segment.
The following tables reflect the results of Agilent Technologies' reportable
segments under Agilent Technologies management system. These results are not
necessarily a depiction that is in conformity with generally accepted accounting
principles. The performance of each segment is measured based on
F-24
<PAGE>
15. SEGMENT INFORMATION (CONTINUED)
several metrics, including earnings from operations. These results are used, in
part, by management, in evaluating the performance of, and in allocating
resources to, each of the segments.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR HEALTHCARE CHEMICAL TOTAL
MEASUREMENT PRODUCTS SOLUTIONS ANALYSIS SEGMENTS
----------- ------------- ---------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1999:
External revenue....................... $4,082 $1,722 $1,501 $1,026 $8,331
Internal revenue....................... 4 40 1 -- 45
------ ------ ------ ------ ------
Total net revenue...................... $4,086 $1,762 $1,502 $1,026 $8,376
====== ====== ====== ====== ======
Depreciation and amortization
expense.............................. $ 152 $ 156 $ 35 $ 16 $ 359
====== ====== ====== ====== ======
Earnings from operations............... $ 377 $ 133 $ 125 $ 112 $ 747
====== ====== ====== ====== ======
YEAR ENDED OCTOBER 31, 1998:
External revenue....................... $4,100 $1,574 $1,340 $ 938 $7,952
Internal revenue....................... -- 39 -- -- 39
------ ------ ------ ------ ------
Total net revenue...................... $4,100 $1,613 $1,340 $ 938 $7,991
====== ====== ====== ====== ======
Depreciation and amortization
expense.............................. $ 133 $ 205 $ 28 $ 15 $ 381
====== ====== ====== ====== ======
Earnings (loss) from operations........ $ 348 $ (106) $ 62 $ 75 $ 379
====== ====== ====== ====== ======
YEAR ENDED OCTOBER 31, 1997:
External revenue....................... $4,203 $1,479 $1,208 $ 895 $7,785
Internal revenue....................... -- 27 -- 1 28
------ ------ ------ ------ ------
Total net revenue...................... $4,203 $1,506 $1,208 $ 896 $7,813
====== ====== ====== ====== ======
Depreciation and amortization
expense.............................. $ 107 $ 177 $ 16 $ 13 $ 313
====== ====== ====== ====== ======
Earnings from operations............... $ 674 $ 57 $ 30 $ 77 $ 838
====== ====== ====== ====== ======
</TABLE>
F-25
<PAGE>
15. SEGMENT INFORMATION (CONTINUED)
RECONCILIATIONS TO AGILENT TECHNOLOGIES, AS REPORTED.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenue:
Total reportable segments................................. $8,376 $7,991 $7,813
Elimination of internal revenue........................... (45) (39) (28)
------ ------ ------
Total net revenue, as reported.......................... $8,331 $7,952 $7,785
====== ====== ======
Earnings before taxes:
Total reportable segments' earnings from operations....... $ 747 $ 379 $ 838
Corporate and unallocated................................. (6) 63 32
Other income (expense), net............................... 46 (46) (47)
------ ------ ------
Total earnings before taxes, as reported................ $ 787 $ 396 $ 823
====== ====== ======
Depreciation and amortization expense:
Total reportable segments................................. $ 359 $ 381 $ 313
Corporate and unallocated................................. 116 96 96
------ ------ ------
Total depreciation and amortization expense, as
reported.............................................. $ 475 $ 477 $ 409
====== ====== ======
</TABLE>
Corporate and unallocated expenses primarily relate to employee related
benefit programs. The expenses for these programs are recorded by the segments
at a pre-determined rate and are adjusted at the corporate level to reflect the
actual rate. This adjustment is not allocated to the segments. Corporate and
unallocated expenses also include certain unallocated depreciation and goodwill
amortization.
MAJOR CUSTOMERS. In 1999, HP accounted for approximately 10% of Agilent
Technologies' total net revenue. See Note 11, "Transactions with
Hewlett-Packard." No other customer represented 10% or more of Agilent
Technologies total net revenue in any period presented.
SEGMENT ASSETS AND OTHER ITEMS. Segment assets directly managed by the segment
primarily consist of accounts receivable, inventory, property, plant and
equipment and certain other current and non-current assets. In some cases,
several segments may occupy the same location and therefore will share a common
building and certain machinery and equipment. In these cases, there will not be
a precise correlation between a segment's earnings from operations and the
segment's assets. Capital expenditures for each segment also reflect the asset
assignment by segment.
Corporate-held assets not allocated to the segments include property, plant
and equipment assigned to corporate functions, equity investments managed at the
corporate level, deferred tax assets and other current and non-current assets
managed at the corporate level.
F-26
<PAGE>
15. SEGMENT INFORMATION (CONTINUED)
The equity investment totals disclosed for each segment represent equity
investments directly managed by the segment.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR HEALTHCARE CHEMICAL TOTAL
MEASUREMENT PRODUCTS SOLUTIONS ANALYSIS SEGMENTS
----------- ------------- ---------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AS OF OCTOBER 31, 1999:
Assets................................. $2,555 $1,014 $958 $528 $5,055
Capital expenditures, year-to-date..... 185 96 15 9 305
Investment in equity-method
investees............................ 13 15 -- 12 40
AS OF OCTOBER 31, 1998:
Assets................................. $2,188 $1,134 $847 $517 $4,686
Capital expenditures, year-to-date..... 155 162 22 8 347
Investment in equity-method
investees............................ 11 19 -- -- 30
AS OF OCTOBER 31, 1997:
Assets................................. $2,305 $1,273 $793 $469 $4,840
Capital expenditures, year-to-date..... 147 316 13 17 493
Investment in equity-method
investees............................ 14 4 -- -- 18
</TABLE>
RECONCILIATIONS TO AGILENT TECHNOLOGIES, AS REPORTED.
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Assets:
Total reportable segments................................. $5,055 $4,686 $4,840
Unallocated corporate assets.............................. 389 301 166
------ ------ ------
Total assets, as reported................................. $5,444 $4,987 $5,006
====== ====== ======
</TABLE>
GEOGRAPHIC INFORMATION.
