<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 April 30, 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 April 30, 2000
----------------------------- -------------------------------
Common Stock, $0.01 par value 452,271,967 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 April 30, 2000
and October 31, 1999 3
Condensed Consolidated Statements of Earnings (Unaudited) for the
Three and Six Months Ended April 30, 2000 and April 30, 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended April 30, 2000 and April 30, 1999 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 43
Part II. Other Information 43
Item 1. Legal Proceedings 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 6. Exhibits and Reports on Form 8-K 44
Signature 44
Exhibits Index 45
</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>
Apr. 30, Oct. 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $978 $ -
Accounts receivable...................................................... 1,826 1,635
Due from Hewlett-Packard, net............................................ 63 -
Inventory................................................................ 1,622 1,499
Other current assets..................................................... 568 404
--------------- -------------
Total current assets.................................................. 5,057 3,538
Property, plant and equipment, net.......................................... 1,453 1,387
Other assets................................................................ 811 519
--------------- -------------
Total assets................................................................ $7,321 $5,444
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and short-term borrowings.................................. $ 98 $ -
Accounts payable......................................................... 509 510
Employee compensation and benefits....................................... 644 550
Deferred revenue......................................................... 329 241
Accrued income taxes..................................................... 192 -
Other accrued liabilities................................................ 414 380
--------------- -------------
Total current liabilities............................................. 2,186 1,681
Other liabilities........................................................... 493 381
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; 452,271,967 shares at April 30, 2000 and
380,000,000 shares at October 31, 1999 issued and outstanding......... 5 4
Additional paid-in capital............................................... 4,344 3,378
Retained earnings........................................................ 297 -
Other comprehensive losses............................................... (4) -
--------------- -------------
Total stockholders' equity............................................ 4,642 3,382
--------------- -------------
Total liabilities and stockholders' equity.................................. $7,321 $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 Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
Products..................................................... $1,999 $1,524 $3,799 $2,839
Products to Hewlett-Packard.................................. 156 190 296 378
Services and other........................................... 330 296 636 579
--------------------------- ---------------------------
Total net revenue......................................... 2,485 2,010 4,731 3,796
--------------------------- ---------------------------
Costs and expenses:
Cost of products............................................. 1,052 846 2,028 1,655
Cost of services and other................................... 209 173 393 338
Research and development..................................... 296 241 586 463
Selling, general and administrative.......................... 714 510 1,339 999
--------------------------- ---------------------------
Total costs and expenses.................................. 2,271 1,770 4,346 3,455
--------------------------- ---------------------------
Earnings from operations........................................ 214 240 385 341
Other income (expense), net..................................... 42 2 73 15
--------------------------- ---------------------------
Earnings before taxes........................................... 256 242 458 356
Provision for taxes............................................. 90 85 161 125
--------------------------- ---------------------------
Net earnings.................................................... $ 166 $ 157 $ 297 $ 231
=========================== ===========================
Basic net earnings per share.................................... $ .37 $ .41 $ .67 $ .61
Diluted net earnings per share.................................. $ .36 $ .41 $ .66 $ .61
Average shares used in computing net earnings per share:
Basic........................................................ 452 380 445 380
Diluted...................................................... 457 380 448 380
Pro forma net earnings per share:
Basic........................................................ $ .37 $.66
Diluted...................................................... $ .36 $.64
Average shares used in computing pro forma net earnings per share:
Basic........................................................ 452 452
Diluted...................................................... 465 462
</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>
Six Months
Ended April 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................................... $ 297 $ 231
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization....................................................... 199 235
Gain on sale of equity investments.................................................. (25) -
Deferred taxes on earnings.......................................................... (59) (69)
Changes in assets and liabilities:
Accounts receivable............................................................... (187) (59)
Due from Hewlett-Packard, net..................................................... (63) -
Inventory......................................................................... (118) 18
Accounts payable.................................................................. 11 (32)
Accrued income taxes.............................................................. 192 -
Other current assets and liabilities.............................................. 110 (24)
Other, net........................................................................ (11) (77)
-------------- -----------
Net cash provided by operating activities................................................. 346 223
-------------- -----------
Cash flows from investing activities:
Investments in property, plant and equipment........................................... (222) (196)
Dispositions of property, plant and equipment.......................................... 97 31
Sales of equity investments............................................................ 53 -
Acquisitions, net of cash acquired..................................................... (486) (12)
Cash proceeds of divestitures.......................................................... - 39
Other, net............................................................................. 9 6
-------------- -----------
Net cash used in investing activities..................................................... (549) (132)
-------------- -----------
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.................................... 2 -
Change in notes payable and short-term borrowings...................................... 98 -
Net funding from (to) Hewlett-Packard.................................................. 1,081 (91)
-------------- -----------
Net cash provided by (used in) financing activities....................................... 1,181 (91)
-------------- -----------
Change in cash and cash equivalents....................................................... 978 -
Cash and cash equivalents at beginning of period.......................................... - -
-------------- -----------
Cash and cash equivalents at end of period................................................ $ 978 $ -
============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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 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 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 8).
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
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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 Agilent some of the assets and
liabilities related to its business, including some of the accounts
receivable, accounts payable and other liabilities of
Hewlett-Packard Japan. In addition, HP transferred to Agilent $521
million to fund its acquisition of Yokogawa Electric Corporation's
25% minority equity ownership of Hewlett-Packard Japan (Note 9). 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 six months
ended April 30, 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 six months
ended April 30, 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 April 30, 2000 and
its consolidated results of operations and cash flows for the three
and six months ended April 30, 2000 and 1999.
