<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended July 31, 2000
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______________ to_________________
Commission file number: 001-15405
AGILENT TECHNOLOGIES, INC.
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0518772
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
395 Page Mill Road, Palo Alto, California 94306
------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 752-5000
--------------
Former address: 3000 Hanover Street, Palo Alto, California 94304
------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
----------------------------- -------------------------------
Common Stock, $0.01 par value 453,014,579 shares
<PAGE>
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
Part I. Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets (Unaudited) as of July 31, 2000
and October 31, 1999 3
Condensed Consolidated Statements of Earnings (Unaudited) for the
Three and Nine Months Ended July 31, 2000 and July 31, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended July 31, 2000 and July 31, 1999 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 39
Part II. Other Information 40
Item 1. Legal Proceedings 40
Item 6. Exhibits and Reports on Form 8-K 41
Signature 41
Exhibit Index 42
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Agilent Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except par value and share amounts)
<TABLE>
<CAPTION>
July 31, Oct. 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $703 $ -
Accounts receivable.............................................. 2,167 1,635
Inventory........................................................ 1,762 1,499
Other current assets............................................. 712 404
------ ------
Total current assets.......................................... 5,344 3,538
Property, plant and equipment, net.................................. 1,581 1,387
Other assets........................................................ 902 519
------ ------
Total assets........................................................ $7,827 $5,444
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings.......................... $ 129 $ -
Accounts payable................................................. 783 510
Employee compensation and benefits............................... 600 550
Deferred revenue................................................. 361 241
Accrued income taxes............................................. 238 -
Other accrued liabilities........................................ 399 380
------ ------
Total current liabilities..................................... 2,510 1,681
Other liabilities................................................... 415 381
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 125,000,000 shares
authorized; none issued and outstanding....................... - -
Common stock; $.01 par value; 2,000,000,000 shares
authorized; 453,014,579 shares at July 31, 2000 and
380,000,000 shares at October 31, 1999 issued and outstanding. 5 4
Additional paid-in capital....................................... 4,451 3,378
Retained earnings................................................ 452 -
Other comprehensive losses....................................... (6) -
------ ------
Total stockholders' equity.................................... 4,902 3,382
------ ------
Total liabilities and stockholders' equity.......................... $7,827 $5,444
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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Agilent Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue:
Products.............................................. $2,331 $1,788 $6,426 $5,005
Services and other.................................... 339 299 975 878
------ ------ ------ ------
Total net revenue.................................. 2,670 2,087 7,401 5,883
------ ------ ------ ------
Costs and expenses:
Cost of products...................................... 1,186 926 3,214 2,581
Cost of services and other............................ 183 177 576 515
Research and development.............................. 318 242 904 705
Selling, general and administrative................... 773 547 2,112 1,546
------ ------ ------ ------
Total costs and expenses........................... 2,460 1,892 6,806 5,347
------ ------ ------ ------
Earnings from operations................................. 210 195 595 536
Other income (expense), net.............................. 28 12 101 27
------ ------ ------ ------
Earnings before taxes.................................... 238 207 696 563
Provision for taxes...................................... 83 72 244 197
------ ------ ------ ------
Net earnings............................................. $ 155 $ 135 $ 452 $ 366
====== ====== ====== ======
Basic net earnings per share............................. $ .34 $ .36 $1.01 $ .96
Diluted net earnings per share........................... $ .34 $ .36 $1.00 $ .96
Average shares used in computing net earnings per share:
Basic................................................. 453 380 448 380
Diluted............................................... 461 380 452 380
Pro forma net earnings per share:
Basic................................................. $ .34 $1.00
Diluted............................................... $ .33 $ .97
Average shares used in computing pro forma net earnings
per share:
Basic................................................. 453 452
Diluted............................................... 464 464
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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Agilent Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
2000 1999
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................................ $ 452 $ 366
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................ 345 365
Gain on sale of equity investments....................................... (29) -
Deferred taxes on earnings............................................... (19) 49
Non-cash asset impairment charge......................................... - 51
Changes in assets and liabilities:
Accounts receivable.................................................... (514) (84)
Inventory.............................................................. (254) (113)
Accounts payable....................................................... 282 (9)
Accrued income taxes................................................... 238 -
Other current assets and liabilities................................... (52) (147)
Other, net............................................................. (34) (52)
----- -----
Net cash provided by operating activities...................................... 415 426
----- -----
Cash flows from investing activities:
Investments in property, plant and equipment................................ (448) (336)
Dispositions of property, plant and equipment............................... 101 71
Sales of equity investments................................................. 60 -
Purchases of equity investments............................................. (22) -
Acquisitions, net of cash acquired.......................................... (667) (28)
Cash proceeds of divestitures............................................... - 39
Other, net.................................................................. 10 (4)
----- -----
Net cash used in investing activities.......................................... (966) (258)
----- -----
Cash flows from financing activities:
Initial public offering proceeds............................................ 2,068 -
Initial public offering proceeds distributed to Hewlett-Packard............. (2,068) -
Issuance of common stock under employee stock plans......................... 44 -
Change in notes payable and short-term borrowings........................... 129 -
Net funding from (to) Hewlett-Packard....................................... 1,081 (168)
----- -----
Net cash provided by (used in) financing activities............................ 1,254 (168)
----- -----
Change in cash and cash equivalents............................................ 703 -
Cash and cash equivalents at beginning of period............................... - -
----- -----
Cash and cash equivalents at end of period..................................... $ 703 $ -
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Agilent Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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), comprised of HP's test and measurement, semiconductor
products, healthcare solutions and chemical analysis businesses,
related portions of Hewlett-Packard Laboratories and associated
infrastructure.
Agilent was incorporated in Delaware in May 1999 as a wholly-owned
subsidiary of HP with 125,000,000 shares of $.01 par value preferred
stock and 2,000,000,000 shares of $.01 par value common stock
authorized and 10,000,000 shares of common stock issued to HP.
Effective October 21, 1999, Agilent's Board of Directors declared a
38-for-one stock split in the form of a stock dividend. As a result of
the stock split, common stock issued and outstanding increased to
380,000,000 shares. On November 18, 1999, Agilent launched its initial
public offering of 72,000,000 shares of common stock at $30 per share.
The net proceeds of the offering of $2.1 billion were paid to HP as a
dividend on November 23, 1999. On April 7, 2000, HP announced that its
board of directors had declared a stock dividend of all of HP's shares
in Agilent. The dividend was distributed on June 2, 2000 (the
distribution date), to HP shareholders of record as of 5 p.m. Eastern
Daylight Time on May 2, 2000. The distribution was on the basis of
0.3814 of an Agilent share for each HP common share outstanding.
The condensed consolidated 1999 financial information has been
prepared using HP's historical bases in the assets and liabilities
and the historical results of operations of Agilent. Agilent began
accumulating retained earnings on November 1, 1999.
The condensed consolidated 1999 financial information includes
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
considered to be a reasonable reflection of the utilization of
services provided or the benefit received by Agilent. However, the
1999 financial information included herein may not reflect the
consolidated financial position, operating results, and cash flows
of Agilent in the future or what they would have been had Agilent
operated as a separate, stand-alone entity during 1999. In fiscal
2000, Agilent entered into interim service level agreements with HP
covering the provision of various services, including information
technology, financial, accounting, building, legal and other
services (Note 9).
Effective November 1, 1999, Agilent began operating as a stand-alone
company. In November 1999, HP transferred to Agilent a majority of the
assets and liabilities relating to its businesses and also provided
Agilent with cash funding of approximately $1.1 billion. HP retained
some of Agilent's assets and liabilities, including some of its
accounts receivable and accounts payable, accrued payroll and related
items and taxes payable, except deferred taxes, and transferred to
6
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Agilent some of the assets and liabilities related to its business,
including some of the accounts receivable, accounts payable and other
liabilities of Agilent Technologies Japan, Ltd. (formerly called
Hewlett-Packard Japan, Ltd.). In addition, HP transferred to Agilent
$521 million to fund its acquisition of Yokogawa Electric Corporation's
25% minority equity ownership of Agilent Technologies Japan, Ltd. (Note
4). In December 1999, HP provided Agilent with additional cash funding
of approximately $200 million based on its and HP's balance sheets as
of October 31, 1999.
