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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 001-15405
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AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0518772
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICES:
395 PAGE MILL ROAD, PALO ALTO, CALIFORNIA 94306
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 752-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange, Inc.
par value $0.01 per share
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates as of December 26, 2000 was approximately $18.55 billion. As of
December 26, 2000, there were outstanding 456,366,381 shares of common stock,
par value $0.01 per share. Shares of stock held by officers, directors and 5% or
more shareholders have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT DESCRIPTION 10-K PART
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Portions of the Proxy Statement for the Annual Meeting of
Stockholders (the "Proxy Statement") to be held on February
23, 2001, and to be filed pursuant to Regulation 14A within
120 days after registrant's fiscal year ended October 31,
2000 are incorporated by reference into Part III of this
Report...................................................... III
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 28
Item 6. Selected Financial Data..................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 48
Item 8. Financial Statements and Supplementary Data................. 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 49
Exhibit Index......................................................... 52
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FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this report or in the
pages from our Proxy Statement incorporated by reference into this report. The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K. This report contains forward-looking statements including, without
limitation, statements regarding the anticipated completion of transactions and
our liquidity position that involve risks and uncertainties. Our actual results
could differ materially from the results contemplated by these forward looking
statements due to certain factors, including those discussed below in Item 7 and
elsewhere in this report.
PART I
ITEM 1. BUSINESS.
OVERVIEW
BUSINESS
Agilent Technologies is a global diversified technology company that
provides enabling solutions to high growth markets within the communications,
electronics, healthcare and life sciences industries. The Company has four
primary businesses:
- test and measurement, which provides test instruments, standard and
customized test, measurement and monitoring instruments and systems for
the design, manufacture and support of electronics and communications
devices and software for the design of high-frequency electronic and
communications devices;
- semiconductor products, which provides fiber optic communications devices
and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronics and image
sensors;
- healthcare solutions, which provides patient monitoring, ultrasound
imaging, cardiology products and systems and related services and
supplies; and
- chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
On March 2, 1999, Hewlett-Packard announced a plan to create a separate
company, subsequently named Agilent Technologies, Inc., that comprised
Hewlett-Packard's test and measurement, semiconductor products, healthcare
solutions and chemical analysis businesses, related portions of Hewlett-Packard
Laboratories, and associated infrastructure. Hewlett-Packard and we have entered
into various agreements related to certain interim and ongoing relationships
between the two companies. More information about the ongoing relationships with
Hewlett-Packard is contained in Item 7 of this report.
Our test and measurement and semiconductor businesses share focus on growth
opportunities in the communications sector, while our healthcare and chemical
analysis businesses share focus on growth opportunities in healthcare and life
sciences. On November 17, 2000, Agilent announced that Koninklijke Philips
Electronics, N.V. ("Philips") would acquire Agilent's healthcare solutions
business, as more specifically discussed below under "Healthcare Solutions" and
in Note 19, "Subsequent Events," to the consolidated financial statements
included in Item 8 of this report.
On October 13, 2000, we entered into a vendor financing agreement with The
CIT Group, Inc. ("CIT") whereby CIT will provide equipment financing and leasing
services to Agilent's customers on a global basis. CIT will be responsible for
all operations, services and funding related to financing and leasing. Under the
terms of the agreement, CIT established a wholly-owned subsidiary, Agilent
Financial Services, Inc. ("AFS") and is offering financing products to our
customers under this name. This arrangement is discussed below in Note 3,
"Acquisitions and Dispositions," to the consolidated financial statements
included in Item 8 of this report.
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We sell our products primarily through our direct sales force, but we also
utilize distributors, resellers, telesales and electronic commerce. Of our total
net revenue of $10.8 billion in the fiscal year ended October 31, 2000, we
generated 44.2% in the United States and 55.8% internationally. As of October
31, 2000, we employed approximately 47,000 people worldwide. We have major
research and development and manufacturing sites in California, Colorado,
Delaware, Massachusetts, and Washington in the United States and in China,
Germany, Japan, Malaysia, Singapore and the United Kingdom.
Our net revenue by business segment for each of the years ending October
31, 2000, 1999 and 1998 was:
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YEARS ENDED OCTOBER 31,
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2000 1999 1998
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(IN MILLIONS)
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Test and measurement.................................... $ 6,108 $4,082 $4,100
Semiconductor products.................................. $ 2,213 $1,722 $1,574
Healthcare solutions.................................... $ 1,412 $1,501 $1,340
Chemical analysis....................................... $ 1,040 $1,026 $ 938
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Total net revenue..................................... $10,773 $8,331 $7,952
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More financial information about the business segments is contained in Note 18,
"Segment Information," of the consolidated financial statements included in Item
8 of this report. Hewlett-Packard accounted for 6.5% of our total net revenue in
the fiscal year ended October 31, 2000, 10.0% in fiscal year 1999 and 8.8% in
fiscal year 1998.
AGILENT TECHNOLOGIES LABORATORIES
All of our businesses are supported by the technological expertise of
Agilent Technologies Laboratories, one of the world's foremost industrial
research and development organizations. Agilent Technologies Laboratories
consists of those operations of Hewlett-Packard Laboratories that historically
conducted basic research in our focus areas. Agilent Technologies Laboratories
works with our businesses in design, development and manufacturing engineering,
and substantially all of its development staff are aligned with the research and
development teams in our individual businesses.
Agilent Technologies Laboratories is located primarily in Palo Alto,
California and employs approximately 500 people. Approximately half of the 300
technical professionals in Agilent Technologies Laboratories have doctoral
degrees and over 75% have some form of advanced degree. On average, 80 patents
have been issued annually to Agilent Technologies in recent years, based on
inventions made in Agilent Technologies Laboratories.