Certain amounts in the condensed consolidated statements of operations
for the three and six months ended April 30, 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 six months ended April
30, 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 $4 million of accumulated other
comprehensive losses to stockholders' equity in the six months ended
April 30, 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 quarter of its fiscal year
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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." The Staff Accounting Bulletin is effective no
later than the first 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. Earnings Per Share
Basic net earnings per share is computed by dividing net earnings
available to common stockholders (numerator) by the weighted average
number of common shares outstanding (denominator) during the period and
excludes the dilutive effect of stock options. 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 sum of the 380,000,000 common shares held by HP
plus the 72,000,000 shares issued in Agilent's initial public
offering, 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 sum of the 380,000,000 common shares
held by HP plus the 72,000,000 shares issued in the initial public
offering plus the estimated effect of dilutive stock options and
other employee stock plans, including an estimate of those HP shares
or options as of April 30, 2000 that were converted to Agilent stock
or options on the distribution date. The 72,000,000 shares issued in
Agilent's initial public offering are assumed to have been
outstanding for the entire first six months of 2000.
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.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
2000 1999 2000 1999
---- ---- ---- ----
(in millions, except per share data)
<S> <C> <C> <C> <C>
Numerators:
Net earnings....................................................... $ 166 $ 157 $ 297 $ 231
Denominators:
Basic weighted average shares...................................... 452 380 445 380
Potentially dilutive common shares - stock options................. 5 - 3 -
------------------------- ----------------------
Diluted weighted average shares........................................ 457 380 448 380
Net earnings per share:
Basic.............................................................. $0.37 $0.41 $0.67 $0.61
Diluted............................................................ $0.36 $0.41 $0.66 $0.61
Pro forma denominators:
Basic pro forma shares............................................. 452 452
Potentially dilutive pro forma common shares - stock options and
other employee stock plans.............................. 13 10
------------- -----------
Diluted pro forma shares............................................... 465 462
Pro forma net earnings per share:
Basic.............................................................. $0.37 $0.66
Diluted............................................................ $0.36 $0.64
</TABLE>
5. Inventory
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
---- ----
(in millions)
<S> <C> <C>
Finished goods............................................... $ 528 $ 639
Purchased parts and fabricated assemblies.................... 1,094 860
--------------- -------------
$1,622 $1,499
=============== =============
</TABLE>
6. Comprehensive Earnings
For the three months ended April 30, 2000, Agilent recorded an
unrealized loss, net of tax, of $57 million, which was subtracted
from net earnings of $166 million to compute comprehensive earnings
of $109 million. For the six months ended April 30, 2000, Agilent
recorded an unrealized loss, net of tax, of $4 million, which was
subtracted from net earnings of $297 million to compute
comprehensive earnings of $293 million. Prior to November 1, 1999,
Agilent had no material components of comprehensive earnings or
losses.
7. Supplemental Cash Flow Information
The condensed consolidated statement of cash flows for the six
months ended April 30, 2000 excludes a net asset transfer of $22
million to Agilent from HP. This non-cash event was accounted for as
a change in paid-in capital.
8. Related Party Transactions
Agilent's net revenue from sales of products to HP was $156 million and
$296 million for the three and six months ended
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April 30, 2000, respectively, compared to $190 million and $378
million in the same periods of 1999. As of April 30, 2000, there was
$84 million of accounts receivable from HP included in accounts
receivable recorded in the condensed consolidated balance sheet.
In 1999 and 2000, Agilent purchased certain products from HP, at
prices that management believes approximate the prices an unrelated
third party would pay. For 1999, these products were solely for
inclusion in Agilent products sold to third parties while in 2000,
they also included products purchased for internal use. These
purchases from HP totaled $68 million and $104 million in the three
and six months ended April 30, 2000, respectively, and $41 million
and $61 million in the same periods of 1999. No purchases at cost
were made during fiscal 2000 while purchases at cost for internal
use totaled $19 million and $34 million in the three and six months
ended April 30, 1999.
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
costs 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 $115 million and
$226 million in the three and six months ended April 30, 2000,
respectively. The total cost of services HP received from Agilent
was approximately $41 million and $86 million in the same periods,
respectively.
Agilent's costs and expenses in the three and six months ended April
30, 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 six months ended April 30, 1999 follow.
10
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<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30, Ended April 30,
1999 1999
--------------- ---------------
(in millions)
<S> <C> <C>
Costs of products and services............... $ 57 $ 96
Research and development..................... 37 71
Selling, general and administrative.......... 107 212
</TABLE>
For purposes of governing certain of the ongoing relationships between
Agilent and HP at and after the separation 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
November 1, 1999 (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
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
11
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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.
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, and corporate support services, including accounting,
financial management, tax, payroll, stockholder and public relations,
legal, human resources administration, procurement, real estate
management and other administrative functions. Specified charges for
such services are generally intended to allow the providing company to
recover the direct and indirect costs of providing the services, plus
5% until November 1, 2001, and such costs plus 10% thereafter. The
Master IT Service Level Agreement also covers the provision of certain
additional information
12
<PAGE>
technology services identified from time to time after the separation
date that were inadvertently or unintentionally omitted from the
specified services, or that are essential to effectuate an orderly
transition under the separation agreement, so long as the provision of
such services would not significantly disrupt the providing company's
operations or significantly increase the scope of the agreement.
In addition, the Master IT Service Level Agreement will provide for the
replication of some computer systems, including hardware, software,
data storage or maintenance and support components. Generally, the
party needing the replicated system bears the costs and expenses of
replication. Generally, the party purchasing new hardware or licensing
new software bears the costs and expenses of purchasing the new
hardware or obtaining the new software licenses.
INTELLECTUAL PROPERTY AGREEMENTS. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement,
the Master Trademark Ownership and License Agreement and the ICBD
Technology Ownership and License Agreement together are referred to as
the Intellectual Property Agreements. Under the Intellectual Property
Agreements, HP transferred to Agilent 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 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.
9. Acquisition of Hewlett-Packard Japan
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 Hewlett-Packard Japan (HPJ) 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 HPJ shares from Yokogawa
for approximately $206 million. In the second step, which occurred in
April 2000, Agilent purchased approximately 10.4% of additional HPJ
shares from Yokogawa for approximately $216 million. Agilent will
purchase the remaining 4.2% of HPJ shares owned by Yokogawa prior to
March 31, 2003. HP has provided the
13
<PAGE>
funding for all steps of this transaction. Hewlett-Packard Japan,
Ltd. has changed its name to Agilent Technologies Japan, Ltd.