<TABLE>
<CAPTION>
UNITED REST OF THE
STATES JAPAN WORLD TOTAL
-------- -------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revenue (based on location of customer):
Year ended October 31, 1999............................. $3,735 $ 874 $3,722 $8,331
Year ended October 31, 1998............................. 3,623 880 3,449 7,952
Year ended October 31, 1997............................. 3,399 972 3,414 7,785
Long-lived assets (all non-current assets):
October 31, 1999........................................ $1,147 $ 258 $ 501 $1,906
October 31, 1998........................................ 1,180 242 490 1,912
October 31, 1997........................................ 1,223 261 591 2,075
</TABLE>
F-27
<PAGE>
15. SEGMENT INFORMATION (CONTINUED)
Quarterly Summary
(unaudited)
<TABLE>
<CAPTION>
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- -------- ----------
THREE MONTHS ENDED
---------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net revenue............................................ $1,786 $2,010 $2,087 $2,448
Cost of products and services.......................... $ 974 $1,019 $1,103 $1,292
Earnings from operations............................... $ 101 $ 240 $ 195 $ 205
Net earnings........................................... $ 74 $ 157 $ 135 $ 146
Basic and diluted net earnings per share............... $ .19 $ .41 $ .36 $ .39
Average shares used in computing basic and diluted net
earnings per share................................... 380 380 380 380
1998
Net revenue............................................ $2,012 $2,078 $1,875 $1,987
Cost of products and services.......................... $1,024 $1,158 $1,063 $1,267
Earnings (loss) from operations........................ $ 266 $ 137 $ 86 $ (47)
Net earnings (loss).................................... $ 161 $ 93 $ 54 $ (51)
Basic and diluted net earnings (loss) per share........ $ .42 $ .24 $ .15 $ (.13)
Average shares used in computing basic and diluted net
earnings (loss) per share............................ 380 380 380 380
</TABLE>
Our quarterly net revenue, earnings from operations and net earnings have
varied significantly in the past and we expect that they are likely to vary in
the future. In addition, upon our separation from Hewlett-Packard, we expect to
incur substantial additional costs in future periods resulting from being a
separate, stand-alone entity.
Beginning in the third quarter of 1998 and through the first half of 1999,
our revenue was significantly affected by the economic conditions in Asia and
the slowdown in the semiconductor industry. Since a substantial portion of our
cost of products and services, as well as some of our operating expenses, are
relatively fixed in the short term, the sharp decline in revenue caused our
operating margins to decline. Charges from the restructuring that occurred in
the quarter ended October 31, 1998 adversely affected operating results in that
quarter. The 1999 quarterly results reflect the benefit of the 1998
restructuring as well as other cost containment measures that we implemented in
the second half of 1998. The third quarter of 1999 includes a $51 million charge
related to the write-down of a building that was under construction for the
intended purpose of housing manufacturing operations for eight-inch
semiconductor wafers.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AGILENT TECHNOLOGIES, INC.
Date: January 18, 2000
By /s/ D. CRAIG NORDLUND
-----------------------------------------
D. Craig Nordlund
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY
</TABLE>
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature appears
below constitutes and appoints D. Craig Nordlund and Marie Oh Huber, or either
of them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EDWARD W. BARNHOLT President, Chief Executive Officer
------------------------------------ and Director January 18, 2000
Edward W. Barnholt (Principal Executive Officer)
/s/ GERALD GRINSTEIN
------------------------------------ Chairman of the Board of Directors January 18, 2000
Gerald Grinstein
/s/ ROBERT R. WALKER Senior Vice President and Chief
------------------------------------ Financial Officer January 18, 2000
Robert R. Walker (Principal Financial Officer)
/s/ DOROTHY D. HAYES Vice President, Controller and
------------------------------------ Chief Accounting Officer January 18, 2000
Dorothy D. Hayes (Principal Accounting Officer)
/s/ THOMAS E. EVERHART
------------------------------------ Director January 18, 2000
Thomas E. Everhart
/s/ WALTER B. HEWLETT
------------------------------------ Director January 18, 2000
Walter B. Hewlett
/s/ DAVID M. LAWRENCE, M.D.
------------------------------------ Director January 18, 2000
David M. Lawrence, M.D.
/s/ RANDALL L. TOBIAS
------------------------------------ Director January 18, 2000
Randall L. Tobias
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
2.1 Master Separation and Distribution Agreement between
Hewlett-Packard and the Company effective as of August 12,
1999. Incorporated by reference from Exhibit 2.1 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-85249).
2.2 General Assignment and Assumption Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.2 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.3 Master Technology Ownership and License Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.3 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.4 Master Patent Ownership and License Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.4 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.5 Master Trademark Ownership and License Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.5 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.6 ICBD Technology Ownership and License Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.6 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.7 Employee Matters Agreement between Hewlett-Packard and the
Company. Incorporated by reference from Exhibit 2.7 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-85249).
2.8 Tax Sharing Agreement between Hewlett-Packard and the
Company. Incorporated by reference from Exhibit 2.8 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-85249).
2.9 Master IT Service Level Agreement between Hewlett-Packard
and the Company. Incorporated by reference from Exhibit 2.9
of the Company's Registration Statement on Form S-1
(Registration No. 333-85249).
2.10 Real Estate Matters Agreement between Hewlett-Packard and
the Company. Incorporated by reference from Exhibit 2.10 of
the Company's Registration Statement on Form S-1
(Registration No. 333-85249).
2.11 Environmental Matters Agreement between Hewlett-Packard and
the Company. Incorporated by reference from Exhibit 2.11 of
the Company's Registration Statement on Form S-1
(Registration No. 333-85249).
2.12 Master Confidential Disclosure Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.12 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.13 Indemnification and Insurance Matters Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.13 of the Company's Registration Statement on
Form S-1 (Registration No. 333-85249).
2.14 Non U.S. Plan. Incorporated by reference from Exhibit 2.14
of the Company's Registration Statement on Form S-1
(Registration No. 333-85249).