Of the total $1.8 billion of funding received from HP in the nine
months ended July 31, 2000, $1.1 billion was classified as net cash
provided by financing activities and $0.7 billion was classified among
several categories as net cash provided by operating activities in the
condensed consolidated statement of cash flows for the nine months
ended July 31, 2000.
2. Summary of Significant Accounting Policies
In the opinion of Agilent's management, the accompanying condensed
consolidated financial statements contain all adjustments (which
comprise only normal and recurring accruals) necessary to present
fairly its consolidated financial position as of July 31, 2000 and its
consolidated results of operations and cash flows for the three and
nine months ended July 31, 2000 and 1999.
Certain amounts in the condensed consolidated statements of operations
for the three and nine months ended July 31, 1999 have been
reclassified to conform to the current period's presentation.
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 the condensed
consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
The results of operations for the three and nine months ended July 31,
2000 are not necessarily indicative of the results to be expected for
the full year. The information included in this Form 10-Q should be
read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations as well as the
consolidated financial statements and notes thereto included in
Agilent's 1999 Annual Report on Form 10-K.
3. Accounting Pronouncements
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
Agilent recorded $6 million of accumulated other comprehensive losses
to stockholders' equity in the nine months ended July 31, 2000. Prior
period financial statements were not materially impacted by the
statement.
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 the
balance sheet and measurement of those instruments at fair value. The
statement is effective for years beginning after June 15, 2000. Agilent
will adopt the standard no later than the first
7
<PAGE>
quarter of its fiscal year 2001 and is in the process of determining
the impact that adoption will have on its consolidated financial
statements.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." In June 2000, the SEC delayed the
implementation date of this Staff Accounting Bulletin. This Staff
Accounting Bulletin is effective no later than the fourth quarter of
Agilent's fiscal year 2001. Agilent is in the process of determining
the impact that adoption will have on its consolidated financial
statements.
4. Acquisitions
In July 2000, Agilent acquired all of the outstanding stock of SAFCO
Technologies, Inc. for approximately $120 million in cash. During
fiscal 2000, Agilent acquired several additional companies for
approximately $140 million. 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. 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 all of these acquisitions was approximately $224
million as of July 31, 2000.
On July 6, 1999, HP entered into an agreement with Yokogawa Electric
Corporation (Yokogawa) of Japan to acquire Yokogawa's 25% minority
equity ownership of Agilent Technologies Japan, Ltd. for
approximately $521 million. Under the terms of the agreement which
were assigned to Agilent, Agilent will acquire Yokogawa's shares
through a series of purchase transactions. In the initial step,
which occurred in January 2000, Agilent purchased approximately
10.4% of Agilent Technologies Japan, Ltd. shares from Yokogawa for
approximately $206 million. In the second step, which occurred in
April 2000, Agilent purchased approximately 10.4% of additional
Agilent Technologies Japan, Ltd. shares from Yokogawa for
approximately $216 million. Agilent will purchase the remaining 4.2%
of Agilent Technologies Japan, Ltd. shares owned by Yokogawa prior
to March 31, 2003. HP has provided the funding for all steps of this
transaction.
An independent valuation has been performed to determine the portion
of the Yokogawa purchase price attributable to Agilent's business
and the remaining HP business and to allocate the purchase price to
identifiable assets and liabilities. Of the total purchase price,
$391 million is attributable to Agilent's business, of which
approximately $278 million will be recorded as goodwill and
amortized over 10 years. The net book value of goodwill associated
with the two payments for the purchase of approximately 20.8% of HPJ
shares from Yokogawa was approximately $226 million at July 31,
2000. The remainder of the purchase price was allocated to tangible
assets.
8
<PAGE>
5. Earnings Per Share
Basic net earnings per share is computed by dividing net earnings
(numerator) by the weighted average number of common shares
outstanding (denominator) during the period excluding the dilutive
effect of stock options and other employee stock plans. Diluted net
earnings per share gives effect to all potentially dilutive common
shares outstanding during the period. In computing diluted net
earnings per share, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the
proceeds of stock option exercises.
Pro forma basic net earnings per share has been computed by dividing
net earnings by the weighted average shares outstanding for the
period including the 72,000,000 shares issued in Agilent's initial
public offering and assuming they were outstanding for the entire
period, as the proceeds of the offering were distributed to HP. Pro
forma diluted net earnings per share has been computed by dividing
net earnings by the weighted average shares outstanding for the
period including the 72,000,000 shares issued in Agilent's initial
public offering and assuming they were outstanding for the entire
period plus the dilutive impact of outstanding stock options and
other employee stock plans. It also assumes that HP stock and
options converted to Agilent stock and options on the distribution
date were outstanding for the entire period.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net earnings per share computations for the
periods presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
2000 1999 2000 1999
---- ---- ---- ----
(in millions, except per share data)
<S> <C> <C> <C> <C>
Numerators:
Net earnings ............................................... $ 155 $ 135 $ 452 $ 366
Denominators:
Basic weighted average shares .............................. 453 380 448 380
Potentially dilutive common shares - stock options and other
employee stock plans.................................. 8 -- 4 --
----- ----- ----- -----
Diluted weighted average shares ................................ 461 380 452 380
Net earnings per share:
Basic ...................................................... $0.34 $0.36 $1.01 $0.96
Diluted .................................................... $0.34 $0.36 $1.00 $0.96
Pro forma denominators:
Basic pro forma shares ..................................... 453 452
Potentially dilutive pro forma common shares - stock options
and other employee stock plans ....................... 11 12
----- -----
Diluted pro forma shares ....................................... 464 464
Pro forma net earnings per share:
Basic ...................................................... $0.34 $1.00
Diluted .................................................... $0.33 $0.97
</TABLE>
6. Inventory
<TABLE>
<CAPTION>
July 31, Oct. 31,
2000 1999
-------- --------
(in millions)
<S> <C> <C>
Finished goods ................................................. $ 521 $ 639
Purchased parts and fabricated assemblies ...................... 1,241 860
------ ------
$1,762 $1,499
====== ======
</TABLE>
9
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7. Comprehensive Earnings
For the three months ended July 31, 2000, Agilent recorded an
unrealized loss, net of tax, of $2 million relating to investments
in equity securities, which was subtracted from net earnings of $155
million to compute comprehensive earnings of $153 million. For the
nine months ended July 31, 2000, Agilent recorded an unrealized loss,
net of tax, of $6 million relating to investments in equity securities,
which was subtracted from net earnings of $452 million to compute
comprehensive earnings of $446 million. Prior to November 1, 1999,
Agilent had no material components of comprehensive earnings or losses.
8. Supplemental Cash Flow Information
The condensed consolidated statement of cash flows for the nine months
ended July 31, 2000 excludes a net asset transfer of $14 million to
Agilent from HP. This non-cash event was accounted for as a change in
paid-in capital. Agilent paid approximately $67 million in cash to
Hewlett-Packard in July 2000 concerning Agilent's estimated tax
liability from November 1, 1999 through June 2, 2000.
9. Related Party Transactions
On June 2, 2000, all Agilent shares owned by Hewlett-Packard were
distributed as a stock dividend to HP shareholders of record as of 5
p.m. Eastern Daylight time on May 2, 2000. As a result of this
action, HP is no longer a related party to Agilent as of June 2,
2000.
Agilent's net revenue from sales of products to HP was $44 million and
$341 million for the periods from May 1, 2000 through June 2, 2000 and
November 1, 1999 through June 2, 2000, respectively. Agilent's net
revenue from sales of products to HP was $212 million and $590 million
for the three and nine months ended July 31, 1999.