An independent valuation has been performed to determine the portion
of the 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 $233 million at April 30,
2000. The remainder of the purchase price was allocated to tangible
assets.
10. Restructuring
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 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 a portion of
the equipment and has an active plan to sell the remaining equipment.
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.
14
<PAGE>
<TABLE>
<CAPTION>
Test and Semiconductor Healthcare Chemical Total
Measurement Products Solutions Analysis Segments
----------- -------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Three months ended April 30, 2000:
External revenue................ $1,385 $497 $343 $260 $2,485
Internal revenue................ - 11 - - 11
-----------------------------------------------------------------------
Total net revenue............... $1,385 $508 $343 $260 $2,496
=======================================================================
Earnings (loss) from operations. $ 193 $58 ($30) $ 1 $ 222
=======================================================================
Three months ended April 30, 1999:
External revenue................ $ 964 $408 $377 $261 $2,010
Internal revenue................ 1 7 - - 8
-----------------------------------------------------------------------
Total net revenue............... $ 965 $415 $377 $261 $2,018
=======================================================================
Earnings from operations........ $ 86 $56 $50 $35 $ 227
=======================================================================
</TABLE>
THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
AGILENT, AS REPORTED
<TABLE>
<CAPTION>
Three Months
Ended
April 30,
2000 1999
---- ----
(in millions)
<S> <C> <C>
Net revenue:
Total reportable segments................................................... $2,496 $2,018
Elimination of internal revenue............................................. (11) (8)
-------------- --------------
Total net revenue, as reported.............................................. $2,485 $2,010
============== ==============
Earnings before taxes:
Total reportable segments' earnings from operations......................... $222 $227
Corporate and unallocated................................................... (8) 13
Other income (expense), net................................................. 42 2
-------------- --------------
Total earnings before taxes, as reported.................................... $256 $242
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Test and Semiconductor Healthcare Chemical Total
Measurement Products Solutions Analysis Segments
----------- -------- --------- -------- --------
(in millions)
<S> <C> <C> <C> <C> <C>
Six months ended April 30, 2000:
External revenue................ $2,546 $944 $738 $503 $4,731
Internal revenue................ - 20 - - 20
-----------------------------------------------------------------------
Total net revenue............... $2,546 $964 $738 $503 $4,751
=======================================================================
Earnings (loss) from operations. $ 317 $89 ($13) $14 $ 407
=======================================================================
Six months ended April 30, 1999:
External revenue................ $1,853 $773 $671 $499 $3,796
Internal revenue................ 3 12 - - 15
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
--------------------------------------------------------------------------
Total net revenue............... $1,856 $785 $671 $499 $3,811
==========================================================================
Earnings from operations........ $ 151 $65 $45 $63 $ 324
==========================================================================
</TABLE>
THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
AGILENT, AS REPORTED
<TABLE>
<CAPTION>
Six Months Ended
April 30,
2000 1999
---- ----
(in millions)
<S> <C> <C>
Net revenue:
Total reportable segments...................................................... $4,751 $3,811
Elimination of internal revenue................................................ (20) (15)
-------------- --------------
Total net revenue, as reported.............................................. $4,731 $3,796
============== ==============
Earnings before taxes:
Total reportable segments' earnings from operations............................ $407 $324
Corporate and unallocated...................................................... (22) 17
Other income (expense), net.................................................... 73 15
-------------- --------------
Total earnings before taxes, as reported.................................... $458 $356
============== ==============
</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.
16
<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 Hewlett-Packard Japan. In addition, Hewlett-Packard
transferred to us $521 million to fund our acquisition of Yokogawa
Electric Company's 25% minority equity ownership of Hewlett-Packard
Japan. 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.
17
<PAGE>
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 8 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, and building
services. Under these agreements, we generally reimburse
Hewlett-Packard for its cost of the service plus 5%. The transition
period varies depending on the agreement but is generally less than
two years. Some of the agreements, including those for building
services and information technology services, may be extended beyond
the initial transition period. If these agreements are extended, we
will reimburse Hewlett-Packard at its cost plus 10% for information
technology services and most other services and at negotiated market
rates for building services. The agreements do not necessarily
reflect the costs of obtaining the services from unrelated third
parties or of our providing the applicable services ourselves.
However, we believe that purchasing these services from
Hewlett-Packard provides us with an efficient means of obtaining
these services during the transition period. In addition, we
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 six months ended
April 30, 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
18
<PAGE>
cycles could disproportionately affect our quarterly and annual
operating results.
Economic Conditions in Asia
Our revenue and operating results for the three months and six months
ended April 30, 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, especially 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
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 $4 million of accumulated other
comprehensive losses to stockholders' equity in the six months ended
April 30, 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 issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The Staff Accounting Bulletin is effective no later than
the first quarter of our fiscal year 2001. We are in the process of
determining the impact that adoption will have on our consolidated
financial statements.
19
<PAGE>
Results of Operations
Our results of operations for the three and six months ended April
30, 2000 and 1999 in dollars and as a percentage of total net
revenue follow.