2.15 Five Year Credit Agreement dated as November 5, 1999.
Incorporated by reference from Exhibit 2.15 of the Company's
Registration Statement on Form S-1 (Registration
No. 333-85249).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
<C> <S>
2.16 364-Day Credit Arrangement dated as of November 5, 1999.
Incorporated by reference from Exhibit 2.16 of the Company's
Registration Statement on Form S-1 (Registration
No. 333-85249).
3.1 Amended and Restated Certificate of Incorporation.
Incorporated by reference from Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Registration No.
333-85249).
3.2 Bylaws. Incorporated by reference from Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-85249).
10.1 Employee Stock Purchase Plan. Incorporated by reference from
Exhibit 10.1 of the Company's Registration Statement on Form
S-1 (Registration No. 333-85249).*
10.2 1999 Stock Plan. Incorporated by reference from Exhibit 10.2
of the Company's Registration Statement on Form S-1
(Registration No. 333-85249).*
10.3 1999 Non-Employee Director Stock Plan. Incorporated by
reference from Exhibit 10.3 of the Company's Registration
Statement on Form S-1 (Registration No. 333-85249).*
10.4 Yokogawa Electric Corporation and Hewlett-Packard Company
Agreement for the Redemption and Sale of Shares and
Termination of Joint Venture Relationship. Incorporated by
reference from Exhibit 10.4 of the Company's Registration
Statement on Form S-1 (Registration No. 333-85249).
10.5 Form of Indemnification Agreement entered into by the
Company with each of its directors and executive officers.
Incorporated by reference from Exhibit 10.5 of the Company's
Registration Statement on Form S-1 (Registration No.
333-85249).*
10.6 Executive Deferred Compensation Plan.*
21.1 Subsidiaries of Company as of January 6, 2000.
23.1 Consent of Independent Accountants
24.1 Powers of Attorney. Contained in the signature page of this
Annual Report on Form 10-K and incorporated by reference
into this report.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Indicates management contract or compensatory plan, contract or arrangement.
<PAGE>
EXHIBIT 10.6
AGILENT TECHNOLOGIES, INC.
EXECUTIVE DEFERRED COMPENSATION PLAN
(AMENDED AND RESTATED AS OF DECEMBER 3, 1999)
Section 1. ESTABLISHMENT AND PURPOSE OF PLAN.
The Agilent Technologies, Inc. Executive Deferred Compensation Plan
provides deferred compensation for a select group of management or highly
compensated employees as established in Title I of ERISA. The Plan is intended
to be an unfunded and unsecured deferred compensation arrangement between the
Participant and Agilent, in which the Participant agrees to give up a portion of
the Participant's current compensation in exchange for Agilent's unfunded and
unsecured promise to make a payment at a future date, as specified in Section 6.
Agilent retains the right, as provided in Section 14, to amend or terminate the
Plan at any time. Certain capitalized words used in the text of the Plan are
defined in Section 21 in alphabetical order.
Section 2. PARTICIPATION IN THE PLAN.
2.1 PARTICIPATION IN GENERAL. Employees on the U.S. payroll of Agilent
are eligible to defer Base Pay or Bonus under the Plan if they have Base Pay, at
the time of election as specified in Section 3, equal to or in excess of the sum
of (1) the amount defined in Code section 40l(a)(17), as adjusted by the
Secretary of the Treasury under Code section 415(d), in effect on January 1 of
the calendar year for which amounts are to be deferred, plus (2) $6,000.
2.2 TRANSITION PERIOD PARTICIPATION. Any Participant in HP's or
Agilent's Plan who, during the Transition Period, changes employment to the
other of such companies, shall commence participation in the company's Plan to
which the employee transfers. All existing Deferral Accounts, deferral
elections, beneficiary designations, and any other documentation or information
on file with the Plan in which the employee participated at the former employing
company shall be treated as accounts, elections, designations, documentation or
information relating to the Plan of the new employing company.
Section 3. TIMING AND AMOUNTS OF DEFERRED COMPENSATION.
Eligible Employees shall make elections to participate in the Plan, as
follows:
3.1 TIMING OF BASE PAY DEFERRAL. With respect to a deferral of Base Pay,
an election to participate must be made prior to December 16 - or such earlier
date established by the Committee - of the calendar year preceding the calendar
year with respect to which an election to defer Base Pay is made, in accordance
with any procedures established by the Committee.
3.2 AMOUNT OF BASE PAY DEFERRAL. Once an election is made by an Eligible
Employee, an annual whole dollar amount will be deferred from Base Pay, taken
equally over the twenty-four (24) pay periods falling within the calendar year
to which the election pertains. The minimum amount of Base Pay that may be
deferred is $6,000 per calendar year. The maximum amount of Base Pay which may
be deferred each calendar year is equal to the amount of Base Pay exceeding the
amount defined in Code section 401(a)(17), as adjusted by the Secretary of the
Treasury under Code section 415(d), in effect on January 1 of the calendar year
to which the deferral election pertains.
3.3 TIMING OF BONUS DEFERRAL. Participants must make an election to
defer an H1 Bonus and/or H2 Bonus before December 16 - or such earlier date
established by the Committee - of the calendar year ending within the fiscal
year to which the H1 and H2 Bonuses pertain, in accordance with any procedures
established by the Committee. Notwithstanding the foregoing, an election to
defer an H2 Bonus
<PAGE>
may be amended or revoked at any time prior to the commencement of the
Performance Period to which the H2 Bonus relates, in accordance with any
procedures established by the Committee.
3.4 AMOUNT OF BONUS DEFERRAL. An Eligible Employee may defer any
portion, up to 100%, of any H1 or H2 Bonus to which he or she may become
entitled, so long as the deferral amount is expressed in terms of a whole
percentage point. Once an election is made by an Eligible Employee to defer any
portion or all of a Bonus, the appropriate dollar amount will be withheld from
the Bonus when this amount has been certified by the Committee in accordance
with the PFR Plan.