TEST AND MEASUREMENT
Our test and measurement business is a leader in providing test and
measurement solutions to companies in the communications, electronics,
semiconductor and related industries. We provide standard and customized
solutions that are used in the design, development, manufacture, installation,
deployment and operation of electronic equipment and systems. These solutions
include test and measurement instruments and systems, automated test equipment,
communications network monitoring, management, and optimization tools and
software design tools and associated services. Our solutions are employed by a
wide range of industries, including:
- communications and network equipment manufacturers, including providers
of fiber optic, wireless and wireline components, products and systems;
- providers of communications services, including telecommunications,
Internet and cellular service providers;
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- designers and manufacturers of semiconductor products, including
microprocessors, memory devices, Application Specific Integrated Circuits
("ASICs"), radio frequency and microwave integrated circuits and other
types of integrated circuits; and
- designers and manufacturers of electronic equipment, including printed
circuit board assemblies and electronic equipment, such as cellular
handsets, personal computers and avionics equipment.
Our test and measurement business employed approximately 21,100 people as
of October 31, 2000. We serve customers in more than 110 countries and sell our
products primarily through our direct sales force, as well as through resellers,
distributors, telesales and electronic commerce. Our products are complemented
by service and support offerings such as consulting, training, local solutions
integration, and instrument calibration and repair. We have manufacturing and
research and development facilities in Australia, Canada, China, Germany, Japan,
Korea, Malaysia, Singapore, the United Kingdom and the United States. Our test
and measurement business generated $6.1 billion in revenue in fiscal 2000 and
$4.1 billion in both fiscal 1999 and 1998.
MARKETS
The market for our test and measurement products comprises three major
customer groups:
- communications network equipment manufacturers and service providers;
- electronic component and equipment manufacturers; and
- semiconductor manufacturers and purchasers of semiconductors.
Communications Network Equipment Manufacturers and Service Providers
Network equipment manufacturers provide products to facilitate the
transmission of voice and data traffic. This transmission may be in various
forms, such as electronic signals over copper wire, optical signals over fiber
cables, and radio frequency or microwave signals. The customers of the network
equipment manufacturers are the communications service providers that deploy and
operate the networks. These service providers require network equipment that
enables their networks to operate at increasingly faster speeds while providing
rapidly expanding capacity and superior reliability. To meet these demands,
network component and equipment manufacturers require test and measurement
instruments, systems and solutions for the development, production, installation
and operation of each new network technology.
Communications and Internet service providers also require a range of
sophisticated test instruments and systems to evaluate network performance and
to identify any sources of communications failure. Additionally, these customers
require advanced software and systems to monitor and manage the network
infrastructure on a continuous, proactive basis to achieve either regulated or
customer-specified service levels. Real-time monitoring of the network
infrastructure also enables the implementation of additional services, such as
fraud detection, which customers increasingly require of service providers.
The market for cellular telephony has increased dramatically in recent
years, as the levels of wireless penetration in developed countries have grown
rapidly. Many lesser-developed countries have decided to build wireless
communications infrastructure to meet their nations' needs for telephony, rather
than invest in expensive wire-based infrastructure. To develop cellular
telephone equipment, manufacturers require electronic design software and test
instruments and systems for the development of high-frequency communications
circuits, devices and systems. Cellular equipment manufacturers also require
advanced, high-frequency test instruments and systems to develop, manufacture
and deploy cellular base stations for these wireless networks. In addition, the
rapid growth of the cellular handset market has created a new market segment for
automated test equipment to test cellular handsets on the factory floor.
Further, as new standards evolve in the wireless industry, new test and
measurement equipment and systems have to be developed to enable testing of the
new standards in the research and development and later in the manufacturing and
deployment phases.
We believe that in the last several years, producers of networking
communications equipment have increased their use of contract manufacturers.
Contract manufacturers require test solutions that are
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particularly well-suited for faster production and flexible for use in different
applications. Recently, mobile phone and appliance producers have also begun to
increase their use of contract manufacturers, including using contract
manufacturers for functional test. This requires specialized test products and
services to address the particular needs of these high-frequency products.
Electronic Equipment Manufacturers
The electronics industry designs, develops and manufactures a wide range of
products, including products produced in high volumes, such as computers,
computer peripherals, electronic components, printed circuit assemblies and
consumer electronics. These components and printed circuit assemblies may be
designed, developed and manufactured by electronic components companies, by
original equipment manufacturers or by third-party contract manufacturers. For
the development and timely commercialization of new technologies, original
equipment manufacturers require state-of-the-art test instruments, systems and
software design tools in order to design the products for efficient and
cost-effective manufacturing and validate product performance in a variety of
configurations and environments.
High volume manufacturers of electronics products, such as printed circuit
board assemblies, require sophisticated automated test equipment to operate and
perform highly accurate tests at speeds and volumes matching those of the
production line. This equipment includes in-circuit testing systems, automated
x-ray inspection systems and automated optical inspection systems, all of which
examine the printed circuit assemblies for manufacturing defects. Manufacturers
are also beginning to demand automated functional test systems, which test an
electronic device as if it were in its final environment.
Electronics manufacturing also requires standardized test instruments,
system components and complete solutions. Aerospace and defense are important
markets for standardized electronic equipment because of the high electronic
content of advanced defense systems and defense-related communications and
surveillance equipment. We believe that following recent reductions in defense
spending, defense purchasers are shifting from specialized test equipment to
off-the-shelf test products and systems.
Semiconductor Manufacturers
Semiconductor test systems are used by semiconductor designers,
semiconductor manufacturers and electronic component manufacturers in the
design, manufacture and testing of a wide variety of semiconductor products,
including logic, memory, mixed analog and digital signal, and system-on-a-chip
integrated circuits. Semiconductor test systems are sold to semiconductor
manufacturers and assembly and test subcontractors to the semiconductor
industry.
According to VLSI Research, the market for automatic test equipment for
semiconductor manufacturing was approximately $3.3 billion in 1998 and is
expected to grow at a compound annual rate of approximately 20% over the next
five years. Demand for this test equipment is driven primarily by the increased
volume of semiconductor devices produced. Advances in semiconductor technology
are also increasing demand for semiconductor test equipment. The development of
increasingly faster and more complex semiconductor devices stimulates demand for
testers capable of evaluating these high-speed devices. In addition, the
continuing integration of functions, such as microprocessor, logic and memory,
on a single integrated circuit has created a new category of device called
system-on-a-chip. These devices require a new category of sophisticated and
flexible automatic test equipment.