<TABLE>
<CAPTION>
Three Months Ended April 30,
------------------------------------------------------
As a Percentage of
Total Net Revenue Dollars
-------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net revenue:
Products........................................ $2,155 $1,714 86.7 85.3
Services and other.............................. 330 296 13.3 14.7
---------------------- --------------------
Total net revenue............................ 2,485 2,010 100.0 100.0
---------------------- --------------------
Costs and expenses:
Cost of products................................ 1,052 846 42.3 42.1
Cost of services and other...................... 209 173 8.4 8.6
Research and development........................ 296 241 11.9 12.0
Selling, general and administrative............. 714 510 28.8 25.4
---------------------- --------------------
Total costs and expenses..................... 2,271 1,770 91.4 88.1
---------------------- --------------------
Earnings from operations........................... 214 240 8.6 11.9
Other income (expense), net........................ 42 2 1.7 0.1
---------------------- --------------------
Earnings before taxes.............................. 256 242 10.3 12.0
Provision for taxes................................ 90 85 3.6 4.2
---------------------- --------------------
Net earnings....................................... $166 $157 6.7 7.8
====================== ====================
Cost of products as a percentage of products
revenue......................................... 48.8 49.4
Cost of services as a percentage of services
revenue......................................... 63.3 58.4
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended April 30,
------------------------------------------------------
As a Percentage of
Total Net Revenue Dollars
-------------------------
2000 1999 2000 1999
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Net revenue:
Products........................................ $4,095 $3,217 86.6 84.7
Services and other.............................. 636 579 13.4 15.3
---------------------- --------------------
Total net revenue............................ 4,731 3,796 100.0 100.0
---------------------- --------------------
Costs and expenses:
Cost of products................................ 2,028 1,655 42.9 43.6
Cost of services and other...................... 393 338 8.3 8.9
Research and development........................ 586 463 12.4 12.2
Selling, general and administrative............. 1,339 999 28.3 26.3
---------------------- --------------------
Total costs and expenses..................... 4,346 3,455 91.9 91.0
---------------------- --------------------
Earnings from operations........................... 385 341 8.1 9.0
Other income (expense), net........................ 73 15 1.6 0.4
---------------------- --------------------
Earnings before taxes.............................. 458 356 9.7 9.4
Provision for taxes................................ 161 125 3.4 3.3
---------------------- --------------------
Net earnings....................................... $297 $231 6.3 6.1
====================== ====================
Cost of products as a percentage of products
revenue......................................... 49.5 51.4
Cost of services as a percentage of services
revenue......................................... 61.8 58.4
</TABLE>
Certain amounts in the condensed consolidated statements of
operations for the three and six months ended April 30, 1999 have
been reclassified to conform to the current period's presentation.
20
<PAGE>
NET REVENUE
Total net revenue increased 23.6 percent to $2.5 billion and 24.6
percent to $4.7 billion in the three and six months ended April 30,
2000, respectively, compared to $2.0 billion and $3.8 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 as well as robust demand in
the semiconductor businesses. In addition, improvements in economic
conditions in Asia continued to contribute to overall revenue
growth. In the three months ended April 30, 2000, the increase was
partially offset by a decline in revenue in our healthcare solutions
business and no growth in revenue in our chemical analysis
business.
United States revenue increased 17.1 percent to $1.0 billion
and 20.1 percent to $2.0 billion in the three and six months ended
April 30, 2000, respectively, compared to $888 million and $1.7
billion in the same periods in 1999. International revenue increased
28.8 percent to $1.5 billion and 28.2 percent to $2.7 billion in the
three and six months ended April 30, 2000, respectively, compared to
$1.1 billion and $2.1 billion in the same periods in 1999. The
higher net revenue growth in the international arena was primarily
attributable to improved economic conditions in Asia, particularly
Japan and Korea. There was minimal currency impact on net revenue
growth in the three and six months ended April 30, 2000.
In the three months ended April 30, 2000, revenue from products
increased 25.7 percent while revenue from services increased 11.5
percent, compared to the same period in 1999. In the first six months
of 2000, revenue from products increased 27.3 percent while revenue
from services increased 9.8 percent, compared to the same period in
1999. The higher product revenue growth was primarily due to the
growing communications market, a strengthening of the semiconductor
industry and improved economic conditions in Asia. Generally, service
revenue growth follows behind product revenue as our installed base of
products increases.
Demand for our products and services in the communications and
electronics markets has continued to be strong in the three months
ended April 30, 2000. This increase in demand has continued to put
pressure on our manufacturing capacity in the three months ended
April 30, 2000, particularly on products for the wireless and fiber
optic markets. We are continuing to work on many fronts to boost
capacity to meet this demand but we may experience additional
capacity constraints or parts shortages in the future if demand
continues to exceed our expectations. We currently project our net
revenue for fiscal 2000 will be $10.3 billion, representing a
year-over-year growth of 24 percent.
EARNINGS FROM OPERATIONS
21
<PAGE>
Earnings from operations decreased 10.8 percent to $214 million and
increased 12.9 percent to $385 million in the three and six months
ended April 30, 2000, respectively, compared to $240 million and
$341 million in the same periods in 1999. The decrease in the three
months ended April 30, 2000 was primarily due to costs and expenses
related to branding and operating on our own as well as weaker gross
margin contribution from our healthcare solutions and chemical
analysis businesses. The increase in the six months ended April 30,
2000 was primarily due to strong results in the test and measurement
and semiconductor businesses, partially offset by the performance of
our healthcare solutions business, planned investments in life
sciences, as well as on-going costs associated with operating on our
own.
Cost of products and services, as a percentage of net revenue,
remained constant at 50.7 percent in the three months ended April
30, 2000, compared to the same period in 1999. Cost of products and
services, as a percentage of net revenue, decreased 1.3 percentage
points, to 51.2 percent, in the six months ended April 30, 2000,
compared to 52.5 percent in the same period in 1999. The flat cost of
products and services, as a percentage of revenue, in the three
months ended April 30, 2000 resulted from lower costs as a
percentage of revenue in our semiconductor and test and measurement
businesses partially offset by higher costs as a percentage of
revenue in our healthcare solutions and chemical analysis
businesses. The decrease in the six months ended April 30, 2000 was
primarily attributable to higher volumes and a more profitable product
mix within the test and measurement and semiconductor businesses.
Operating expenses as a percentage of net revenue increased 3.3
percentage points to 40.7 percent and 2.2 percentage points to 40.7
percent in the three and six months ended April 30, 2000,
respectively, compared to 37.4 percent and 38.5 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.
Research and development expenses increased 22.8 percent and 26.6
percent in the three and six months ended April 30, 2000,
respectively, compared to the same periods in 1999. The increases
reflect ongoing investments in developing new products and new
technologies. Selling, general and administrative expenses increased
40.0 percent and 34.0 percent in the three and six months ended
April 30, 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.
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 increase as a
result of our stand-alone operations. We also expect that annual net
earnings will be a bit over 6 percent of net revenue in 2000.