In 1999 and 2000, Agilent purchased certain products from HP. These
products were purchased for inclusion in Agilent products sold to
third parties and for internal use. In 2000, Agilent purchased
products from HP at prices that management believes approximate the
prices an unrelated party would pay. These purchases from HP amount
to approximately $18 million and $122 million in the period from May 1,
2000 through June 2, 2000 and November 1, 1999 through June 2, 2000,
respectively. In 1999, Agilent purchased products from HP for the
amount of $47 million and $108 million in the three and nine months
ended July 31, 1999. Purchases from HP at cost for internal use totaled
$29 million and $63 million in the three and nine months ended July 31,
1999.
Agilent's costs and expenses during the three and nine months ended
July 31, 1999 included 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 were
determined on bases that HP and Agilent considered to be a
reasonable reflection of the utilization of services provided or the
benefit received by Agilent. The allocation methods included
relative sales, headcount, square footage, transaction processing
costs, adjusted operating expenses and others. Allocated costs
included in the accompanying condensed consolidated statements of
earnings for the three and nine months ended July 31, 1999 follow.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended July 31, Ended July 31,
1999 1999
------------- -------------
(in millions)
<S> <C> <C>
Costs of products and services............. $ 52 $ 147
Research and development................... 37 108
Selling, general and administrative........ 112 324
</TABLE>
Agilent has entered into interim service level agreements with HP
covering the provision of various services, including information
technology, financial, accounting, building, legal and other services
by HP to Agilent or, in some circumstances, vice versa. These services
are generally being provided for fees equal to the actual direct and
indirect costs of providing the services plus 5%. The interim service
level agreements generally have a term of two years or less from the
date of separation from HP. However, some interim service level
agreements, including those for building services and information
technology services, may be extended beyond the initial two-year
period. If these agreements are extended, their terms will change so
that the lessor will receive fair market rental value for the rental
component of the building services and the cost plus 10% for
information technology and other services and non-rental components of
building services. The total cost of services Agilent received from HP
was approximately $41 million and
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$267 million in the periods from May 1, 2000 through June 2, 2000 and
November 1, 1999 through June 2, 2000, respectively. The total cost
of services HP received from Agilent was approximately $9 million
and $95 million in the same periods, respectively.
For purposes of governing certain of the ongoing relationships between
Agilent and HP at and after November 1, 1999 (the separation date) and
to provide for an orderly transition, Agilent and HP have entered into
various agreements. A brief description of each of the agreements
follows. Each of these agreements were filed as exhibits to Agilent's
Registration Statement on Form S-1.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT. The separation agreement
contains the key provisions relating to the separation, Agilent's
initial funding, initial public offering and the distribution. The
agreement lists the documents and items that the parties had to deliver
in order to accomplish the transfer of assets and liabilities from HP
to Agilent, effective on the separation date. The agreement also
contains conditions that had to occur prior to the initial public
offering and the distribution. The parties also entered into ongoing
covenants that survive the transactions, including covenants to
establish interim service level agreements, exchange information,
notify each other of changes in 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 and the liabilities that Agilent 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 condensed
consolidated balance sheet at October 31, 1999, after adjustment for
certain assets and liabilities that were retained by HP.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Effective as of the
separation date, Agilent 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 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
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separation agreement. In addition, HP and Agilent will each indemnify
the other against liability for specified environmental matters.
Agilent reimbursed HP for the cost of any insurance coverage from the
separation date to the distribution date.
EMPLOYEE MATTERS AGREEMENT. The Employee Matters Agreement allocates
responsibility for, and liability related to, the employment of those
employees of HP who have become Agilent employees. The agreement also
contains provisions describing Agilent's benefit and equity plans.
Agilent established employee benefit plans comparable to those of 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 of employees at certain of HP's
international operations, and of certain pension and employee benefit
plans, may not take place until Agilent receives consents or approvals
or has satisfied other applicable requirements.
TAX SHARING AGREEMENT. The tax sharing agreement provides for HP's and
Agilent's obligations concerning various tax liabilities. The tax
sharing agreement provides that HP generally will pay, and indemnify
Agilent if necessary, for all federal, state, local and foreign taxes
relating to Agilent's business for any taxable period ending prior to
November 1, 1999. In addition, the tax sharing agreement provides that
HP and Agilent will make payments between them such that the amount of
taxes to be paid by HP and Agilent will be determined, subject to
specified adjustments, as if HP and Agilent and each of their
subsidiaries included in HP's consolidated tax returns had filed their
own consolidated, combined or unitary tax return for that period. For
U.S. federal income tax purposes, such consolidated return period is
November 1, 1999 through June 2, 2000.
The tax sharing agreement allocates responsibility for various taxes
arising from restructurings related to the spinoff between HP and
Agilent. In addition, Agilent 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 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. Specifically, Agilent 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's 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. The agreement
describes the manner in which HP transferred to or shares with Agilent
various leased and owned properties. The Real Estate Matters Agreement
also provided that all costs required to effect the transfers,
including landlord consent fees, landlord attorneys' fees, title
insurance fees and transfer taxes, were paid by HP.
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MASTER IT SERVICE LEVEL AGREEMENT. The Master IT Service Level
Agreement governs the provision of information technology services
by HP and Agilent to each other, on an interim basis, until November
1, 2001, unless extended for specific services or otherwise
indicated in the agreement. The services include data processing and
telecommunications services, such as voice telecommunications and
data transmission. Specified charges for such services are generally
intended to allow the providing company to recover the direct and
indirect 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 provides for the
replication of some computer systems, including hardware, software,
data storage or maintenance and support components. Generally, the
party needing the replicated system bears the costs and expenses of
replication. Generally, the party purchasing new hardware or licensing
new software bears the costs and expenses of purchasing the new
hardware or obtaining the new software licenses.
INTELLECTUAL PROPERTY AGREEMENTS. The Master Technology Ownership
and License Agreement, the Master Patent Ownership and License
Agreement, the Master Trademark Ownership and License Agreement and
the ICBD Technology Ownership and License Agreement together are
referred to as the Intellectual Property Agreements. Under the
Intellectual Property Agreements, HP transferred to Agilent its
rights in specified patents, specified trademarks and other
intellectual property related to Agilent's current business and
research and development efforts. HP and Agilent each are licensed
under the other's patents issued on patent applications with
effective filing dates before November 1, 2004, subject to field of
use restrictions. HP and Agilent are also licensed to use technology
that has been disclosed to such licensed company or that is in the
licensed company's possession as of the separation date, with
certain limitations. The agreements include certain rights to
sublicense for both parties. Agilent is licensed to use some HP
trademarks, and this license is royalty-bearing after five years.
ENVIRONMENTAL MATTERS AGREEMENT. HP has agreed to retain and indemnify
Agilent for liabilities associated with properties transferred to
Agilent which are undergoing environmental investigation and
remediation and for which HP has accrued a reserve as of the separation
date. The purpose of the Environmental Matters Agreement is to address,
in a general way, HP's and Agilent's rights and obligations with
respect to that investigation and remediation.
10. Restructuring, Asset Impairment and Other Charges
Subsequent to July 31, 2000, Agilent announced a reorganization of its
healthcare solutions business. The reorganization will involve a
workforce reduction of approximately 650 employees (including
approximately 450 regular and 200 temporary employees) located in
the United States, Asia Pacific
13
<PAGE>
and Europe.
During the three months ended July 31, 1999, Agilent recognized an
impairment loss of $51 million related to a building that was under
construction for the intended purpose of housing manufacturing
operations for eight-inch CMOS semiconductor wafers. Agilent has an
active plan to sell the building.
During 1998, management committed to transfer the production of
eight-inch semiconductor wafers to a third-party contractor. The
restructuring costs 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. Agilent has sold all of this equipment
as of July 31, 2000.