STRATEGY
Our test and measurement business pursues the following strategies to
extend our global leadership position as the communications and electronics
industries shift to new business models and value chains.
ADDRESS THE NEEDS OF THE WIRELESS AND INTERNET COMMUNICATIONS MARKET
Our greatest focus is on providing product leadership and
application-focused solutions to high-growth markets where wireless, Internet
and computing technologies are converging. We have targeted our test and
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measurement products and services to enable our customers in this high-growth
segment to bring their new technologies to market.
IDENTIFY CUSTOMERS' BUSINESS AND TECHNOLOGY NEEDS, THEN LEVERAGE ACROSS THE
VALUE CHAIN
Agilent addresses the business and technology needs of players across the
wireless and Internet communications value chain, from component manufacturers,
network equipment manufacturers, and contract and design manufacturers to
content providers, operators and service providers. A key success factor for
this strategy is development of technologies and platforms that are reusable and
leverageable, enabling us to deploy new solutions and systems faster.
SATISFY CUSTOMERS THROUGH OPERATIONAL EXCELLENCE
A key component of our strategy is to make customer experience a
competitive advantage by achieving operational excellence in three areas: sales
and support experience, whether contact is via the web, email, by telephone or
in person; global manufacturing and supply chain management so that customers
will receive high-quality products, when they need them; and product generation.
FOCUS INTENTLY ON LEADING EDGE CUSTOMERS
By engaging in collaborative, co-development relationships with wireless
and Internet communications leaders such as Nokia, Ericsson and Motorola,
component manufacturers such as Murata, contract manufacturers such as Solectron
Corp., Flextronics International and SCI and service providers such as AT&T
Wireless, Verizon Wireless, China Unicom and Vodaphone, we are developing
solutions that support next generation technologies and enable these leaders to
maximize their performance and continue to lead their industry.
BUILD A NEW GLOBAL CAPABILITY IN SOLUTIONS, SYSTEMS AND SERVICES
Our strategy is to leverage the technologies, platforms and knowledge we
acquire from growing our core product categories into application-focused
solutions, world-class systems and high-value services. These programs will
dramatically increase our growth potential by building on and strengthening our
customer relationships as we move up the value chain; and by creating a
services-based annuity stream that offsets capital equipment cycles.
PRODUCTS
Our test and measurement business designs, develops and manufactures test
and design products that range from single-unit electronic measurement devices
priced under $1,000 to large scale integrated test solutions priced at $1
million and higher.
Communications Equipment Test Solutions
We provide test solutions for fiber optic, broadband wire-based, radio
frequency and microwave communications networks and products.
Fiber Optics. Our products include optical signal and spectrum analysis
instruments used by the industry's leading equipment manufacturers to develop
and manufacture reliable optical components. Our products also include network
analyzers and high-speed bit-error rate testers that measure key transmission
properties of high-speed optical and electrical signals.
Broadband and Data Networks. Our Internet Advisor product line helps to
troubleshoot high-speed local area networks, wide area networks and asynchronous
transfer mode networks. We also provide cable television test equipment.
Wireless Communications and Microwave. Our radio frequency and microwave
test instruments assist in the design and production of cellular handsets and
base stations, as well as satellite and aerospace defense
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systems. Examples of our radio frequency and microwave products include network
analyzers, spectrum analyzers and signal sources.
Communications Service Test and Monitoring Solutions
Our acceSS7 product is designed to allow major communications service
providers that use the communications network protocol Signaling System 7 (SS7)
to monitor and analyze their signaling network traffic for network performance
and management, fraud management and billing of interconnecting service
providers. Similarly, our AccessFiber products and solutions perform fault
detection and monitor fiber optic communications networks. Our Firehunter
network management software solution provides performance monitoring, analysis
and reporting capabilities for Internet service providers.
We also market benchtop and handheld measurement devices such as lightwave
multimeters, power meters and optical sources.
Electronics Design and Manufacturing Solutions
General Purpose Instruments. General purpose instruments are used
principally by engineers in research and development laboratories,
manufacturing, calibration and service for measuring voltage, current,
frequency, signal pulse width and other standard electronics measurements.
Examples of general purpose instruments include digitizing oscilloscopes,
voltmeters and multimeters, frequency counters, bench and system power supplies,
and function generators and waveform synthesizers.
Modular Instruments and Test Software. Our modular instruments and test
software, including instruments incorporating the VXI bus and modular
measurement system software, is used to dynamically configure and reconfigure
test systems for designers and manufacturers of electronic devices.
Data Acquisition Devices. Data acquisition and control products include
digital-to-analog converters that are attached to sensors to measure a wide
range of physical data such as temperature, airplane wing strain and vibrations
in cars, jet engines and power generation equipment.
Digital Design Products. These systems range from simple digital control
circuits to complex, high-speed servers incorporating the latest microprocessor
technology. Our digital design products include logic analyzers, logic-signal
sources and data generators.
Automated In-Circuit Testing. Our in-circuit testers use a probe fixture
which makes electrical contact with the circuit board and enables electrical
measurements.
Automated X-ray Inspection. Our leading x-ray inspection products provide a
three-dimensional scan of printed circuit board assemblies to identify and
isolate quality defects caused by the manufacturing process. Using patented
techniques, our products can look through a device to identify structural
defects in soldering that are not identified by visual inspection and that may
not be detected with in-circuit testing.
Automated Optical Inspection. Our automated optical inspection line of
products enables automated visual inspection of printed circuit assemblies.
These systems are able to locate, with a high degree of repeatability and
reliability, misplaced and misaligned parts, gross solder defects and other
process faults without the need for a human inspector.
Intelligent Test. Our AwareTest Software enables customers to design test
processes that avoid unnecessary test duplication. For example, an in-circuit
test device will receive information about the faults that have already been
detected by an x-ray inspection system and not repeat the test of that circuit.
Semiconductor Automated Test Equipment
We produce semiconductor test equipment to perform electrical and
functional testing of the operation of memory, logic, mixed signal,
systems-on-a-chip, and radio frequency integrated circuits. Our parametric test
instruments and systems combine hardware technology and customizable system
software, and are used to
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examine semiconductor wafers during the semiconductor manufacturing process. Our
product development efforts are targeted at leading edge technologies, such as
systems-on-a-chip and high-speed memory products.