22
<PAGE>
OTHER INCOME (EXPENSE), NET
Other income (expense), net increased $40 million to income of $42
million and increased $58 million to income of $73 million in the
three and six months ended April 30, 2000, respectively. The
increases were primarily due to approximately $25 million of gains
on sales of equity investments that no longer supported our business
strategies 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 six months
ended April 30, 2000 and 1999. The rate is based on estimates of our
earnings before taxes in the various tax jurisdictions in which we
operate throughout the world. While changes in our mix of earnings
before taxes in these tax jurisdictions can cause our effective tax
rate to fluctuate, we currently expect our effective tax rate to remain
at 35.0 percent throughout 2000.
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $1,385 $964
Earnings from operations.............................. 193 86
As a percentage of net revenue................... 13.9% 8.9%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $2,546 $1,853
Earnings from operations.............................. 317 151
As a percentage of net revenue................... 12.5% 8.2%
</TABLE>
NET REVENUE
Net revenue from our test and measurement business increased 43.7
percent to $1.4 billion and 37.4 percent to $2.5 billion in the
three and six months ended April 30, 2000, respectively, compared to
$1.0 billion and $1.9 billion in the same periods in 1999. The
increases were attributable to extraordinary growth in the optical,
wireless and transmission-test businesses as well as in the
semiconductor test system business. This growth rate was affected in
part by a comparison with the year-ago first half that was negatively
impacted by weakness in the semiconductor industry and the Asian
markets. Revenue growth was also extremely strong for products and
systems
23
<PAGE>
that enable our customers to design and develop next-generation
communications networks, deploy new technologies and services as well
as manage and optimize existing networks.
In the three months ended April 30, 2000, our net revenue from products
increased 42.5 percent while our net revenue from services increased
17.6 percent, compared to the same period in 1999. In the six months
ended April 30, 2000, our net revenue from products increased 39.3
percent while our net revenue from services increased 12.6 percent,
compared to the same period in 1999. The higher product revenue growth
was primarily due to the growing communications market and the improved
economic conditions in Asia. Generally, service revenue growth follows
product revenue as our installed base of products increases.
EARNINGS FROM OPERATIONS
Earnings from operations from our test and measurement business
increased 124.4 percent to $193 million and 109.9 percent to $317
million in the three and six months ended April 30, 2000, respectively,
compared to $86 million and $151 million in the same periods in 1999.
The increases resulted from increased revenue, lower cost of products
and services as a percentage of revenue, as well as lower operating
expenses as a percentage of revenue.
Cost of products and services as a percentage of net revenue
decreased 1.8 percentage points and 2 percentage points in the three
and six months ended April 30, 2000, respectively, as compared to
the same periods in 1999. The decreases were substantially
attributable to higher volumes and a more profitable product mix,
primarily in wireless communications products and automated test
equipment. To a lesser extent, diminished pricing pressure
contributed to the decrease, which was partially offset by the use
of other equipment manufacturers products as a strategy to meet
customer demands.
Operating expenses as a percentage of net revenue decreased 3.2
percentage points and 2.2 percentage points in the three and six months
ended April 30, 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 19.7 percent and 22.3
percent in the three and six months ended April 30, 2000, respectively,
compared to the same periods in 1999. The increases reflect our
continuing investments in new product development such as new Flash
memory and router testers. Selling, general and administrative
expense increased 39.7 percent and 34.3 percent in the three and six
months ended April 30, 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.
24
<PAGE>
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $497 $408
Earnings from operations.............................. 58 56
As a percentage of net revenue................... 11.7% 13.7%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue........................................... $944 $773
Earnings from operations.............................. 89 65
As a percentage of net revenue................... 9.4% 8.4%
</TABLE>
NET REVENUE
Net revenue from our semiconductor products business increased 21.8
percent to $497 million and 22.1 percent to $944 million in the
three and six months ended April 30, 2000, respectively, compared to
$408 million and $773 million in the same periods in 1999. Net
revenue growth was primarily 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 in the three months ended
January 31, 2000. High speed networking products, mobile
communications products and digital imaging products achieved strong
growth during the three and six months ended April 30, 2000. In
addition, fiber optics components and RF/wireless products had
strong demand as well. As a percentage of net revenue for the
semiconductor products business, revenue from sales to
Hewlett-Packard, consisting of primarily ASICs and motion control
products, was 28.4 percent and 29.0 percent for the three and six
months ended April 30, 2000, respectively, compared to 35.3 percent
and 36.9 percent for the same periods in 1999.
In the three months ended April 30, 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
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
half of 2000, was minimal. Adjusting the 1999 base for revenues
relating to the LED business, net revenue growth would be 27.1 percent
and 27.2 percent for the three and six months ended April 30, 2000,
respectively.
EARNINGS FROM OPERATIONS
Earnings from operations from our semiconductor products business
increased 3.6 percent to $58 million and 36.9 percent to $89 million in
the three and six months ended April 30, 2000, respectively, compared
to $56 million and $65 million in the same periods in 1999. 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 decreased 2.1
percentage points and 4.2 percentage points in the three and six months
ended April 30, 2000, respectively, compared to the same periods in
1999. 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 in the three months ended
April 30, 2000 contributed to the decrease.
25
<PAGE>
Operating expenses as a percentage of net revenue increased 4.2
percentage points and 3.2 percentage points in the three and six months
ended April 30, 2000, respectively, compared to the same periods in
1999. The increase was primarily due to increased research and
development investment and infrastructure costs related to operating
on our own.
Research and development expense increased 29.4 percent and 30.2
percent in the three and six months ended April 30, 2000,
respectively, compared to the same periods in 1999. The increases
reflect increased investments in the fast-growing fiber optics,
high-speed networking, and image and position sensor businesses.
Selling, general and administrative expenses increased 56.0 percent
and 45.0 percent in the three and six months ended April 30, 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.
HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue.......................................... $343 $377
Earnings (loss) from operations..................... (30) 50
As a percentage of revenue...................... (8.7)% 13.3%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue.......................................... $738 $671
Earnings (loss) from operations..................... (13) 45
As a percentage of revenue...................... (1.8)% 6.7%
</TABLE>
NET REVENUE
Net revenue from our healthcare solutions business decreased 9.0
percent to $343 million and increased 10.0 percent to $738 million
in the three and six months ended April 30, 2000, respectively,
compared to $377 million and $671 million in the same periods in
1999. The decrease in the three months ended April 30, 2000 was
mainly due to a strong prior year comparison related to a transition
to a new enterprise resource planning system in the three months
ended January 31, 1999, which contributed to the delay of product
shipments into the three months ended April 30, 1999. In addition,
the decrease of revenue in the three months ended April 30, 2000
was exacerbated by a slow-down in capital expenditure by
hospitals, mainly in the United States. In the three months ended
April 30, 2000, our net revenue from products decreased 12.9 percent
while our net revenue from services increased 8.8 percent compared
to the same period in 1999. In the first six months of 2000, our net
revenue from products increased 9.4 percent while our net revenue
from
26
<PAGE>
services increased 12.5 percent, compared to the same period in
1999. Service revenue growth follows product revenue based on our
installed base of products. Our overall anticipated revenue growth
for the remainder of 2000 is low to mid single digits.
EARNINGS (LOSS) FROM OPERATIONS
The loss from operations from our healthcare solutions business was
$30 million and $13 million in the three and six months ended April
30, 2000, respectively, compared to earnings from operations of $50
million and $45 million in the same periods in 1999. The decline in
earnings from operations in the three months ended April 30, 2000
was due to disappointing net revenue as well as higher costs and
expenses. The decline in earnings from operations in the six months
ended April 30, 2000 was primarily due to higher costs and expenses.
Cost of products and services as a percentage of net revenue increased
by 9.7 percentage points and 3.6 percentage points in the three and six
months ended April 30, 2000, respectively, compared to the same periods
in 1999. The increase in the three months ended April 30, 2000 was
primarily attributable to lower net revenue. The increase in the six
months ended April 30, 2000 was primarily due to an unfavorable
product mix.
Operating expenses as a percentage of net revenue increased 12.2
percentage points and 5.0 percentage points in the three and six months
ended April 30, 2000, respectively, compared to the same periods in
1999. The increases were primarily due to increased research and
development investments and higher infrastructure costs and branding
expenses related to operating on our own.
Research and development expense increased 11.8 percent and 21.2
percent in the three and six months ended April 30, 2000, respectively,
compared to the same periods in 1999. The increases were largely a
result of our on-going development projects including the new automatic
external defibrillator. Selling, general and administrative expenses
increased 26.3 percent and 24.8 percent in the three and six months
ended April 30, 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.
27
<PAGE>
CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
Three Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue................................................ $260 $261
Earnings from operations................................... 1 35
As a percentage of revenue................................. 0.4% 13.4%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended April 30,
----------------------------
2000 1999
---- ----
(dollars in millions)
<S> <C> <C>
Net revenue................................................ $503 $499
Earnings from operations................................... 14 63
As a percentage of revenue................................. 2.8% 12.6%
</TABLE>
NET REVENUE
Net revenue from our chemical analysis business decreased 0.4 percent
to $260 million and increased 0.8 percent to $503 million in the three
and six months ended April 30, 2000, respectively, compared to $261
million and $499 million in the same periods in 1999. The flat revenue
growth was due to slower sales in some mature markets as well as a
difficult comparison to a strong three and six months ended April
30, 1999 where we had unusually strong sales due to a promotional
campaign. Service revenue was also flat in the three and six months
ended April 30, 2000, compared to the same periods in 1999.
EARNINGS FROM OPERATIONS
Earnings from operations from our chemical analysis business decreased
97.1 percent to $1 million and 77.8 percent to $14 million in the three
and six months ended April 30, 2000, respectively, compared to $35
million and $63 million in the same periods in 1999. The decreases were
primarily due to 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 2.5 percentage points and 0.2 percentage points for the three and
six months ended April 30, 2000, respectively, compared to the same
periods in 1999. The increase in the three months ended April 30,
2000 was primarily due to certain increased inventory parts costs.
Operating expenses as a percentage of net revenue increased 10.5
percentage points and 9.6 percentage points in the three and six months
ended April 30, 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 28.6 percent and 36.6
percent in the three and six months ended April 30, 2000, respectively,
compared to the same periods in 1999. The
28
<PAGE>
increases reflect increased new product development programs in
life science products. Selling, general and administrative expense
increased 30.0 percent and 26.3 percent in the three and six months
ended April 30, 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 approximately $1.0 billion at April
30, 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's 25% minority equity ownership of Hewlett-Packard Japan.
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 six months ended April 30, 2000.
We generated cash flows from operations of $346 million during the
six months ended April 30, 2000, compared to $223 million for the
corresponding period of 1999. The increase in cash flows from
operating activities in the six months ended April 30, 2000 was
attributed in part to higher net earnings before non-cash charges
for depreciation and amortization. In addition, the increase in cash
from operations for the six months ended April 30, 2000 resulted from
an increase in other current liabilities.
Net cash used for investing activities in the six months ended April
30, 2000 was $549 million, compared to $132 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 Hewlett-Packard Japan.
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
29
<PAGE>
and our unused lines of credit, which total $500 million, will be
sufficient to satisfy our working capital, capital expenditure and
research and development requirements for the foreseeable future.
However, we may require or choose to obtain additional debt or equity
financing in the future. We cannot 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
regulatory clearance, entrenched patterns of clinical practice,
uncertainty over third-party reimbursement and clinicians'
30
<PAGE>
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 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, if we experience difficulties in
obtaining parts or components needed for manufacturing, 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 overall business.
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.
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.
31
<PAGE>
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.
OUR OPERATING RESULTS COULD BE HARMED IF THE INDUSTRIES INTO WHICH WE
SELL OUR PRODUCTS ARE IN DOWNWARD CYCLES.
32
<PAGE>
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.