3.5 EFFECT OF TAXES ON MAXIMUM DEFERRALS. Notwithstanding any provision
herein to the contrary, and to the extent consistent with the terms of the PFR
Plan, the Company may withhold Taxes from any cash payment made under the Plan
or PFR Plan, owing as a result of any deferral or payment hereunder, as the
Company deems appropriate in its sole discretion. If, with respect to the pay
period within which a deferral, payment or Bonus is made under the Plan or PFR
Plan, the Participant receives insufficient actual cash compensation to cover
such Taxes, then the Company may withhold any remaining Taxes owing from the
Participant's subsequent cash compensation received, until such Tax obligation
is satisfied.
SECTION 4. DEFERRAL ACCOUNTS.
4.1 CREDITING IN GENERAL. Amounts deferred pursuant to Section 3 shall
be credited to a Deferral Account in the name of the Participant. Each Deferred
Account shall be a bookkeeping entry of Agilent. Deferred Amounts arising from
deferrals of Base Pay shall be credited to a Deferral Account at least
quarterly. Deferrals resulting from amounts credited to a Participant's
Deferral Account from the deferral of Bonuses shall be credited to a Deferral
Account as soon as practicable after the Committee has certified the amount of
an Bonus in writing, pursuant to the provisions of the PFR Plan. The
Participant's rights in the Deferral Account shall be no greater than the rights
of any other unsecured general creditor of Agilent. Deferred Amounts and
Earnings thereon invested hereunder shall for all purposes be part of the
general funds of Agilent. Any payout to a Participant of amounts credited to a
Participant's Deferral Account is not due, nor are such amounts ascertainable,
until the Payout Commencement Date.
4.2 HEWLETT-PACKARD COMPANY OFFICERS EARLY RETIREMENT PLAN DEFERRALS. A
Deferral Account may be created or credited pursuant to the termination of the
Hewlett-Packard Company Officers Early Retirement (OER) Plan, as restated
effective October 31, 1999. Except as otherwise provided in this Section 4.2,
an OER Deferral shall be forfeited in full, if the Termination Date of a
Rollover Participant for whom the OER Deferral was created or credited occurs
prior to April 1, 2001. Notwithstanding the foregoing, the OER Deferral of a
Rollover Participant shall not be forfeited due to his or her Termination Date
occurring prior to April 1, 2001, if the Rollover Participant has attained the
age of 58 on or before March 31, 1999.
4.3 CERTAIN TRANSITION PERIOD DEFERRAL ACCOUNTS. With respect to an
employee who becomes a Plan participant during the Transition Period, as
described in Section 2.2, a Deferral Account shall be created for such a new
Participant as soon as practicable after the employee becomes an Agilent
employee, in an initial amount equal to the employee's total cumulative Plan
Deferral Account as of the date on which he or she changes employment, with
Earnings thereon determined on a pro rata basis. All deferrals - and any
Earnings thereon - arising after the date on which the employee changes
employment, shall be credited to such employee's Deferral Account in a fashion
consistent with the provisions of this Plan.
SECTION 5. EARNINGS ON THE DEFERRAL ACCOUNT
Amounts in a Participant's Deferral Account will be credited at least
quarterly with Earnings until such amounts are paid out to the Participant under
this Plan as set forth in Section 6. All Earnings attributable to the Deferral
Account shall be added to the liability of and retained therein by Agilent. Any
such addition to the liability shall be appropriately reflected on the books and
records of Agilent and identified as an addition to the total sum owing the
Participant. The Deferral Account of a Rollover Participant shall be credited
with Earnings at the same time and accounted for in the same manner as the
<PAGE>
Deferral Account of a Participant (regardless of the Rollover Participant's
eligibility to participate in the Plan), pro-rated to reflect the date on which
the deferral account from a Rollover Plan is transferred into the Plan.
SECTION 6. PAYOUT TO THE PARTICIPANTS.
6.1 TERMINATION AFTER RETIREMENT DATE. If a Participant's Termination
Date is on or after his or her Retirement Date, an election as to the form and
commencement of benefit may be made in accordance with this Section 6.1. An
election under this section is only valid if made before the date which is at
least twelve (12) months prior to the Participant's Termination Date, and on or
before the last day of the calendar year preceding the Termination Year.
6.1.1 FORM OF PAYOUT. A Participant making a valid election under
this Section 6.1 may elect to receive either (a) a single lump sum payout by
January 15 of the year following the Termination Year, or (b) a payout in annual
installments over a five (5) to fifteen (15) year period beginning with the
January 15 following the Termination Year.
6.1.2 COMMENCEMENT OF PAYOUT. A Participant making a valid
election under this Section 6.1 may elect to further defer the Payout
Commencement Date, under either the single lump sum or the annual installment
election addressed in Section 6.1.1, by an additional one (1), two (2) or three
(3) years beginning after the January 15 following the Termination Year.
6.1.3 EARNINGS ON DEFERRAL ACCOUNTS. Whatever the form of payout
under Section 6, and whatever the timing of the Payout Commencement Date, the
Deferral Account of a Participant shall continue to be credited with Earnings
until all amounts in such an account are paid out to the Participant.
6.2 DEFAULT FORM AND COMMENCEMENT OF PAYOUT. If a Participant's
Termination Date is on or after his or her Retirement Date and a valid election
under Section 6.1 is not made, the Participant shall receive his or her payout
in annual installments over the fifteen (15) year period beginning with the
January 15 following the Termination Year.
6.3 DEATH OF PARTICIPANT. If a Participant dies and an election was made
under Section 6.1, the Beneficiary will be paid according to the election even
though the election was not made twelve (12) months or more prior to the
Participant's death. If the Participant dies and no election was made, then the
Beneficiary will receive the payout in annual installments over the fifteen (15)
year period beginning with the January 15 in the calendar year following the
year of the Participant's death.
6.4 TERMINATION PRIOR TO RETIREMENT DATE. If the Participant's
Termination Date precedes his or her Retirement Date, then the Participant will
receive a single lump sum payout as soon as practicable after the Termination
Date.
6.5 COMMITTEE DISCRETION. Notwithstanding anything in this Section 6 to
the contrary, the Committee shall have the discretion to modify the availability
and timing of a valid election under Section 6.1, and the timing, form and
amount (e.g., payouts affected by a forfeiture under Section 4.2) of any payout,
in any manner it deems appropriate; provided, however, that any alteration with
respect to a Covered Officer must be consistent with the requirements for
deductibility of compensation under section 162(m) of the Code.