Our semiconductor test products test a variety of different circuit types.
These devices are usually tested after final assembly, but the testing of some
devices is most effective immediately after the production of the silicon wafer,
when the wafers are sorted. We believe we are the industry leader in wafer-sort
test solutions for flash memory devices, which retain data even when the power
is turned off and that are critical for use in digital cameras, cellular phones,
personal digital assistants and storage of portable digital audio files. Our
flash memory test products can test as many as 36 devices in parallel, greatly
improving test throughput and lowering test costs for our customers.
High-Frequency Electronic Design Tools
Our high-frequency electronic design automation software tools are used by
radio frequency integrated circuit design engineers to model, simulate and
analyze communications product designs at the circuit and system levels.
CUSTOMERS
We market our test and measurement solutions to customers across a broad
array of industries. Several of our customers purchase products across several
of our major product lines for their different business units.
A representative list of the customers of our test and measurement business
follows:
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Alcatel Alsthom Intel Corporation Nokia
ASE Test LG Group Qualcomm, Inc.
AT&T Lockheed Martin Corporation Samsung Electronics Co., Ltd.
Bell Canada Enterprises, Lucent Siemens
Inc. Matsushita Electric Solectron Corporation
(Nortel Networks Industrial Sprint
Corporation) Co., Ltd. THOMSON Multimedia, S.A.
The Boeing Company Mitsubishi Electronics Toshiba Corporation
Ericsson America, Inc. Tyco International Ltd.
Fujitsu Limited Motorola United States Air Force
General Electric NEC Corporation U S WEST, Inc.
General Motors Corporation Nippon Telephone & Telegraph
Hitachi, Ltd. Corporation
IBM
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SALES, MARKETING AND SUPPORT
We have a focused sales strategy to strengthen customer satisfaction. Our
direct sales force is focused on identifying customer needs and recommending
solutions involving the effective use and deployment of our equipment and
systems. Some members of our direct sales force focus on global accounts,
providing uniform services on a worldwide basis. Others focus on our more
complex products such as our communications monitoring systems and our automated
test equipment, where customers require intensive strategic consultation. Our
sales force also specifically targets the contract manufacturer market by
collaborating with original equipment manufacturers to specify that our test
equipment be used by contract manufacturers, as well as marketing to contract
manufacturers directly.
Our direct sales force consists of field engineers and systems engineers
who often hold advanced degrees and who have in-depth knowledge of the
customers' business and technology needs. Some of our field engineers are
account managers for our large accounts, and enhance our understanding of the
future needs of these customers. Our systems engineers provide a combination of
consulting, systems integration and application and software engineering
services, and are instrumental in all stages of the sale, implementation and
support of our complex systems and solutions. We also use value-added resellers
to address specific market segments.
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MANUFACTURING
We concentrate our test and measurement manufacturing efforts primarily on
final assembly and test of our products. To maximize our productivity and our
ability to respond to market conditions, we use contract manufacturers for the
production of printed circuit boards, sheetmetal fabrication, metal die casting,
plastic molding and standard electronic components. We also manufacture
proprietary devices and assemblies, such as x-ray tubes and high-frequency
integrated circuits and devices, in our own foundries for competitive advantage.
COMPETITION
The market for test and measurement equipment is highly competitive, and we
expect this competition to increase. We believe that the principal factors of
competition are:
- speed, accuracy and cost of test;
- breadth of product offerings;
- scalability and flexibility of products;
- ease of product use;
- ability to upgrade product platform;
- time to market of new technologies;
- adherence to industry standards;
- ability to support emerging industry protocols; and
- ability to provide localized service and support on a worldwide basis.
Our test and measurement business competes with a number of significant
competitors in all our major product categories and across our targeted
industries. In communications test, our primary competitors are Anritsu, IFR
Systems, Inc./Marconi Communications Ltd., Network Associates, Inc., Rhode &
Schwartz, Tektronix, Inc. and Wandel & Goltermann Technologies, Inc./Wavetek
Corporation, as well as INET Technologies, Inc. and Micromuse Inc. in the
communications network monitoring market. In the semiconductor test market, we
compete primarily against Advantest Corporation, Schlumberger Limited and
Teradyne. In the printed circuit board test market, a segment of the electronics
manufacturing market, we compete against GenRad, Inc. and Teradyne. In the
general purpose electronic test market, we compete against companies such as
Fluke Corporation (a subsidiary of Danaher Corporation), Keithley Instruments,
Inc., LeCroy Corporation, National Instruments Corporation and Tektronix.
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.
SEMICONDUCTOR PRODUCTS
Our semiconductor products business is a leading supplier of semiconductor
components, modules and assemblies for high performance communications systems.
We design, develop and manufacture products for the networking, wireless, and
imaging markets.
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We believe we are the leading provider of:
- fiber optic communications transceiver (transmitter/receiver) modules
used for high speed data communications;
- integrated circuits for storage area networks based on the Fibre Channel
protocol, a protocol for communications among storage area networks;
- infrared components for data communications (IrDA);
- Light emitting diodes (LEDs) and displays;
- ASICs to Hewlett-Packard for its scanners and printers; and
- CMOS image sensors used to capture images in digital cameras and as
position sensors in computer mice.
As of October 31, 2000, our semiconductor products business had
approximately 10,200 employees worldwide. We have eleven major design centers
and eight manufacturing sites around the world. Our semiconductor products
business generated revenue of $2.2 billion in fiscal year 2000, $1.7 billion in
fiscal year 1999 and $1.6 billion in fiscal year 1998.
MARKETS
Our semiconductor products business serves two markets:
- communications (its primary focus); and
- computing.
Communications
High-Speed Networking. The advent of the Internet as a communications
medium has dramatically increased business and consumer demand for high-speed,
reliable access to data and, as a result, has placed considerable stress on
existing communications networks. In data communications, speed is measured in
the number of bits of data per second that can be transmitted across the
network. Fiber optic cables can carry very large amounts of data in a small
space and are immune to electrical and magnetic interference.