AS A SEPARATE COMPANY FROM HEWLETT-PACKARD, WE MAY EXPERIENCE INCREASED
COSTS RESULTING FROM DECREASED PURCHASING POWER WHICH COULD DECREASE
OUR PROFITABILITY.
Prior to our separation from Hewlett-Packard, our businesses were able
to take advantage of Hewlett-Packard's size and purchasing power in
procuring goods, services and technology, such as computer software
licenses. As a separate, stand-alone entity, we may be unable to obtain
goods, services and technology at prices and on terms as favorable as
those we obtained prior to the separation.
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.
33
<PAGE>
Although we have entered into a supply agreement for the sale to
Hewlett-Packard of these kinds of integrated circuits, the supply
agreement does not require Hewlett-Packard to purchase a minimum amount
of product from us. In the event that Hewlett-Packard reduces its
purchase of our integrated circuits, we would be unable to address this
reduction through sales of these kinds of integrated circuits for these
types of products to other customers.
IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER
PRODUCTS DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER,
OUR SEMICONDUCTOR PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.
Historically, our semiconductor products business has sold products to
Hewlett-Packard and have engaged in product development efforts with
divisions of Hewlett-Packard. For the three and six months ended April
30, 2000, Hewlett-Packard accounted for 6.3% and 6.3% of our total net
revenue and 28.4% and 29.0% of our semiconductor products business' net
revenue, respectively. In comparison, for the three and six months
ended April 30, 1999, Hewlett-Packard accounted for 9.5% and 10.0% of
our total net revenue and 35.3% and 36.9% of our semiconductor products
business' net revenue, respectively.
OUR ABILITY TO COMPETE FOR HEWLETT-PACKARD'S BUSINESS MAY SUFFER AS A
RESULT OF OUR SEPARATION DUE TO DECREASED ACCESS TO HEWLETT-PACKARD'S
RESEARCH AND DEVELOPMENT STRATEGY, TECHNOLOGY PLANS, FUTURE PRODUCT
FEATURES AND PRODUCT SUPPLY NEEDS.
In the past, we have benefited from our access to Hewlett-Packard's
research and development strategy, technology plans, future product
features and product supply needs in competing for Hewlett-Packard's
business. If our competitors were to gain better access to
Hewlett-Packard as a result of our separation, our competitors may be
able to develop products that better meet the future needs of
Hewlett-Packard, decreasing the competitiveness of our products. In
addition, we have taken advantage of collaborative relationships with
some of Hewlett-Packard's businesses and we may not continue to enjoy
all of the benefits of these collaborative relationships.
WE FACE AGGRESSIVE COMPETITION IN ALL AREAS OF OUR BUSINESSES, AND IF
WE DO NOT COMPETE EFFECTIVELY, OUR BUSINESSES WILL BE HARMED.
We encounter aggressive competition in all areas of our businesses. Our
competitors are numerous, ranging from some of the world's largest
corporations, such as General Electric Company, International Business
Machines Corporation, Lucent Technologies, Inc. and Siemens AG, to many
highly specialized firms, such as Anritsu Corporation, PE Biosystems,
Teradyne, Inc. and Waters Corporation, as well as many smaller
technology startups. We may not be able to compete effectively with all
of these competitors. To remain competitive, we will need to develop
new products and periodically enhance our existing products in a timely
manner. We anticipate that we may have to adjust prices of many of our
products to stay competitive, and we will have to manage financial
returns effectively. In
34
<PAGE>
addition, new competitors may emerge, and entire product lines may be
threatened by new technologies or market trends which reduce the value
of these product lines.
WE MAY FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND
REGULATIONS IN THE MANUFACTURE, PROCESSING AND DISTRIBUTION OF
CHEMICALS, AND, IF WE FAIL TO COMPLY, WE COULD BE SUBJECT TO CIVIL OR
CRIMINAL PENALTIES OR BE PROHIBITED FROM DISTRIBUTING OUR PRODUCTS.
Some of our chemical analysis business' products are used in
conjunction with chemicals whose manufacture, processing and
distribution are regulated by the United States Environmental
Protection Agency under the Toxic Substances Control Act, and by
regulatory bodies in other countries with laws similar to the Toxic
Substances Control Act. We must conform the manufacture, processing and
distribution of these chemicals to these laws, and adapt to regulatory
requirements in all countries as these requirements change. If we fail
to comply with these requirements in the manufacture or distribution of
our products, then we could be made to pay civil penalties, face
criminal prosecution and, in some cases, be prohibited from
distributing our products in commerce until the products or component
substances are brought into compliance.
IF WE FAIL TO MAINTAIN SATISFACTORY COMPLIANCE WITH THE FOOD AND DRUG
ADMINISTRATION'S REGULATIONS, WE MAY BE FORCED TO RECALL PRODUCTS AND
CEASE THEIR MANUFACTURE AND DISTRIBUTION, AND WE COULD BE SUBJECT TO
CIVIL OR CRIMINAL PENALTIES.
The medical device products produced by our healthcare solutions
business are subject to regulation by the United States Food and Drug
Administration (FDA) and similar international agencies. Their
regulations govern a wide variety of product activities from design and
development to labeling, manufacturing, promotion, sales and
distribution. For example, we received a warning letter from the FDA in
1996 alleging non-compliance with the FDA's quality system regulations
at one of our facilities. The FDA's quality systems regulation includes
elaborate design, testing, control, documentation and other quality
assurance requirements. We had to apply considerable resources to
address the FDA's concerns. We believe we have resolved the issues
identified in the FDA's letter and the FDA has concurred with our
assessment, but we cannot assure you that the FDA will not identify
other areas of noncompliance. If we fail to maintain satisfactory
compliance with the FDA's quality system and other regulations, we may
have to recall products and cease their manufacture and distribution.
In addition, we could be subject to fines or criminal prosecution.
In addition, our chemical analysis products are used in the drug design
and production processes to test compliance with the Toxic Substances
Control Act, the Federal Food, Drug and Cosmetic Act and similar
regulations. Therefore, we must continually adapt our chemical analysis
products to changing regulations.