6.6 TRANSITION PERIOD TRANSFERS. Notwithstanding anything within this
Section 6 to the contrary, a transfer of a Participant's employment between
Agilent and HP prior to the Distribution Date shall not be considered a
termination of employment nor trigger a Termination Date for purposes of
applying the provisions of this section. Rather, the employee shall continue
his or her participation in the HP Plan or Agilent Plan as provided in Sections
2.2 and 4.3 of this Plan and the HP Plan.
<PAGE>
Section 7. HARDSHIP PROVISION.
7.1 UNFORESEEABLE EMERGENCIES. Neither the Participant nor his or her
Beneficiary is eligible to withdraw amounts credited to a Deferral Account prior
to the time specified in Section 6. However, such credited amounts may be
subject to early withdrawal if an unforeseeable emergency occurs that is caused
by an event beyond the Participant's or Beneficiary's control and would result
in severe financial hardship to the individual if early withdrawal is not
permitted. A severe financial hardship exists only when all other reasonably
available financial resources have been exhausted. The Committee shall have
sole discretion to determine whether to approve any hardship withdrawal, which
amount will be limited to the amount necessary to meet the emergency. The
Committee's decision is final and binding on all interested parties.
7.2 WAITING PERIOD. If the Committee approves a hardship withdrawal, the
Participant (1) may not defer Base Pay or Bonuses, as specified in Section 3,
for the remainder of the calendar year in which the hardship withdrawal is
received, and (2) may not participate in the deferral election which relates to
the next succeeding calendar year (with respect to deferrals of Base Pay), and
to both the H1 and H2 Bonuses arising from the next succeeding fiscal year.
Section 8. OTHER ACCESS TO CREDITED AMOUNTS.
8.1 UNANTICIPATED NEEDS. Neither the Participant nor his or her
Beneficiary is eligible to withdraw amounts credited to a Deferral Account prior
to the time specified in Section 6. However, such credited amounts may be
subject to early withdrawal if an unanticipated need for funds occurs, other
than a need specified in Section 7; provided, however, that the Participant
permanently forfeits ten percent (10%) of the amount to be withdrawn.
Additionally, withdrawals based on an unanticipated need for funds may be made
no more than once each calendar year and the amount to be withdrawn must be at
least $12,000.
8.2 WAITING PERIOD. If the Participant withdraws amounts credited to a
Deferral Account under this section, he or she (1) may not defer Base Pay or
Bonuses, as specified in Section 3, for the remainder of the calendar year in
which the withdrawal is received, and (2) may not participate in the deferral
election which relates to the next succeeding calendar year (with respect to
deferrals of Base Pay), and to both the H1 and H2 Bonuses arising from the next
succeeding fiscal year.
Section 9. DESIGNATION OF BENEFICIARY.
The Participant shall, by written notice to Agilent, (1) designate a
Beneficiary hereunder, and (2) shall have the right thereafter to change such
designation. Notwithstanding the foregoing, with respect to an employee who
becomes a Plan Participant during the Transition Period, as described in Section
2.2, all existing beneficiary designations on file with the HP Plan shall be
deemed and treated as designations under this Plan. In the case of a
Participant's death, payment due under this Plan shall be made to the designated
Beneficiary or, in the absence of such designation, by will or the laws of
descent and distribution in the state of residence of the Participant.
Section 10. CHANGE IN CONTROL.
10.1 DISCRETION TO ACCELERATE. In the event of a proposed change in
control of Agilent, as defined below, the Committee shall have complete
authority and discretion, but no obligation, to accelerate payments of both
terminated and active Participants.
10.2 PROPOSED CHANGE IN CONTROL. A "proposed change in control" shall
mean (1) a tender offer by any person or entity, other than Agilent or an
Agilent subsidiary, to acquire securities representing 40 percent or more of the
voting power of Agilent or (2) the submission to Agilent's shareholders for
approval of a transaction involving the sale of all or substantially all of the
assets of Agilent or a merger of Agilent with or into another corporation.
Notwithstanding the foregoing, neither the initial public offering
<PAGE>
of voting common stock in Agilent, nor the distribution by HP of shares of
Agilent voting common stock in a transaction which qualifies under Section 355
of the Code, shall constitute a "proposed change in control" for purposes of
this Section 10.
10.3 REQUEST FOR NEGOTIATION. The Committee may also ask the Board of
Directors to negotiate, as part of any agreement involving the sale or merger of
Agilent, or a sale of substantially all of Agilent's assets or a similar
transaction, terms providing for protection of Participants and their interests
in the Plan.
Section 11. LIMITATION ON ASSIGNMENTS.
Benefits under this Plan are not subject to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment or garnishments by
creditors of the Participant or the Participant's Beneficiary and any attempt to
do so shall be void.
Section 12. ADMINISTRATION.
12.1 ADMINISTRATION BY COMMITTEE. The Plan shall be administered by the
Committee. No member of the Committee shall become a Participant of the Plan.
The Committee shall have the sole authority to interpret the Plan, to establish
and revise rules and regulations relating to the Plan and to make any other
determinations that it believes necessary or advisable for the administration of
the Plan. Decisions and determination by the Committee shall be final and
binding upon all parties, including shareholders, Participants, Beneficiaries
and other employees. The Committee may delegate its administrative
responsibilities, as it deems appropriate.
12.2 BOOKS AND RECORDS. Books and records maintained for the purpose of
the Plan shall be maintained by the officers and employees of Agilent at its
expense and subject to supervision and control of the Committee.
Section 13. NO FUNDING OBLIGATION.
Agilent is under no obligation to transfer amounts credited to the
Participant's Deferral Account to any trust or escrow account, and Agilent is
under no obligation to secure any amount credited to a Participant's Deferral
Account by any specific assets of Agilent or any other asset in which Agilent
has an interest. This Plan shall not be construed to require Agilent to fund
any of the benefits provided hereunder nor to establish a trust for such purpose
Agilent may make such arrangements as it desires to provide for the payment of
benefits, including, but not limited to, the establishment of a rabbi trust or
such other equivalent arrangements as Agilent may decide. No such arrangement
shall cause the Plan to be a funded plan within the meaning of Title I of ERISA,
nor shall any such arrangement change the nature of the obligation of Agilent
nor the rights of the Participants under the Plan as provided in this document.