We are a major supplier of fiber optic transceivers, which convert digital
data into light signals for transmission, and convert light signals back into
digital form on the receiving end of the communication. We market fiber optic
transceivers for both short-range, local area network applications and
long-range, wide area network applications to major telecommunications and data
networking equipment vendors such as Alcatel, Cisco Systems, Lucent and Nortel.
In addition, we supply high reliability solid-state lasers to major
telecommunications companies for ultra-long-distance applications. We are also a
major supplier of physical layer integrated circuits for high-speed networking
applications, which prepare data for transmission across fiber networks.
Storage Area Networking. As the volume of data that is being transmitted,
processed and stored in networked environments has increased, the market for
storage area network equipment, which connects computers and storage devices,
has grown dramatically. The increase in data transmission speeds across networks
has created a demand for high-speed and high-performance storage-to-server and
server-to-server connectivity. The Fibre Channel interconnect protocol, a
standard for the transfer of information between computers and storage devices
defined by the American National Standards Institute, was developed to meet this
growing demand. Fibre Channel supports the transfer of large amounts of data
within storage area networks at speeds of one gigabit per second and greater and
provides high transmission reliability. We supply a broad range of integrated
circuits, fiber optic components and systems to manufacturers of storage area
network systems utilizing the Fibre Channel protocol, such as Compaq, EMC
Corporation, Hitachi and NEC. We are aggressively pursuing new standards in the
storage networking area as they emerge. We have shown
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<PAGE> 12
early technology demonstrations of both the InfiniBand and IP SAN standards, and
plan to have products for both technologies as the market requires them.
Wireless Communications. Worldwide subscriber growth for wireless
communications has been increasing rapidly in recent years. The Strategis Group
anticipates that the worldwide market for cellular services will increase to
approximately 650 million subscribers by 2002 from approximately 300 million
subscribers in 1998. In addition, we supply a wide range of radio frequency and
microwave integrated circuits and devices to mobile telephone manufacturers and
vendors of equipment for the mobile telephone infrastructure to meet this
increasing demand. We supply infrared and radio frequency devices and modules
for short-range, point-to-point wireless communications to manufacturers of
computers, printers and consumer electronics products, such as mobile
telephones, digital cameras, personal digital assistants and pagers.
Imaging. Increasingly, images are used to enhance the content and context
of communications. Agilent's CMOS image sensors are used in high-volume digital
cameras to capture images and convert them to digital files. We have produced
over 15 million devices for cameras and for optical mice. Optical mice use
Agilent image sensors to take approximately 1500 pictures per second and compare
them sequentially to determine movement of the mouse.
Computing
We are the largest supplier to Hewlett-Packard of ASICs for printers,
workstations and servers. ASICs are semiconductors that are designed for a
unique, customer-specified application and typically replace a number of
discrete components resulting in improved performance, lower cost and high
reliability. We are also a world leader in LEDs, optocouplers, and motion
control devices for a variety of industrial and commercial products.
STRATEGY
To service the needs of our customers in the communications and computer
industries, the semiconductor products business pursues the following
strategies:
Apply our Broad Technology Base to Capture Demand for Higher-speed and Mobile
Data Transmission
High-speed communications solutions will increasingly require strength in
analog (optoelectronic or wireless), mixed-signal and digital integrated circuit
technologies. The semiconductor products business offers technology strength in
all these areas to develop and produce highly integrated solutions for next
generation networking, wireless and imaging systems.
Continue to be Hewlett-Packard's Leading Supplier of ASICs
We are focused on reducing the costs and improving the performance of the
ASICs we provide to Hewlett-Packard by pursuing higher levels of device
integration and employing advanced process technology. We have also begun to
increase sales of ASICs to purchasers other than Hewlett-Packard, in areas other
than workstations, servers and printers, particularly in the networking area.
Take Advantage of Technology Partnerships
We intend to continue to enter into strategic technology partnerships to
gain access to intellectual property and advanced semiconductor manufacturing
process technology.
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<PAGE> 13
PRODUCTS
Our major product areas include:
Fiber Optics
We market optical transceivers, transmitters and receivers for high-speed
local area network applications from 10 megabits per second to one gigabit per
second and higher, and wide area network applications at up to 2.5 gigabits per
second. We also produce solid-state lasers.
High-Speed Network Input-Output Circuits
We produce physical layer integrated circuits for high speed network
switches and routers, devices that direct network traffic. We produce Fibre
Channel protocol-based integrated circuits and subsystems for storage area
networks.
Radio Frequency and Microwave Communications Devices
We produce a broad family of radio frequency and microwave communications
products, primarily integrated circuits for wireless communications products and
infrastructure. Our products include integrated circuits, individual transistors
and diodes and amplifiers used in higher speed and higher frequency
applications.
Infrared Emitters, Detectors and Transceiver Modules
We produce a full line of infrared products that enable short range,
point-to-point wireless communication between portable and stationary devices,
including notebook personal computers, cellular phones, personal digital
assistants and digital cameras.
ASICs
We provide graphics chips, core electronics chipsets that surround central
processing units and microprocessors for Hewlett-Packard's workstations and
servers.
Optical Image Sensors and Optical Position Sensors
Our sensor products include color and monochrome still and video camera
image capture solutions and intelligent optical sensors. We also produce optical
position motion control products used primarily for motion control in printers
and small motors that require precise control.
LEDs and Optocouplers
We manufacture and sell a broad range of LEDs, alphanumeric displays and
optocouplers. LEDs are semiconductor devices that emit light when an electrical
signal is applied. Optocoupler products are devices that provide both electrical
insulation, for protection, and signal isolation, to prevent distortion of data,
between differing electrical environments.
Lighting Joint Venture
Pursuant to a global joint venture with Philips Electronics, we develop,
manufacture and sell LEDs, modules, products and systems for a broad spectrum of
lighting applications, including automotive lighting, high-brightness traffic
signals, contour lighting and signs, outdoor illumination, and white LEDs for
both indoor and outdoor applications.