11. Segment Information
The following tables reflect the results of Agilent's reportable
segments under the Agilent 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 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>
Three months ended July 31, 2000:
External revenue ................ $1,514 $591 $319 $246 $2,670
Internal revenue ................ -- 13 -- -- 13
------ ---- ---- ---- ------
Total net revenue ............... $1,514 $604 $319 $246 $2,683
====== ==== ==== ==== ======
Earnings(loss) from operations .. $ 162 $ 99 ($40) ($ 8) $ 213
====== ==== ==== ==== ======
Three months ended July 31, 1999:
External revenue ................ $1,003 $457 $372 $255 $2,087
Internal revenue ................ 1 14 1 -- 16
------ ---- ---- ---- ------
Total net revenue ............... $1,004 $471 $373 $255 $2,103
====== ==== ==== ==== ======
Earnings from operations ........ $ 122 $ 16 $ 41 $ 36 $ 215
====== ==== ==== ==== ======
</TABLE>
THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
AGILENT, AS REPORTED
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
---- ----
(in millions)
<S> <C> <C>
Net revenue:
Total reportable segments' net revenue.......................................... $2,683 $2,103
Elimination of internal revenue................................................. (13) (16)
------ ------
Total net revenue, as reported............................................... $2,670 $2,087
====== ======
Earnings before taxes:
Total reportable segments' earnings from operations............................. $213 $215
Corporate and unallocated....................................................... (3) (20)
Other income (expense), net..................................................... 28 12
------ ------
Total earnings before taxes, as reported..................................... $238 $207
====== ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Test and Semiconductor Healthcare Chemical Total
Measurement Products Solutions Analysis Segments
----------- -------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Nine months ended July 31, 2000:
External revenue ............... $4,060 $1,535 $1,057 $749 $7,401
Internal revenue ............... -- 33 -- -- 33
------ ------ ------ ---- ------
Total net revenue .............. $4,060 $1,568 $1,057 $749 $7,434
====== ====== ====== ==== ======
Earnings(loss) from operations . $ 479 $ 188 $ (53) $ 6 $ 620
====== ====== ====== ==== ======
Nine months ended July 31, 1999:
External revenue ............... $2,856 $1,230 $1,043 $754 $5,883
Internal revenue ............... 4 26 1 -- 31
------ ------ ------ ---- ------
Total net revenue .............. $2,860 $1,256 $1,044 $754 $5,914
====== ====== ====== ==== ======
Earnings from operations ....... $ 273 $ 81 $86 $ 99 $ 539
====== ====== ====== ==== ======
</TABLE>
THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
AGILENT, AS REPORTED
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
2000 1999
---- ----
(in millions)
<S> <C> <C>
Net revenue:
Total reportable segments' net revenue......................................... $7,434 $5,914
Elimination of internal
revenue.................................................................. (33) (31)
------ ------
Total net revenue, as reported.............................................. $7,401 $5,883
====== ======
Earnings before taxes:
Total reportable segments' earnings from operations............................ $620 $539
Corporate and unallocated...................................................... (25) (3)
Other income (expense), net.................................................... 101 27
------ ------
Total earnings before taxes, as reported.................................... $696 $563
====== ======
</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.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS FORM 10-Q. 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,"
"PROJECTS," "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" IN THIS FORM 10-Q.
Overview
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company, subsequently named Agilent Technologies, Inc. (Agilent), 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.
We were incorporated in Delaware in May 1999 as a wholly-owned
subsidiary of Hewlett-Packard. Our businesses historically were
operated as internal units of Hewlett-Packard. In November 1999,
Hewlett-Packard transferred to us a majority of the assets and
liabilities relating to our businesses and also provided us with
cash funding of approximately $1.1 billion. Hewlett-Packard retained
some of our assets and liabilities including some of our accounts
receivable and accounts payable, accrued payroll and related items
and taxes payable, except deferred taxes, and transferred to us some
of the assets and liabilities related to its business, including
some of the accounts receivable, accounts payable and other
liabilities of Agilent Technologies Japan, Ltd. (formerly called
Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard
transferred to us $521 million to fund our acquisition of Yokogawa
Electric Corporation's 25% minority equity ownership of Agilent
Technologies Japan, Ltd. In December 1999, Hewlett-Packard provided
us with cash funding of approximately $200 million based on our and
Hewlett-Packard's balance sheets as of October 31, 1999.
After the completion of our initial public offering in November 1999,
Hewlett-Packard owned approximately 84.1% of our outstanding common
stock. On April 7, 2000, Hewlett-Packard announced that its board of
directors had declared a stock dividend of all of Hewlett-Packard's
shares in Agilent. The dividend was distributed on June 2, 2000, to
Hewlett-Packard shareholders of record as of 5 p.m. Eastern Daylight
Time on May 2, 2000. The distribution was on the basis of 0.3814 of an
Agilent share for each Hewlett-Packard common share outstanding.
Hewlett-Packard and we have entered into various agreements related to
certain ongoing relationships between the companies. For a brief
description of these agreements, see Note 9 of Item 1. In addition, we
have entered into agreements with Hewlett-Packard under which
Hewlett-Packard will provide services to us during a transition period
which began November 1, 1999. The agreements relate primarily to
information technology, finance, accounting, legal and building
services. Under these agreements, we generally reimburse
Hewlett-Packard for its cost of the
16
<PAGE>
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 effective means
of obtaining these services during the transition period. In addition,
we provide some transition services to Hewlett-Packard, for which we
are reimbursed at our cost plus 5%.
Basis of Presentation
The financial information presented in this Form 10-Q is not indicative
of our consolidated financial position, results of operations or cash
flows in the future nor is it necessarily indicative of what our
consolidated financial position, results of operations or cash flows
would have been had we been a separate, stand-alone entity for the 1999
periods presented. The 1999 financial information presented in this
Form 10-Q does not reflect the many significant changes that occurred
in our funding and operations as a result of our becoming a stand-alone
entity and our initial public offering.
Cyclical Business
Several significant 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.
Our revenue and operating results for the three and nine months ended
July 31, 2000 compared to the corresponding periods in 1999 have
improved as a result of an upturn in the semiconductor industry.
Additionally, as a capital equipment provider, our revenue is driven by
the capital expenditure budgets and spending patterns of our customers
who often delay or accelerate purchases in reaction to variations in
their business. For instance, increasing pressure on hospitals from the
balanced-budget amendment in the United States has slowed capital
purchasing of our hospital customers. 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 operating results.
Economic Conditions in Asia
Our revenue and operating results for the three months and nine months
ended July 31, 2000 compared to the corresponding periods in 1999 have
improved in part as a result of the upturn in Asian economies.
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, particularly the Japanese yen and the Euro which
was introduced on January 1, 1999 to replace 11 European national
currencies. In 1999, our currency exposures were hedged as part of
17
<PAGE>
Hewlett-Packard's global hedging program, which was designed to
minimize exposure to foreign currency fluctuations. We implemented a
similar hedging program upon our separation from Hewlett-Packard in
November 1999.
Recent Accounting Pronouncements
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," we
recorded $6 million of accumulated other comprehensive losses to
stockholders' equity in the nine months ended July 31, 2000. Prior
period financial statements were not materially impacted by the
statement.
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 years beginning after June 15, 2000. We will
adopt the standard no later than the first quarter of our fiscal year
2001 and we are in the process of determining the impact that adoption
will have on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." In June 2000, SEC delayed the implementation
date of this Staff Accounting Bulletin. This Staff Accounting Bulletin
is effective no later than the fourth quarter of our fiscal year 2001.
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 three and nine months ended July 31,
2000 and 1999 in dollars and as a percentage of total net revenue
follow.