Neither the Participant nor his or her estate shall have any rights against
Agilent with respect to any portion of the Deferral Account except as a general
unsecured creditor. No Participant has an interest in his or her Deferral
Account until the Participant actually receives the deferred payment.
SECTION 14. AMENDMENT AND TERMINATION OF THE PLAN.
Agilent, by action of the Committee, in its sole discretion may suspend or
terminate the Plan or revise or amend it in any respect whatsoever; provided,
however, that amounts already credited to Deferral Accounts will continue to be
owed to the Participants or Beneficiaries and will continue to accrue Earnings
and continue to be a liability of Agilent. Any amendment or termination of the
Plan will not affect the entitlement of any Participant or the Beneficiary of a
Participant who terminates employment before the amendment or termination. All
benefits to which any Participant or Beneficiary may be entitled shall be
determined under the Plan as in effect at the time the Participant terminates
employment and shall not be affected by any subsequent change in the provisions
of the Plan; provided, however, that Agilent reserves the right to change the
basis of return on investment of the Deferral Account with respect to any
Participant
<PAGE>
or Beneficiary. Participants or Beneficiaries will be given notice prior to the
discontinuance of the Plan or reduction of any benefits provided by the Plan.
SECTION 15. TAX WITHHOLDING.
If Agilent concludes that Tax is owing with respect to any deferral of
income or payment hereunder, Agilent shall withhold such amounts from any
payments due the Participant, or otherwise make appropriate arrangements with
the Participant or his or her Beneficiary for satisfaction of such obligation.
SECTION 16. CHOICE OF LAW.
This Plan, and all rights under this Plan, shall be interpreted and
construed in accordance with ERISA and, to the extent not preempted, the law of
the State of Delaware, unless otherwise stated in the Plan.
SECTION 17. NOTICE.
Any written notice to Agilent required by any of the provisions of this
Plan shall be addressed to the chief personnel officer of Agilent or his or her
delegate and shall become effective when it is received.
SECTION 18. NO EMPLOYMENT RIGHTS.
Nothing in the Plan, nor any action of Agilent pursuant to the Plan, shall
be deemed to give any person any right to remain in the employ of Agilent or
affect the right of Agilent to terminate a person's employment at any time, with
or without cause.
SECTION 19. ROLLOVERS FROM OTHER PLANS.
19.1 DISCRETION TO ACCEPT. The Committee shall have complete authority
and discretion, but no obligation, to allow the Plan to create Deferral Accounts
for Rollover Participants and credit such accounts with amounts to reflect the
Rollover Participant's deferral account in a Rollover Plan. The amounts
credited to such Deferral Accounts are fully subject to the provisions of this
Plan. Reference in the Plan to such a crediting as a "rollover" or "transfer"
of assets from a Rollover Plan is nominal in nature, and confers no additional
rights upon a Rollover Participant other than those specifically set forth in
the Plan.
19.2 STATUS OF ROLLOVER PARTICIPANTS. A Rollover Participant and his or
her Beneficiary are fully subject to the provisions of this Plan, except as
otherwise expressly set forth herein. A Rollover Participant who is not already
a Participant in the Plan and is not otherwise eligible to participate in the
Plan at the time of rollover, shall not be entitled to make any additional
deferrals under the Plan unless and until he or she has becomes an Eligible
Employee under the terms of the Plan.
19.3 PAYMENT TO ROLLOVER PARTICIPANTS. If at the time of rollover or
transfer, payments from a Rollover Participant's account in a Rollover Plan have
already commenced from a Rollover Plan, he or she shall continue to receive such
payments in accordance with the form and timing of payment provisions of such
plan. If a Rollover Participant is not yet eligible to receive payments from
the Rollover Plan at the time of the rollover or transfer, he or she is bound by
the payout provisions of this Plan.
SECTION 20. CODE SECTION 162(m).
With respect to Covered Employees, this Plan is designed to satisfy the
special requirements for performance-based compensation set forth in Section
162(m)(4)(C) of the Code, and the Plan shall be so construed. Furthermore, if a
provision of the Plan as it relates to a Covered Officer causes a deferral or
payment to fail to satisfy these special requirements, the Plan shall be deemed
amended to satisfy the requirements to the extent permitted by law and subject
to Committee approval.
<PAGE>
SECTION 21. DEFINITIONS.
21.1 AGILENT means Agilent Technologies, Inc., a Delaware corporation, and
any business entity within the Agilent consolidated group.
21.2 BASE PAY means the annual base rate of cash compensation for
employees on the U.S. payroll of Agilent, excluding bonuses, commissions,
overtime pay, Bonuses, shift differential, payments under the Agilent or HP
Income Protection Plan, the Agilent or HP Supplemental Income Protection Plan,
or any other additional compensation.
21.3 BENEFICIARY means the person or persons designated by a Participant
pursuant to Section 9 to receive any amounts payable under the Plan in the event
of the Participant's death.
21.4 BONUS shall have the same meaning as set forth in the PFR Plan.
21.5 CODE means the Internal Revenue Code of 1986, as amended from time to
time.
21.6 COMMITTEE means the Compensation Committee of the Board of Directors
of Agilent, as constituted in accordance with the provisions of the PFR Plan, or
its delegate.
21.7 COVERED OFFICER shall have the same meaning as "covered employee"
does under Code section 162(m).
21.8 DEFERRAL ACCOUNT means the account balance of a Participant in the
Plan created from Deferred Amounts or from a credit to a Participant's account
from a Rollover Plan, and the Earnings thereon prior to a payout to the
Participant.
21.9 DEFERRED AMOUNT means the amount the Participant elects to have
deferred from Base Pay and/or a Bonus, pursuant to Section 3.
21.10 DISTRIBUTION DATE has the same meaning as this same defined term in
the Master Separation and Distribution Agreement between HP and Agilent,
effective August 12, 1999.