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CUSTOMERS
We sell to a broad array of customers in the communications and computing
industries. We sell to original equipment manufacturers directly, as well as
contract manufacturers including Celestica, Jabil Circuit, SCI Systems and
Solectron. Our top customers by product line, including customers purchasing
through contract manufacturers and distributors, include the following:
<TABLE>
<CAPTION>
FIBER OPTICS HIGH-SPEED NETWORKING COMPONENTS WIRELESS
------------ -------------------------------- --------
<S> <C> <C>
Alcatel Cisco Systems Alcatel
Allied Telesyn International Compaq Computer Corporation Ericsson
Corp
Cabletron Systems, Inc. Data General Hyundai
Cisco Systems EMC Lucent
FORE Systems, Inc. Hewlett-Packard Motorola
IBM Hitachi Nokia
Lucent IBM Nortel
Motorola Interphase Corporation Qualcomm
Nortel NEC Samsung
Tellabs, Inc. 3Com Corporation Siemens
3Com Corporation
Tyco
</TABLE>
Our semiconductor technology licensing and supply arrangements with
Hewlett-Packard limit our ability to sell to other companies. Through sales of
ASICs, storage area networking components, motion-control products and
microprocessors, Hewlett-Packard accounted for approximately 30% of our
semiconductor products revenue in fiscal year 2000, approximately 37% in fiscal
year 1999, and approximately 34% in fiscal year 1998.
SALES, MARKETING AND SUPPORT
Our semiconductor sales organization consists of nearly 400 professionals,
and is divided into four groups. These groups have responsibilities for large,
global accounts and three regional areas: the Americas, Europe and Asia Pacific.
We also have a direct sales team that has several years of experience in
servicing our customer relationship with Hewlett-Packard. Our sales force has
specialized product and service knowledge that enables it to sell specific
offerings at key levels throughout a customer's organization. In addition to our
direct sales force, we generate approximately 25% of our revenue through our
relationships with key electronic distributors, such as Arrow Electronics, Inc.
and Avnet, Inc. on a worldwide basis, EBV Electronik GmbH/ Wyle Electronics in
Europe and North America, Future Electronics, Inc. in Europe and North America,
and Ryoyo Electro Singapore PTE, Ltd. and Tokyo Electric Power Company in Japan.
We have also recently focused a sales effort to major contract manufacturers
such as Celestica, Jabil, SCI and Solectron.
We also provide a broad range of products and applications-related
information to customers and channel partners via the Internet.
MANUFACTURING
The majority of our silicon and gallium arsenide wafer fabrication is done
in the United States and Singapore, while our assembly and test operations are
in Malaysia, Singapore and the United Kingdom. In addition to these facilities,
we utilize a network of contract manufacturers throughout Asia for semiconductor
fabrication and test.
Our manufacturing strategy has been to outsource more mature technologies
while using our in-house manufacturing fabrication, assembly and test
capabilities to develop new, leading edge-products. Our production facilities
have developed several quality-management processes designed to increase
productivity. We have developed proprietary automated test systems, particularly
in optical, light-emitting diode and microwave.
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<PAGE> 15
COMPETITION
The markets for our semiconductor products are intensely competitive, and
we expect competition to increase. Our ability to compete effectively depends on
a number of factors, including:
- product reliability and performance in operation;
- price;
- power consumption;
- compliance with standards;
- product size and integration; and
- time to market
In the fiber-optic products market, our principal competitors are Tyco,
Lucent and Infineon. In the market for high-speed network components, our
principal competitors are Emulex Corporation, LSI Logic Corporation, QLogic
Corporation and Vitesse Semiconductor Corporation. Our principal competitors in
wireless communications are Motorola, NEC and Infineon. In the market for
infrared products, our principal competitors are Vishay Intertechnology, Inc.
and IBM. We compete with companies including LSI, IBM, Mitsubishi, Motorola and
NEC in the production of integrated circuits. Principal competitors in our LED
businesses include Lite-on, Inc., Stanley Electronic Co., Ltd., Infineon and
Toshiba.
HEALTHCARE SOLUTIONS
Our healthcare solutions business is a worldwide leader in electro-medical
clinical measurement and diagnostic solutions. Our products and systems enable
medical professionals to gather and analyze information in hospital intensive
care units and emergency rooms, outpatient clinics, doctors' offices, patients'
homes and other settings. Our products and services include patient monitoring
systems, imaging systems, external defibrillators, cardiology products and
related professional services and support, each aimed at helping our customers
improve the quality of patient care while decreasing their costs.
We market our products to professionals and institutions in more than 100
countries. We have sales offices in 33 countries and manufacturing sites in
California, Massachusetts and Washington in the United States, China and
Germany. As of October 31, 2000, the healthcare solutions business had
approximately 5,000 employees worldwide. Our healthcare solutions business
generated revenue of $1.4 billion in fiscal year 2000, $1.5 billion in fiscal
year 1999, and $1.3 billion in fiscal year 1998.
Agilent has recently signed an agreement with Philips to sell its
healthcare solutions business unit. The deal is expected to close in the first
half of 2001 after all the legal, regulatory and government requirements, and
other closing conditions, have been met. At that time, the business unit will
become part of Philips. Until then, the Healthcare solutions business and
Philips will operate independently and there will be no changes in operations or
in customer relationships.
MARKETS
The principal markets in which we participate are:
- patient monitoring;
- ultrasound imaging; and
- external defibrillator and cardiology products.
Patient Monitoring
Patient monitoring systems continuously assess a patient's vital signs,
such as heart rate, blood pressure and respiration rates, to enable very rapid
decision making in emergency and critical care environments. Our patient
monitoring systems are used in three major market segments: critical care,
anesthesia care and neonatal care. According to Frost & Sullivan, the worldwide
market for multi-functional patient monitoring
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equipment totaled $5.3 billion in 1997, growing at a compound annual rate of
8.7% from 1994 to 1997. This market is forecasted to grow at a compound annual
rate of 11.5% from 1998 to 2003.
Patient monitoring equipment and services are also used in non-critical
care environments, as providers seek to reduce costs. These non-critical care
areas, which include non-intensive-care areas of hospitals, outpatient care
facilities and patients' homes, are expected to provide significant growth
opportunities for patient monitoring markets in the future.