<TABLE>
<CAPTION>
Three Months Ended July 31,
------------------------------------------------------
As a Percentage of
Total Net Revenue Dollars
-------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net revenue:
Products...................................... $2,331 $1,788 87.3 85.7
Services and other............................ 339 299 12.7 14.3
------ ------ ----- -----
Total net revenue.......................... 2,670 2,087 100.0 100.0
------ ------ ----- -----
Costs and expenses:
Cost of products.............................. 1,186 926 44.4 44.4
Cost of services and other.................... 183 177 6.8 8.5
Research and development...................... 318 242 11.9 11.6
Selling, general and administrative........... 773 547 29.0 26.2
------ ------ ----- -----
Total costs and expenses..................... 2,460 1,892 92.1 90.7
------ ------ ----- -----
Earnings from operations........................ 210 195 7.9 9.3
Other income (expense), net..................... 28 12 1.0 0.6
------ ------ ----- -----
Earnings before taxes........................... 238 207 8.9 9.9
Provision for taxes............................. 83 72 3.1 3.4
------ ------ ----- -----
Net earnings.................................... $155 $135 5.8 6.5
====== ====== ===== =====
Cost of products as a percentage of products
revenue...................................... 50.9 51.8
Cost of services and other as a percentage of
services and other revenue................... 54.0 59.2
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended July 31,
------------------------------------------------------
As a Percentage of
Total Net Revenue Dollars
-------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net revenue:
Products..................................... $6,426 $5,005 86.8 85.1
Services and other........................... 975 878 13.2 14.9
------ ------ ----- -----
Total net revenue......................... 7,401 5,883 100.0 100.0
------ ------ ----- -----
Costs and expenses:
Cost of products............................. 3,214 2,581 43.4 43.9
Cost of services and other................... 576 515 7.8 8.7
Research and development..................... 904 705 12.2 12.0
Selling, general and administrative.......... 2,112 1,546 28.6 26.3
------ ------ ----- -----
Total costs and expenses.................. 6,806 5,347 92.0 90.9
------ ------ ----- -----
Earnings from operations........................ 595 536 8.0 9.1
Other income (expense), net..................... 101 27 1.4 0.5
------ ------ ----- -----
Earnings before taxes........................... 696 563 9.4 9.6
Provision for taxes............................. 244 197 3.3 3.4
------ ------ ----- -----
Net earnings.................................... $452 $366 6.1 6.2
====== ====== ===== =====
Cost of products as a percentage of products
revenue...................................... 50.0 51.6
Cost of services and other as a percentage of
services and other revenue................... 59.1 58.7
</TABLE>
Certain amounts in the condensed consolidated statements of earnings
for the three and nine months ended July 31, 1999 have been
reclassified to conform to the current period's presentation.
NET REVENUE
Total net revenue increased 27.9 percent to $2.7 billion and 25.8
percent to $7.4 billion in the three and nine months ended July 31,
2000, respectively, compared to $2.1 billion and $5.9 billion in the
same periods in 1999. The increases were the result of a number of
factors, including continued growth in revenue from the
communications and electronics markets. This was especially evident
with the robust demand in our test and measurement and semiconductor
products businesses. In addition, increased demand in Asia continued
to contribute to overall revenue growth. In the three months ended
July 31, 2000, the increase was partially offset by declines in
revenue in our healthcare solutions and our chemical analysis
businesses.
United States revenue increased 19.0 percent to $1.2 billion and 19.7
percent to $3.2 billion in the three and nine months ended July 31,
2000, respectively, compared to $1.0 billion and $2.7 billion in the
same periods in 1999. International revenue increased
19
<PAGE>
35.9 percent to $1.5 billion and 30.8 percent to $4.2 billion in the
three and nine months ended July 31, 2000, respectively, compared to
$1.1 billion and $3.2 billion in the same periods in 1999. The
higher net revenue growth abroad was primarily attributable to
increased demand in Asia, particularly Taiwan, Korea and Japan.
There was minimal currency impact on net revenue growth in the three
and nine months ended July 31, 2000.
In the three months ended July 31, 2000, revenue from products
increased 30.4 percent while revenue from services and other
increased 13.4 percent, compared to the same period in 1999. In the
first nine months of 2000, revenue from products increased 28.4
percent while revenue from services and other increased 11.0
percent, compared to the same period in 1999. The higher product
revenue growth was primarily due to the growing communications and
electronics markets, a strengthening of the semiconductor industry
and increased demand in Asia. Generally, service revenue growth
follows behind product revenue as our installed base of products
increases and warranty periods expire. Additionally, there is no
service revenue associated with our semiconductor products business.
Demand for our products and services in the communications and
electronics markets has continued to be strong in the three months
ended July 31, 2000. This increase in demand has continued to put
pressure on our manufacturing capacity, particularly on products for
the wireless and fiber optic markets. We are continuing to work on
increasing capacity to meet this demand but we may experience
additional capacity constraints or parts shortages in the future.
EARNINGS FROM OPERATIONS
Earnings from operations increased 7.7 percent to $210 million and 11.0
percent to $595 million in the three and nine months ended July 31,
2000, respectively, compared to $195 million and $536 million in the
same periods in 1999. The increases were primarily due to strong
results in the test and measurement and semiconductor businesses,
partially offset by weak performance in our healthcare solutions and
chemical analysis businesses, which included the on-going costs
associated with operating on our own as well as planned investments
in life sciences.
Cost of products and services, as a percentage of net revenue,
decreased 1.6 percentage points, to 51.3 percent, in the three
months ended July 31, 2000, compared to 52.9 percent in the same
period in 1999. Cost of products and services, as a percentage of
net revenue, decreased 1.4 percentage points, to 51.2 percent, in
the nine months ended July 31, 2000, compared to 52.6 percent in the
same period in 1999. Adjusted for the 1999 impairment loss of $51
million related to a building under construction for the
manufacturing of eight-inch CMOS semiconductor wafers, cost of
products and services as a percentage of net revenue increased 0.9
percentage points and decreased 0.6 percentage points in the three
and nine months ended July 31, 2000, respectively. When adjusted for
the 1999 impairment loss, the increase in cost of products and
services, as a percentage of revenue, in the three months ended July
31, 2000 resulted from higher costs as a percentage of revenue in
our healthcare solutions and chemical analysis businesses partially
offset by lower costs as a percentage of revenue in our
semiconductor products business. When adjusted for the 1999
impairment loss, the decrease in the nine months
20
<PAGE>
ended July 31, 2000 was primarily attributable to higher volumes in
the test and measurement and semiconductor products businesses as
well as a more profitable product mix within the semiconductor
products business.
Operating expenses as a percentage of net revenue increased 3.1
percentage points to 40.9 percent and 2.5 percentage points to 40.8
percent in the three and nine months ended July 31, 2000, respectively,
compared to 37.8 percent and 38.3 percent in the same periods in 1999.
The increases were primarily due to higher infrastructure costs related
to operating on our own as well as higher marketing costs, including
branding expenses. These increases were partially offset in the
three months ended July 31, 2000 by reduced costs associated with
stock appreciation rights.
Research and development expenses increased 31.4 percent and 28.2
percent in the three and nine months ended July 31, 2000,
respectively, compared to the same periods in 1999. The increases
reflect ongoing investments in developing new products and new
technologies in the areas of wireless, networking and the life
sciences. Selling, general and administrative expenses increased
41.3 percent and 36.6 percent in the three and nine months ended
July 31, 2000, respectively, compared to the same periods in 1999.
The increases were primarily due to higher infrastructure costs
related to operating on our own as well as higher marketing costs,
including branding expenses. These increases were partially offset
by reduced costs associated with stock appreciation rights.
Costs related to our operating as a separate, stand-alone entity
include significant incremental expenditures. We expect operating
expenses for the remainder of 2000 compared to 1999, primarily
infrastructure costs and branding expenses, to be higher as a result
of our stand-alone operations.
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased $16 million to income of $28
million and increased $74 million to income of $101 million in the
three and nine months ended July 31, 2000, respectively. The increases
were primarily due to approximately $4 million and $29 million of gains
on sales of equity investments that no longer supported our business
strategies for the three and nine months ended July 31, 2000,
respectively, and interest income earned on the initial cash funding
received from Hewlett-Packard.
PROVISION FOR TAXES
Our effective tax rate was 35.0 percent in the three and nine months
ended July 31, 2000 and 1999. The rate is based on estimates of our
earnings before taxes in the various jurisdictions in which we
operate throughout the world and the amount of acquisition-related
charges. While changes in our mix of earnings before taxes in these
tax jurisdictions and balances of acquisition-related charges can
cause our effective tax rate to fluctuate, we currently expect our
effective tax rate to remain at 35.0 percent throughout the
remainder of 2000.