COST CONTAINMENT MEASURES IN THE HEALTHCARE INDUSTRY AND THE EFFECT OF
ANY HEALTHCARE REFORM COULD HARM OUR PROFITABILITY.
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<PAGE>
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,
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.
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<PAGE>
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
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
37
<PAGE>
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
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 EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.
Several of our facilities could be subject to a catastrophic loss
caused by earthquake due to their location. We have significant
facilities in areas with above average seismic activity, such as our
production facilities, headquarters and
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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 RECOGNIZED AS A BRAND IN THE MARKETPLACE, AND
AS A RESULT OUR PRODUCT SALES COULD SUFFER.
The loss of the "Hewlett-Packard" brand name may hinder our ability to
establish new relationships. In addition, our current customers,
suppliers and partners may react negatively to the separation. In
connection with our separation from Hewlett-Packard, we changed the
brand name and most of the trademarks and trade names under which we
conduct our businesses. This transition to our new name occurred
rapidly in the case of some products and will occur over specified
periods of time in the case of other products. We believe that sales of
our products have benefited from the use of the "Hewlett-Packard" brand
name. In addition, although we believe we have all necessary rights to
use the new brand name, our rights to use it may be challenged by
others.
WE CURRENTLY 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 up to the next eighteen
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
eventually replace Hewlett-Packard's systems. We may not be
successful in implementing these systems and transitioning data from
Hewlett-Packard's systems to ours. We are currently in the process
of selecting and implementing new enterprise resource planning
software applications to manage some of our information systems. Our
chemical analysis and healthcare solutions businesses have each
migrated to new enterprise resource planning software, and each
experienced disruptions during the transition process that
negatively affected their operating results for the period in which
the transition occurred.
Any failure or significant downtime in Hewlett-Packard's or our own
information systems could prevent us from taking customer
39
<PAGE>
orders, shipping products or billing customers and could harm our
businesses.
THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY HEWLETT-PACKARD MAY
NOT BE SUFFICIENT TO MEET OUR NEEDS, AND WE MAY PAY INCREASED COSTS TO
REPLACE THESE SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD
EXPIRE.
Hewlett-Packard has agreed to provide certain transitional services to
us, including services related to:
- information technology systems;
- buildings and facilities; and
- finance and accounting.
These services may not be provided at the same level as when we were
part of Hewlett-Packard, and we may not be able to obtain the same
benefits. We 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.
SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Hewlett-Packard distributed approximately 380,000,000 shares of
Agilent common stock to Hewlett-Packard on June 2, 2000.
Substantially all of these shares are eligible for immediate resale
in the public market. We are unable to predict whether significant
amounts of common stock will be sold in the open market or whether
there will be a sufficient number of buyers for this stock.
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Some of our stock is held by institutional stockholders who may not
be allowed by their charters to hold the stock of companies that do
not pay dividends. Since we currently do not intend to pay
dividends, we expect that these stockholders will sell the shares of
our common stock distributed to them. Any sales of substantial
amounts of common stock in the public market, or the perception that
such sales might occur, whether as a result of this distribution or
otherwise, could harm the market price of our common stock.
OUR 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
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 will occur in our cost structure, funding
and operations as a result of our separation from Hewlett-Packard,
including changes in our employee base, changes in our tax
structure, increased costs associated with reduced economies of
scale, increased marketing expenses related to establishing a new
brand identity and increased costs associated with being a public,
stand-alone company.
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;
41
<PAGE>
- 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.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST
BECAUSE OF THEIR OWNERSHIP OF HEWLETT-PACKARD COMMON STOCK.
Many of our directors and executive officers have a substantial amount
of their personal financial portfolios in Hewlett-Packard common stock
and options to purchase Hewlett-Packard common stock. Ownership of
Hewlett-Packard common stock by our directors and officers after our
separation from Hewlett-Packard could create, or appear to create,
potential conflicts of interest when directors and officers are faced
with decisions that could have different implications for
Hewlett-Packard and us.
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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 April 30, 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Agilent Technologies, Inc. was held
at 10:00 a.m. Pacific Standard Time, on February 29, 2000 at the Flint Center
for the Performing Arts located at 21250 Stevens Creek Boulevard, Cupertino,
California.
The three proposals presented at the meeting were:
1. To elect two (2) directors for a term of three years.
2. To ratify the appointment of PricewaterhouseCoopers LLP as the company's
independent accountants for the 2000 fiscal year.
3. A management proposal to approve the Agilent Technologies,
Inc. Pay-for-Results Plan.
(b) Each of the two directors was elected for a term of three years and
received the number of votes set forth below:
<TABLE>
<CAPTION>
Name For Withheld
<S> <C> <C>
Edward W. Barnholt 441,446,445 127,649
Gerald Grinstein 441,433,300 140,794
</TABLE>
The term of office of Walter B. Hewlett, Randall L. Tobias, Thomas E.
Everhart and David M. Lawrence, M.D. as directors continued after the meeting.
43
<PAGE>
(c) The ratification of the appointment of PricewaterhouseCoopers LLP as the
company's independent accountants for the 2000 fiscal year was approved by a
vote of 441,459,307 shares in favor, 52,358 shares against, and 62,429 shares
abstaining.
The Agilent Technologies, Inc. Pay-for-Results Plan was approved by a vote of
441,097,534 for, 369,950 against, and 106,610 abstaining.
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 April 11, 2000 reporting under Item 5 "Other
Events" the issuance of a press release on April 7, 2000, announcing that the
Board of Directors of Hewlett-Packard Company approved the declaration by
Hewlett-Packard Company of a dividend of all of Hewlett Packard Company's
shares of Agilent Technologies, Inc. common stock.
(ii) Form 8-K dated April 26, 2000 reporting under Item 5 "Other
Events" the issuance of a press release on April 25, 2000, announcing that the
Board of Directors of Agilent Technologies, Inc. approved the adoption of a
Preferred Stock Rights Agreement.
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: June 12, 2000 By: /s/ Robert R. Walker
-----------------------------
Robert R. Walker
Executive Vice President and
Chief Financial Officer
44
<PAGE>
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 8.
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.