21.11 EARNINGS means the deemed return on investment (or charge on
investment loss) allocated to a Participant's Deferral Account, based on the
return of the Fund, reduced by ten (10) percent when the return of the Fund is
positive, and increased by ten (10) percent when the return of the Fund is
negative. Whether the return of the Fund is positive or negative for purposes
of the adjustment described in the preceding sentence, is determined in
accordance with Section 5.
21.12 ELIGIBLE EMPLOYEE means an employee on the U.S. payroll of Agilent
who has Base Pay at the time of election as specified in Section 3 equal to or
in excess of the sum of (1) the amount defined in Code section 401(a)(17), as
adjusted by the Secretary of the Treasury under Code section 415(d), in effect
on January 1 of the calendar year for which amounts are to be deferred, plus (2)
$6,000. Where this Plan references an Eligible Employee's deferral of a Bonus,
this assumes the Eligible Employee is also a participant in the PFR Plan.
21.13 ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
21.14 Fund means-
21.14.1 Unless otherwise provided in this Subsection 21.14, an S&P
500 index Fund, as designated by the Committee from time to time;
and,
<PAGE>
21.14.2 With respect to Earnings credited to the Deferral Account of
a Covered Officer, the term Fund shall specifically refer to the
Vanguard Institutional Index Fund; and,
21.14.3 With respect to a Deferral Account created or credited by
the deferral of amounts arising from the termination of the
Hewlett-Packard Company Officers Early Retirement Plan, as restated
effective October 31, 1999, the term Fund shall specifically refer to
a fund the investments of which are comprised of a mix of debt and
equity, as chosen in the sole discretion of the Committee, and as
subject to the forfeiture provisions of Section 4.2.
21.15 H1 BONUS means a Bonus arising from the Performance Period defined by
the first half of Agilent's fiscal year (November 1 through April 30), or as
otherwise set forth in accordance with the terms of the PFR Plan.
21.16 H2 BONUS means a Bonus arising from the Performance Period defined by
the second half of Agilent's fiscal year (May 1 through October 31), or as
otherwise set forth in accordance with the terms of the PFR Plan.
21.17 HP means Hewlett-Packard Company, a Delaware corporation.
21.18 PARTICIPANT, unless preceded by "PFR" in which case the term
indicates a participant in the PFR Plan, means any individual who has a Deferral
Account under the Plan or who is receiving or entitled to receive benefits under
the Plan. The term Participant also refers to a Rollover Participant, except
where expressly provided otherwise.
21.19 PAYOUT COMMENCEMENT DATE means the date on which the payout to a
Participant of amounts credited to his or her Deferral Account first commences.
21.20 PERFORMANCE MEASURE shall have the same meaning as set forth in the
PFR Plan.
21.21 PERFORMANCE PERIOD shall have the same meaning as set forth in the
PFR Plan.
21.22 PLAN, unless preceded by (i) "PFR", in which case the term refers to
the PFR Plan, (ii) "HP", in which case the term refers to the Hewlett-Packard
Company Executive Deferred Compensation Plan, or (iii) "Rollover", in which case
the terms refers to a Rollover Plan, means the Agilent Technologies, Inc.
Executive Deferred Compensation Plan.
21.23 RETIREMENT DATE means the date on which a Participant has completed
at least 15 years of service, as defined in the Retirement Plan, and has
attained age 55. For this purpose, the Committee may, in its discretion, permit
the years of service of a Rollover Participant to include the years of service
with the employer for which a Rollover Participant worked immediately preceding
employment with Agilent.
21.24 RETIREMENT PLAN means, until the Distribution Date, the
Hewlett-Packard Company Retirement Plan, and on and after the Distribution Date,
the Agilent Retirement Plan.
21.25 ROLLOVER PARTICIPANT means an individual with a Deferral Account in
the Plan transferred from a Rollover Plan in accordance with the provisions of
Section 19. The term Rollover Participant may also refer to an individual who
has previously been a Participant in the Plan, or an existing Participant at the
time of transfer.
21.26 ROLLOVER PLAN means-
21.26.1 The nonqualified deferred compensation plan of any other
employing business entity within the HP consolidated group, until the
Distribution Date; or
<PAGE>
21.26.2 The Hewlett-Packard Company Officers Early Retirement Plan,
to the extent a Deferral Account is created or added to for a
Participant or Rollover Participant, due to the termination of this
plan; or,
21.26.2 The nonqualified deferred compensation plan of a business
entity acquired by Agilent through acquisition of a majority of the
voting interest in, or substantially all of the assets of, such
entity.
21.27 TAX OR (TAXES) means any federal, state, local, or any other
governmental income tax, employment tax, payroll tax, excise tax, or any other
tax or assessment owing with respect to amounts deferred, any Earnings thereon,
and any payments made to Participants under the Plan.
21.28 TERMINATION DATE means the date on which the Participant ceases to be
an employee of Agilent.
21.29 TERMINATION YEAR means the calendar year within which a Participant's
Termination Date falls.
21.30 TRANSITION PERIOD means the period commencing with the beginning of
Agilent's Payroll Date (as defined in the Master Separation and Distribution
Agreement between HP and Agilent, effective August 12, 1999), and ending on the
Distribution Date (as defined in the Master Separation and Distribution
Agreement between HP and Agilent, effective August 12, 1999).
21.31 PFR PLAN means the Agilent Technologies, Inc. Pay-for-Results
Management Incentive Plan effective November 1, 1999, as amended from time to
time.
SECTION 22. EXECUTION.
IN WITNESS WHEREOF, Agilent has caused this Plan to be duly adopted by the
undersigned this 3 day of December 1999, effective December 3, 1999.
Agilent Technologies, Inc.
By: /s/ D. Craig Nordlund
-------------------------------------
D. Craig Nordlund,
Vice President, General Counsel and Secretary
Agilent Technologies, Inc.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF AGILENT TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
<S> <C>
U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES, INC.