21
<PAGE>
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue.......................................... $1,514 $1,003
Earnings from operations............................. 162 122
As a percentage of net revenue................... 10.7% 12.2%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $4,060 $2,856
Earnings from operations.............................. 479 273
As a percentage of net revenue.................... 11.8% 9.6%
</TABLE>
NET REVENUE
Net revenue from our test and measurement business increased 50.9
percent to $1.5 billion and 42.2 percent to $4.1 billion in the
three and nine months ended July 31, 2000, respectively, compared to
$1.0 billion and $2.9 billion in the same periods in 1999. The
increases were attributable to very strong growth in the markets
served by our fast-growing optical, wireless and data-networking
products. Revenue growth was extremely strong in our semiconductor
test system business as well as for our products that test printed
circuit board assemblies as contract manufacturing customers added
capacity to meet demand and new technologies and capabilities were
introduced. The growth rate for the nine months ended July 31, 2000
was affected in part by a comparison with the comparable year-ago
period that was negatively impacted by weakness in the semiconductor
industry and the decreased demand in Asia.
In the three months ended July 31, 2000, our net revenue from products
increased 56.7 percent while our net revenue from services increased
22.9 percent, compared to the same period in 1999. In the nine months
ended July 31, 2000, our net revenue from products increased 47.6
percent while our net revenue from services increased 16.2 percent,
compared to the same period in 1999. The higher product revenue growth
was primarily due to the growing communications market and the
increased demand in Asia. Generally, service revenue growth follows
product revenue as our installed base of products increases and
warranty periods expire.
EARNINGS FROM OPERATIONS
Earnings from operations from our test and measurement business
increased 32.8 percent to $162 million and 75.5 percent to $479 million
in the three and nine months ended July 31, 2000, respectively,
compared to $122 million and $273 million in the same periods in 1999.
The increase for the three months ended July 31, 2000 resulted from
increased revenue, partially offset by higher cost of products and
services as a percentage of revenue. The increase for the nine months
ended July 31, 2000 resulted from higher revenue and lower operating
expenses as a percentage of revenue.
Cost of products and services as a percentage of net revenue increased
1.6 percentage points and decreased 0.7 percentage points in the three
and nine months ended July 31, 2000, respectively, as compared to the
same periods in 1999. The increase in the three months ended July 31,
2000 was substantially attributable to manufacturing inefficiencies
incurred in our efforts to meet customer demands, including the use of
other equipment manufacturers' products as well as premium prices for
scarce components. The slight decrease for the nine months ended
July 31, 2000 is primarily due to higher revenue.
Operating expenses as a percentage of net revenue decreased 0.2
percentage points and 1.5 percentage points in the three and nine
months
22
<PAGE>
ended July 31, 2000, respectively, compared to the same periods of
1999. The decreases were due to higher net revenue partially offset by
higher expenses.
Research and development expense increased 34.8 percent and 26.5
percent in the three and nine months ended July 31, 2000,
respectively, compared to the same periods in 1999. The increases
reflect our continuing investments in new product development.
Selling, general and administrative expense increased 57.1 percent
and 42.2 percent in the three and nine months ended July 31, 2000,
respectively, compared to the same periods in 1999. The increases
were primarily due to higher infrastructure costs related to
operating on our own as well as higher selling and marketing costs
including branding expenses.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $591 $457
Earnings from operations.............................. 99 16
As a percentage of net revenue.................... 16.8% 3.5%
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $1,535 $1,230
Earnings from operations.............................. 188 81
As a percentage of net revenue.................... 12.2% 6.6%
</TABLE>
NET REVENUE
Net revenue from our semiconductor products business increased 29.3
percent to $591 million and 24.8 percent to $1.5 billion in the
three and nine months ended July 31, 2000, respectively, compared to
$457 million and $1.2 billion in the same periods in 1999. In the
three months ended January 31, 2000 net revenue growth was driven by
strong growth in all semiconductor products except ASICs, where
growth was affected by the planned phaseout of microprocessor sales
and temporary supply chain adjustments by Hewlett-Packard. Wireless
and networking components achieved excellent growth in the three
months ended July 31, 2000. Networking component growth was driven
by fiber-optic transceivers and high-speed integrated circuits
tailored for Metro Area Network (MAN) and Gigabit Ethernet Local
Area Network (LAN) applications. Imaging products for digital
cameras and optical mice also achieved particularly strong growth in
the three months ended July 31, 2000. Similarly, wireless, networking
and imaging components led the strong net revenue growth for the
nine months ended July 31, 2000. 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 24.5 percent and 27.3 percent for the three and nine months ended
July 31, 2000, respectively, compared to 37.4 percent and 37.1 percent
for the same periods in 1999.
In the nine months ended July 31, 2000, 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
23
<PAGE>
joint venture, the revenue, costs and expenses of the business
transferred to the joint venture are no longer consolidated in our
results. Instead, we record our portion of the joint venture's net
earnings or loss in other income (expense), net, which in the first
nine months of 2000, was minimal. Adjusting the 1999 base for revenues
relating to the LED business, net revenue growth would be 36.2 percent
and 30.5 percent for the three and nine months ended July 31, 2000,
respectively.
EARNINGS FROM OPERATIONS
Earnings from operations from our semiconductor products business,
adjusted for the 1999 impairment loss of $51 million, increased 47.8
percent to $99 million and 42.4 percent to $188 million in the three
and nine months ended July 31, 2000, respectively. The increases
resulted from higher net revenue and lower cost of products as a
percentage of net revenue, partially offset by higher operating
expenses.
Cost of products as a percentage of net revenue, adjusted for the
1999 impairment loss of $51 million, decreased 6.7 percentage points
and 5.2 percentage points in the three and nine months ended July
31, 2000, respectively. The decreases were primarily driven by
increased volumes and a more favorable product mix. In addition, the
transfer of a portion of our LED business to the joint venture
contributed to the decrease.
Operating expenses as a percentage of net revenue increased 4.6
percentage points and 3.8 percentage points in the three and nine
months ended July 31, 2000, respectively, compared to the same periods
in 1999. The increases were primarily due to infrastructure costs
related to operating on our own and increased research and development
investments.
Research and development expense increased 51.0 percent and 37.4
percent in the three and nine months ended July 31, 2000,
respectively, compared to the same periods in 1999. The increases
reflect increased investments in the fast-growing fiber optics,
high-speed networking, and the imaging businesses. Selling, general
and administrative expenses increased 62.0 percent and 50.7 percent
in the three and nine months ended July 31, 2000, respectively,
compared to the same periods in 1999. The increases were primarily
due to higher infrastructure costs related to operating on our own
as well as higher selling and marketing costs, including branding
expenses.
HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
2000 1999
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net revenue.......................................... $319 $372
Earnings (loss) from operations..................... (40) 41
As a percentage of net revenue.................. (12.5)% 11.0%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue.......................................... $1,057 $1,043
Earnings (loss) from operations..................... (53) 86
As a percentage of net revenue.................. (5.0)% 8.2%
</TABLE>
NET REVENUE
Net revenue from our healthcare solutions business decreased 14.2
percent to $319 million and increased 1.3 percent to $1.1 billion in
the three and nine months ended July 31, 2000, respectively,
compared to $372 million and $1.0 billion in the same periods in
1999. The decrease in net revenue in the three months ended July 31,
2000 was primarily due to a slow-down in capital expenditure by U.S.
hospitals, as hospitals felt continued financial pressure to control
costs. In addition, customers had pulled purchases into 1999 and
into the three months ended January 31, 2000 to avoid potential Year
2000 issues. In the three months ended July 31, 2000, our net revenue
from products decreased 18.0 percent while our net revenue from
services increased 3.0 percent compared to the same period in 1999.
In the nine months ended July 31, 2000, our net revenue from
products decreased 0.5 percent while our net revenue from services
increased 9.1 percent, compared to the same period in 1999. Service
revenue growth generally follows product revenue based on our
installed base of products. The service revenue increases are due to
the strong product installations through the first quarter of 2000.