Ultrasound Imaging
Ultrasound imaging systems enable medical professionals to view multiple
parts of the human anatomy with high-resolution images that are produced
non-invasively from sound waves. The ultrasound imaging equipment market
includes cardiovascular, radiology, obstetrical and general imaging equipment.
Within ultrasound imaging, our principal targeted market is cardiology
ultrasound imaging. Frost & Sullivan estimates that the global market for
cardiology ultrasound imaging equipment was approximately $768 million in 1998
and forecasts the cardiovascular imaging segment to grow at an annual rate of
approximately 6.8% over the next five years.
Cardiology Products
Our cardiology products business includes external defibrillators,
electrocardiographs and related information systems. External defibrillators are
devices that deliver an electrical shock designed to restart the heart of
victims of sudden cardiac arrest. Theta Corporation estimates the worldwide
external defibrillator market was approximately $425 million for 1998 and
forecasts a compound annual growth of 8% for the years 1998 through 2000. We
also sell electrocardiography equipment, which measures and displays information
about the electrical activity of the heart.
STRATEGY
Our healthcare solutions business focuses on creating and delivering new
products and services for the healthcare market, establishing and maintaining a
strong reputation with our customers and developing effective strategic
partnerships by pursuing the following strategies:
Bring New Technologies and Applications to Targeted Markets
In particular, we aim to bring new technologies to the patient monitoring
and imaging markets and expand our coverage in developed countries by delivering
cost-effective diagnostic and therapeutic tools. We are also focused on
developing new, low-cost applications of our existing products to expand our
presence in smaller hospitals and less-developed countries.
Target Medical Care Beyond the Hospital
The growth in outpatient services has increased demand for products that
can enable nurses, other clinicians and nonmedical professionals to provide care
outside of the hospital. We are also delivering cost-effective diagnostic and
therapeutic tools, which can decrease the cost of diagnosing and monitoring
patients. These tools are targeted at smaller hospitals, mobile clinics and
private offices.
Increase Presence in Emerging Systems Worldwide
We plan to expand our global presence by continuing to invest in the
development of low-cost, reliable, high-utility, diagnostic, monitoring and
therapy instruments designed to be easily supported in rural areas. We also work
with international financial organizations, such as the World Bank, to arrange
secured financing services for our customers in these regions.
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<PAGE> 17
Take Advantage of the Rapid Adoption of Information Technology, the Internet and
Industry Standards
We are working with medical professionals to deploy Internet-based
communication systems that link medical professionals and patients. We are also
currently leading several industry-wide efforts to create and promulgate
standards for communication and interoperability among disparate healthcare
systems.
Develop Point-of-Care Technologies
We intend to continue to enhance our patient monitoring capabilities by
developing alliances with other companies. These companies' biochemical sensors,
when integrated into our monitoring platforms, enable time-sensitive
measurements to be made quickly and accurately at a patient's bedside for faster
diagnosis and therapeutic intervention.
Focus on the Management and Treatment of Chronic Illnesses
We have recently begun to pursue opportunities focused on the ongoing
management and treatment of chronic illnesses.
PRODUCTS
Our products and services include patient monitoring, imaging systems,
cardiology products and related professional services.
Patient Monitoring
Our products range from critical-care bedside monitors, fetal monitoring
and remote-measurement systems to central station monitors, associated clinical
decision support systems and critical-care information-management systems. Our
clinical decision support and critical-care information-management systems are
scalable based on department protocols, severity of patient condition and
workflow requirements. Our solutions range from basic surveillance and
centralized alarms to very large system configurations that provide
comprehensive patient information-management support.
Our Agilent Information Center provides advanced real-time, patient data
analysis and surveillance solutions offering data at a central station. Our
CareVue clinical information system captures, stores and makes available data
that can be configured for comprehensive reports, and CareVue enables multiple
caregivers to analyze patient data.
Ultrasound Imaging
We offer three major ultrasound platforms: SONOS 5500, SONOS 4500 and
ImagePoint Hx. SONOS 5500 is a premium performance cardiovascular ultrasound
system used for both research and clinical applications, while SONOS 4500 is a
high-performance cardiovascular ultrasound system used primarily in the clinical
environment. ImagePoint Hx is a multispecialty product used in a broad range of
ultrasound applications to address the broad needs of physicians working in
smaller hospitals, mobile clinics and offices.
Our proprietary transducers enable the ultrasound system to optimize image
detail and penetration without making the operator switch transducers. Our
proprietary Acoustic Quantification, which automatically measures critical
characteristics of the beating heart, eliminates time-consuming manual
measurements.
We have developed EnConcert, which consists of a series of software
applications running on personal computer hardware. EnConcert allows clinicians
to review, measure, manage and archive images, reports and patient data related
to their ultrasound exams.
Cardiology Products
We develop and manufacture external defibrillators, electrocardiographs and
electrocardiogram information management systems. We produce both manual and
automatic external defibrillators, designed for both hospital and
out-of-hospital use. Our ForeRunner automatic external defibrillator is a
portable defibrillator
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<PAGE> 18
that is used by nonmedical professionals to deliver on-site defibrillation
following a cardiac event. Our electrocardiographs monitor the characteristics
of the heart's electrical activity to enable cardiology professionals to provide
accurate diagnoses and deliver care for cardiac patients.
CUSTOMERS
We provide products and services to a broad range of customers in the
industry. Within the last 12 months, 91% of the largest 2,000 hospitals in the
United States purchased our equipment and/or services. Outpatient clinics,
doctors' offices and public facilities, travel companies and entertainment
providers are also a growing part of our customer base.