Agilent Technologies World Trade, Inc. Delaware
Microsensor Technology, Inc. California
Pete, Inc. Delaware
Qos-Effective Systems Ltd. New Hampshire
Rockland Technologies, Inc. Delaware
Security Force Software, Inc. North Carolina
Scope Communications, Inc. Delaware
Versatest, Inc. California
Telegra Corporation California
U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES WORLD TRADE, INC.
Agilent Technologies Inter-Americas, Inc. Delaware
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES, INC.
Agilent Technologies Brasil Ltda. Brazil
U.S. SUBSIDIARY OF PETE, INC.
Heartstream, Inc. Delaware
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES WORLD TRADE, INC.
Agilent Technologies Australia Pty Ltd Australia
Agilent Technologies (Barbados) Limited Barbados
Agilent Tecnologias Chile Limitada Chile
Agilent Tecnologies Colombia Ltda. Colombia
Agilent Tecnologias de Costa Rica S.A. Costa Rica
Agilent Technologies Hong Kong Limited Hong Kong
Agilent Technologies Sales (Malaysia) Sdn. Bhd. Malaysia
Agilent Technologies New Zealand Limited New Zealand
Agilent Technologies Europe B.V. Netherlands
Agilent Technologies Poland Sp.z.o.o. Poland
Agilent-Tecnologias de Medida e Componentes, Unipessoal Lda. Portugal
Agilent Technologies LLC Russia
Agilent Technologies Taiwan Ltd. Taiwan
Agilent Technologies (Thailand) Limited Thailand
Agilent Technologies ocdm Sistemleri Limited Pirketi Turkey
Agilent Technologies de Venezuela, S.R.L Venezuela
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES EUROPE B.V.
Agilent Technologies Belgium S.A./N.V. Belgium
Agilent Technologies Canada Inc. Canada
Agilent Technologies Holding France
Agilent Technologies UK Limited England & Wales
Agilent Technologies India Pvt. Ltd. India
Agilent Technologies Ireland Limited Ireland
<PAGE>
Agilent Technologies Israel Ltd. Israel
Agilent Technologies Italia S.p.A. Italy
Agilent Technologies Korea Limited Korea
Agilent Technologies Limited Korea
Agilent Technologies Microwave Products (M) Sdn. Bhd. Malaysia
Agilent Technologies Mauritius Limited Mauritius
Agilent Technologies Mexico, S.de R.L. de C.V. Mexico
Agilent Technologies International B.V. Netherlands
Agilent Technologies Netherlands Investments B.V. Netherlands
Agilent Technologies Netherlands B.V. Netherlands
Agilent Technologies Philippines Corporation Philippines
Agilent Technologies Singapore (Sales) Pte Ltd Singapore
Agilent Technologies Singapore Vision Operation Pte Ltd Singapore
Agilent Technologies S.ar.L. Switzerland
Agilent Technologies Cervin S.ar.L. Switzerland
Agilent Technologies Leman S.ar.L. Switzerland
LumiLEDS Lighting B.V. Netherlands
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES HOLDING
Agilent Technologies France France
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES NETHERLANDS
INVESTMENTS B.V.
Agilent Technologies Japan, Ltd. Japan
Yakogawa Analytical Systems, Inc. Japan
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES MAURITIUS LIMITED
Agilent Technologies Company Limited China
Agilent Technologies Software Company Limited China
Agilent Technologies Medical Products (Qingdao) Company Limited China
Agilent Technologies Shanghai Analytical Products Co., Ltd. China
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES LEMAN S.AR.L.
Inversiones Agilent Technologies SRL Argentina
Agilent Technologies Osterreich GmbH Austria
Agilent Technologies Denmark A/S Denmark
Agilent Technologies Switzerland AG Switzerland
Agilent Technologies Finland Oy Finland
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES CERVIN S.AR.L
Agilent Technologies Norway Holding AS Norway
Agilent Technologies Holding Spain, S.L. Spain
Agilent Technologies Holding Sweden AB Sweden
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES HOLDING SWEDEN AB
Agilent Technologies Sweden AB Sweden
NON-U.S. SUBSIDIARIES OF INVERSIONES AGILENT TECHNOLOGIES SRL
Agilent Technologies Argentina SRL Argentina
<PAGE>
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES HOLDING SPAIN, S.L.
Agilent Technologies Spain, S.L. Spain
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES S.AR.L.
Agilent Technologies Cayman Islands Inc. Cayman Islands
Agilent Technologies (Malaysia) Sdn. Bhd. Malaysia
NON-U.S. SUBSIDIARIES OF AGILENT TECHNOLOGIES CAYMAN ISLANDS
Agilent Technologies Coordination Center S.C./C.V. Belgium
Agilent Technologies Singapore Pte. Ltd. Singapore
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES INTERNATIONAL B.V.
Agilent Technologies Deutschland Holding GmbH
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES DEUTSCHLAND
HOLDING GMBH
Agilent Technologies Deutschland GmbH Germany
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES DEUTSCHLAND GMBH
Agilent Technologies Deutschland GmbH & Co. Immobilien KG Germany
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES UK LIMITED
Agilent Finance Limited England
BT&D Technologies England
Lybra (Syscom) Limited England
NON-U.S. SUBSIDIARY OF AGILENT TECHNOLOGIES NORWAY HOLDING AS
Agilent Technologies Norway AS Norway
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-91121) of Agilent Technologies, Inc. of our
report dated November 23, 1999 relating to the consolidated financial
statements, which appears in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
San Jose, California
January 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,635
<ALLOWANCES> 0
<INVENTORY> 1,499
<CURRENT-ASSETS> 3,538
<PP&E> 3,657
<DEPRECIATION> 2,270
<TOTAL-ASSETS> 5,444
<CURRENT-LIABILITIES> 1,681
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 3,378
<TOTAL-LIABILITY-AND-EQUITY> 5,444
<SALES> 7,025
<TOTAL-REVENUES> 8,331
<CGS> 3,582
<TOTAL-COSTS> 4,388
<OTHER-EXPENSES> 3,202
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 787
<INCOME-TAX> 275
<INCOME-CONTINUING> 512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 512
<EPS-BASIC> 1.35
<EPS-DILUTED> 1.35
</TABLE>