EARNINGS (LOSS) FROM OPERATIONS
The loss from operations from our healthcare solutions business was $40
million and $53 million in the three and nine months ended July 31,
2000, respectively, compared to earnings from operations of $41 million
and $86 million in the same periods in 1999. The decline in earnings
from operations in the three months ended July 31, 2000 was due to
disappointing net revenue as well as higher costs and expenses. The
decline in earnings from operations in the nine months ended July 31,
2000 was primarily due to higher costs and expenses.
Cost of products and services as a percentage of net revenue
increased by 9.5 percentage points and 5.5 percentage points in the
three and nine months ended July 31, 2000, respectively, compared to
the same periods in 1999. The increase in the three months ended
July 31, 2000 was primarily attributable to lower net revenue
resulting from lower volumes and higher discounts. The increase in
the nine months ended July 31, 2000 was primarily due to an
unfavorable product mix and higher discounts.
25
<PAGE>
Operating expenses as a percentage of net revenue increased 14.1
percentage points and 7.8 percentage points in the three and nine
months ended July 31, 2000, respectively, compared to the same
periods in 1999. The increases were primarily due to lower revenues
and higher infrastructure costs and branding expenses related to
operating on our own.
Research and development expense decreased 8.1 percent and increased
10.7 percent in the three and nine months ended July 31, 2000,
respectively, compared to the same periods in 1999. The decrease in
the three months ended July 31, 2000 is due to recently completed
product introductions and an emphasis on reducing discretionary
costs. The increase for the nine months ended July 31, 2000 is
largely a result of our on-going development projects including the
new automatic external defibrillator, ultrasound imaging, and
web-enabled wireless patient monitoring devices. Selling, general
and administrative expenses increased 27.2 percent and 25.6 percent
in the three and nine months ended July 31, 2000, respectively,
compared to the same periods in 1999. The increases were primarily
due to higher infrastructure costs and branding expenses related to
operating on our own.
Subsequent to July 31, 2000, Agilent announced a reorganization of its
healthcare solutions business. The reorganization will involve a
regular workforce reduction of approximately 650 employees
(including approximately 450 regular and 200 temporary employees)
located in the United States, Asia Pacific and Europe. Agilent
expects to incur a one-time charge of approximately $25 million in
the fourth quarter of 2000. Agilent expects its workforce reduction
and other programs to result in annual savings of approximately $80
million starting in 2001. Based on the current market environment
and the anticipated restructuring, we anticipate an operating loss
for our healthcare solutions business for the remainder of 2000.
CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
2000 1999
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net revenue.......................................... $246 $255
Earnings (loss) from operations...................... (8) 36
As a percentage of net revenue.................... (3.3)% 14.1%
</TABLE>
<TABLE>
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net revenue........................................... $749 $754
Earnings from operations.............................. 6 99
As a percentage of net revenue..................... 0.8% 13.1%
</TABLE>
NET REVENUE
Net revenue from our chemical analysis business decreased 3.5
percent to $246 million and decreased 0.7 percent to $749 million in
the three and nine months ended July 31, 2000, respectively,
compared to $255 million and $754 million in the same periods in
1999. The decreases in net revenue were due to decreased sales in
the chemical, environmental and petrochemical markets partially
offset by increased sales in bioscience products. Service revenue
decreased 4 percent and 1 percent in the three and nine months ended
July 31, 2000, compared to the same periods in 1999.
EARNINGS (LOSS) FROM OPERATIONS
Our chemical analysis business generated a loss from operations of
$8 million in the three months ended July 31, 2000 compared to
earnings from operations of $36 million in the same period in 1999.
Earnings from operations decreased to $6 million in the nine months
ended July 31, 2000 compared to $99 million in the same period in
1999. The decreases were primarily due to lower revenue, higher
infrastructure costs and branding expenses related to the costs of
operating on our own as well as planned investments in life sciences
to launch new products.
Cost of products and services as a percentage of net revenue increased
by 5.5 percentage points and 1.9 percentage points for the three and
nine months ended July 31, 2000, respectively, compared to the same
periods in 1999. The increases
26
<PAGE>
were primarily due to lower volumes and start-up investments for
bioscience products.
Operating expenses as a percentage of net revenue increased 11.9
percentage points and 10.4 percentage points in the three and nine
months ended July 31, 2000, respectively, compared to the same periods
of 1999. The increases resulted primarily from increased life science
investments and higher infrastructure costs and branding expenses
related to operating on our own.
Research and development expense increased 31.8 percent and 34.9
percent in the three and nine months ended July 31, 2000, respectively,
compared to the same periods in 1999. The increases reflect increased
new product development programs in life science products. Selling,
general and administrative expense increased 27.9 percent and 26.9
percent in the three and nine months ended July 31, 2000, respectively,
compared to the same periods in 1999. The increases were primarily due
to higher infrastructure costs and branding expenses related to
operating on our own.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES We believe that the Company's
financial position remains strong, with cash and cash equivalents
and short-term investments of $703 million at July 31, 2000.
Prior to November 1, 1999, cash receipts associated with our
businesses were transferred to Hewlett-Packard on a daily basis and
Hewlett-Packard provided funds to cover our disbursements. Accordingly,
we reported no cash or cash equivalents at October 31, 1999. In
accordance with our separation agreement with Hewlett-Packard, as of
November 1, 1999, 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. In November and December 1999,
Hewlett-Packard made cash payments to us totaling $1.3 billion to fund
our working capital and other needs of our operations as a separate,
stand-alone entity. In addition, Hewlett-Packard transferred
approximately $0.5 billion to fund our acquisition of Yokogawa Electric
Corporation's 25% minority equity ownership of Agilent Technologies
Japan, Ltd. The net proceeds of our initial public offering of $2.1
billion were received in November 1999 and immediately distributed to
Hewlett-Packard as a dividend.
Of the total $1.8 billion received from Hewlett-Packard, $1.1 billion
was classified as net cash provided by financing activities and $0.7
billion was classified among several categories as net cash provided by
operating activities in the condensed consolidated statement of cash
flows for the nine months ended July 31, 2000.
We generated cash flows from operations of $415 million during the
nine months ended July 31, 2000, compared to $426 million for the
corresponding period of 1999. The decrease in cash flows from
operating activities in the nine months ended July 31, 2000 was
mainly attributed to an increase in accounts receivable and inventory
balances offset by increases in net earnings, accounts payable and
accrued tax balances.
27
<PAGE>
Net cash used for investing activities in the nine months ended
July 31, 2000 was $966 million, compared to $258 million for the
corresponding period of 1999. The increase in investing activity was
primarily due to our first and second payments for the acquisition
of Yokogawa's 25% minority equity ownership of Agilent Technologies
Japan, Ltd., our acquisition of SAFCO Technologies, Inc. and an
increase in investments in property, plant and equipment to expand
our manufacturing capacity to meet customer demands.
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 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 be assured that additional
financing, if needed, will be available on favorable terms.
FACTORS THAT MAY AFFECT FUTURE RESULTS
IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER,
OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING
RESULTS WILL SUFFER.
We sell our products in several industries that are characterized by
rapid technological changes, frequent new product and service
introductions and evolving industry standards. Without the timely
introduction of new products, services and enhancements, our products
and services will likely become technologically obsolete over time, in
which case our revenue and operating results would suffer. The success
of our new product and service offerings will depend on several
factors, including our ability to:
- properly identify customer needs;
- price our products competitively;
- innovate and develop new technologies and
applications;
- successfully commercialize new technologies in a
timely manner;
- manufacture and deliver our products in sufficient
volumes on time; 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. 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
28
<PAGE>
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.
IF DEMAND FOR OUR PRODUCTS EXCEEDS OUR MANUFACTURING CAPACITY, OUR
REVENUES AND EARNINGS MAY SUFFER.
Demand for our products has put increased pressure on our
manufacturing capacity, especially in the wireless and fiber optic
areas. If we are not able to increase our manufacturing capacity in
the time necessary to meet demand, or if demand exceeds our
expectations, we may experience insufficient manufacturing capacity.
If our manufacturing capacity does not keep pace with product
demand, we will not be able to fulfill orders in a timely manner
which in turn may have a negative effect on our revenues and
earnings and overall business.
FAILURE OF SUPPLIERS TO DELIVER SUFFICIENT QUANTITIES OF PARTS IN A
TIMELY MANNER COULD ADVERSELY IMPACT OUR OPERATIONS.
Certain parts may be available only from a single supplier or a
limited number of suppliers. In addition, suppliers may cease
manufacturing certain components that are difficult to replace
without significant reengineering of our products. Suppliers may
also extend lead times, limit supplies or increase prices due to
capacity constraints or other factors. Our results may be materially
and adversely impacted if we do not receive sufficient parts to meet
our requirements in a timely manner.
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. We anticipate
that revenue from international operations will continue to represent a
substantial portion of our total revenue. In addition, many of our
manufacturing facilities and suppliers are located outside the United
States. Accordingly, our future results could be harmed by a variety of
factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political
or economic conditions, 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.
29
<PAGE>
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK
PRICE TO DECLINE.
Given the nature of the markets in which we participate, we cannot
reliably predict future revenue and profitability, and unexpected
changes may cause us to adjust our operations. A high proportion of our
costs are fixed, due in part to our significant sales, research and
development and manufacturing costs. Thus, relatively small declines in
revenue could disproportionately affect our operating results in a
quarter. For example, when our revenue declined in the second half of
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.
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.
30
<PAGE>
OUR OPERATING RESULTS COULD BE HARMED IF THE INDUSTRIES INTO WHICH WE
SELL OUR PRODUCTS ARE IN DOWNWARD CYCLES.
Several significant industries and markets into which we sell our
products are cyclical. 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 the
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.
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.
31
<PAGE>
IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER
PRODUCTS DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER,
OUR SEMICONDUCTOR PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.
Historically, our semiconductor products business has sold products
to Hewlett-Packard and has engaged in product development efforts
with divisions of Hewlett-Packard. For the three and nine months
ended July 31, 2000, Hewlett-Packard accounted for 5.6% and 6.0%,
respectively, of our total net revenue and 24.5% and 27.3%,
respectively, of our semiconductor products business' net revenue.
In comparison, for the three and nine months ended July 31, 1999,
Hewlett-Packard accounted for 10.2% and 10.0%, respectively, of our
total net revenue and 37.4% and 37.1%, respectively, 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 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 and we may not continue to
enjoy all of the benefits of these collaborative relationships.
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
32
<PAGE>
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 providers are instituting
and the effects 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,
33
<PAGE>
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 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 are 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.
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
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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 increases these risks. Claims of intellectual property
infringement might also require us to enter into costly royalty or
license agreements. However, we may not be able to obtain royalty or
license agreements on terms acceptable to us, or at all. We also may be
subject to significant damages or injunctions against development and
sale of certain of our products.
We often rely on licenses of intellectual property useful for our
businesses. We cannot assure you that these licenses will be available
in the future on favorable terms or at all. In addition, our position
with respect to the negotiation of licenses may change as a result of
our separation from Hewlett-Packard. Our patent cross-license agreement
with Hewlett-Packard gives us a conditional right to sublicense only a
portion of Hewlett-Packard's intellectual property portfolio. As a
result, in negotiating patent cross-license agreements with third
parties, we may be unable to obtain agreements on terms as favorable as
we may have been able to obtain if we could sublicense
Hewlett-Packard's entire intellectual property portfolio.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND
SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE
INJURY.
Our success depends in large part on our proprietary technology. We
rely on a combination of patents, copyrights, trademarks and trade
secrets, confidentiality provisions and licensing arrangements to
establish and protect our proprietary rights. If we fail to
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successfully enforce our intellectual property rights, our competitive
position could suffer, which could harm our operating results.
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these
patents or trademark registrations. In addition, our patents may not
provide us a significant competitive advantage.
We may be required to spend significant resources to monitor and police
our intellectual property rights. We may not be able to detect
infringement and may lose competitive position in the market before we
do so. In addition, competitors may design around our technology or
develop competing technologies. Intellectual property rights may also
be unavailable or limited in some foreign countries, which could make
it easier for competitors to capture market share.
IF OUR FACTORIES OR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE
TO AN EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.
Several of our facilities could be subject to a catastrophic loss
caused by an earthquake due to their location. We have significant
facilities in areas with above average seismic activity, such as our
production facilities, headquarters and Agilent Laboratories in
California and our production facilities in Washington and Japan. If
any of these facilities were to experience a catastrophic loss, it
could disrupt our operations, delay production, shipments and revenue,
and result in large expenses to repair or replace the facility. Agilent
self-insures against such losses and does not carry catastrophic
insurance policies to cover potential losses resulting from
earthquakes.
OUR NEW NAME IS NOT YET WIDELY 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. Our new brand "Agilent" is not as
widely recognized, so we may not have the ability to attract some
customers who would have purchased our products if they had recognized
that Agilent Technologies, Inc. is the successor company to
Hewlett-Packard in certain industry segments. The new name "Agilent
Technologies, Inc." may also hinder our ability to recruit employees
in certain countries.
WE CURRENTLY STILL USE SOME OF HEWLETT-PACKARD'S INFORMATION
SYSTEMS, AND WE ARE IN THE PROCESS OF DEVELOPING OUR OWN INFORMATION
SYSTEMS.
We currently use Hewlett-Packard's systems to support a portion of our
operations, mainly customer support and networks. We have an agreement
with Hewlett-Packard for Hewlett-Packard to continue to provide these
information services to us for the next fourteen months. 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.
We are in the process of creating our own information systems to
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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 implementing new enterprise
resource planning software applications to manage some of our
information systems.
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 continues 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 continue to 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 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 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.
OUR HISTORICAL 1999 FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
OUR RESULTS AS A SEPARATE COMPANY.
The historical 1999 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
1999 periods presented. In addition, the historical information is not
necessarily indicative of what our
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results of operations, financial position and cash flows will be in
the future. We did not make adjustments to reflect the many
significant changes that occurred 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.
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;
- 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.
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Item 3. 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. Prior to
fiscal 2000, our exposure to exchange rate risks had been managed on an
enterprise-wide basis as part of Hewlett-Packard's risk management
strategy. This strategy 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 implemented a similar hedging
program upon our separation from Hewlett-Packard in November 1999. 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 July 31, 2000, 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. There have been no material developments in
the litigation previously reported in our Form 10-K for the period ended
October 31, 1999.
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Item 6. Exhibits and Reports on Form 8-K
(a) A list of exhibits is set forth in the Exhibit Index found on
page 45 of this report.
(b) Reports on Form 8-K:
(i) Form 8-K dated June 5, 2000 reporting under Item 5 "Other
Events" the completion by Hewlett-Packard of the distribution of shares it
owned in Agilent Technologies, Inc.
AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements 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.
AGILENT TECHNOLOGIES, INC.
(Registrant)
Dated: September 1, 2000 By: /s/ Robert R. Walker
-----------------------------
Robert R. Walker
Executive Vice President and
Chief Financial Officer
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AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number: Description:
-------------- -----------
1. Not applicable.
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 as dated November 5, 1999.
Incorporated by reference from Exhibit 2.15 of the Company's
Registration Statement on Form S-1 (Registration No.
333-85249).
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).
4. None.
5-9. Not applicable.
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. Incorporated by
reference from Exhibit 10.6 of the Company's Form 10-K for
the period ended October 31, 1999.*
11. See Item 4 in Notes to Condensed Consolidated Financial
Statements on Page 9.
12-14. Not applicable.
15. None.
16-17. Not applicable.
18-19. None.
20-21. Not applicable.
22-24. None.
25-26. Not applicable.
27.1 Financial Data Schedule.
28. Not applicable.
99. None.
-----------------------------------------------
* Indicates management contract or compensatory plan, contract or
arrangement.