A representative list of customers of our healthcare solutions business
follows:
<TABLE>
<S> <C> <C>
Adventist Health System- Hawaiian Electric Utility Scripps Memorial Health
Sunbelt Intermountain Health Care System
Advocate Health Care International Military Sisters of Providence (WA)
American Airlines Johnson & Johnson St. John's Health System
AKH Wien, Vienna Kaiser Foundation Hospitals St. Joseph Health System (CA)
Assistance Publique -- Mayo Foundation Stanford Healthcare Services
Hospitaux De Paris Medical Center, Cairo, Egypt Sun Microsystems
Baptist Health System of Memorial Healthcare Systems Sutter Health California
South Florida Nebraska Methodist Health Healthcare Systems
Catholic Healthcare West System Tenet Healthcare Corporation
Cisco The Methodist Hospitals, Tri-State Health Initiative
Columbia/HCA Healthcare Inc. Tokyo General Hospital
Corporation Mount Sinai Health System United States Government
General Growth Properties New York Health Hospital
General Motors Promedica Health System
Quorum Health Group, Inc.
</TABLE>
SALES, MARKETING AND SUPPORT
Our products and services are sold through both direct and indirect
channels. We have sales offices in 33 countries and more than 2,400 direct sales
and service personnel. Our sales strategy is to sell to and service our largest
accounts (hospital and corporate business) directly while employing third-party
distributors and manufacturer's representatives for smaller or more
geographically dispersed countries. Electronic commerce is also an integral and
growing element of our sales and distribution strategy.
In select instances we have also established distribution alliances with
complementary medical equipment manufacturers in order to leverage market
strength or bring a broader array of solutions to our customers.
Our professional services offerings include multivendor systems
integration, training and consulting to hospitals, outpatient facilities and
doctors' offices. Our technical specialists and clinical application specialists
provide installation, repair and training services to preserve and maximize
customer investments in our solutions. In addition, geographic response centers
and remote on-line support supplement on-site services. Finally, we provide
consulting, project management and technical implementation services to meet
customer needs for networking and integrating our solutions.
MANUFACTURING
The healthcare solutions business has four manufacturing locations:
Massachusetts and Washington in the United States, China and Germany. We
selectively use suppliers to provide manufacturing capabilities outside our core
competencies, such as the manufacture of printed circuit assemblies by
Celestica. We typically complete the final assembly and test of our medical
products and systems internally.
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COMPETITION
The markets we address are highly competitive. Our competitors are diverse
and offer a variety of solutions directed at various segments of our medical
products and services markets. Our ability to compete effectively depends upon a
number of factors, including our ability to
- provide a complete set of high quality products for our customers;
- offer competitive prices;
- provide financing services;
- provide support and training; and
- innovate technologically.
Our competitors with broad product portfolios include GE Marquette Medical
Systems and Siemens Medical Systems, Inc. We also compete with other vendors in
specific markets. Our major competitors in patient monitoring include GE
Marquette Medical, Siemens Medical, Spacelabs Medical, Inc. and the Datex-
Ohmeda division of Instrumentarium Corporation. In the imaging systems business,
we compete with Acuson Corporation, Toshiba Medical Systems, Inc., GE Marquette
Medical, Siemens Medical and the ATL Ultrasound, Inc. division of Philips
Medical Systems International. Our competition in the external defibrillator
market comes primarily from Physio Control Corporation (a subsidiary of
Medtronic Inc.) and Zoll Medical Corporation.
GOVERNMENT REGULATION
The products developed and marketed by our healthcare solutions business
are subject to extensive regulation by the FDA and other regulatory bodies. FDA
regulations govern, among other things, the following product activities: design
and development, testing, including animal and human studies, labeling,
premarket clearance or approval, manufacturing, storage, advertising and
promotion, and sales and distribution.
In the United States, medical devices are classified on the basis of
controls deemed necessary to ensure their safety and effectiveness. Class I
devices are subject to general controls, such as labeling, premarket
notification, and adherence to the FDA's Quality System Regulations, which
incorporate current good manufacturing practices that are applicable to medical
devices. Class II devices are subject to general and special controls. Special
controls may include performance standards, postmarket surveillance, patient
registries and FDA guidelines. Most class III devices are controlled through the
premarket approval process to ensure their safety and effectiveness.
Prior to commercialization, premarket notification clearance generally must
be obtained for class I and II devices as well as certain class III devices for
which the FDA has not called for premarket approval ("Pre-Amendent" Class III
devises. For other class III devices, a premarket approval application is
required and must be supported by valid scientific evidence to demonstrate their
safety and effectiveness. The notification or application typically includes
results of bench and laboratory tests, when appropriate, results of animal tests
and clinical studies, a detailed description of the methods, facilities and
controls used to manufacture the device, and proposed labeling and advertising
literature.
Most medical devices marketed by the Agilent healthcare solutions business
are class II or "Pre-Amendment" class III devices, which currently require only
premarket clearance. The Agilent healthcare solutions business does not market
any class III device requiring premarket approval in the United States, but it
may do so in the future or the FDA may require by regulation that premarket
approval applications be submitted for our existing "Pre-Amendment" class III
devices.
Once clearance or approval is obtained, FDA oversight continues. We are
required to demonstrate and maintain compliance with the Quality System
Regulations for all our products. The FDA enforces the Quality System
Regulations through periodic inspections of our manufacturing operations and
those of our contract manufacturers. The Quality System Regulations relate to
product design, manufacture, testing and quality
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assurance, as well as to the maintenance of records and documentation. We are
required to provide information to the FDA on deaths or serious injuries alleged
to have been associated with the use of our medical devices, as well as on
product malfunctions that could contribute to death or serious injury. The FDA
also restricts the promotion of products for unapproved or off-label uses.
If the FDA believes we are not in compliance with the Federal Food, Drug
and Cosmetic Act or its regulations it can detain or seize our products, order
or request a recall, seek an injunction against future violations, assess civil
penalties against us, and initiate criminal proceedings against us.
Compliance with other regulatory requirements is necessary to market our
medical devices outside the United States. These regulations vary from country
to country.
CHEMICAL ANALYSIS
Our chemical analysis business provides instrument systems that enable
customers to identify, quantify, analyze and test the atomic, molecular,
physical and biological properties of substances and products. Our chemical and
life sciences analysis products and services are used by scientists, engineers
and technicians working in disease and drug discovery, research and development,
quality assurance, quality control and manufacturing.
Our four main product lines are chromatography, spectroscopy,
bio-instrumentation and related consumables. We also provide service and
customer support for our products.
We employed approximately 3,700 people as of October 31, 2000 in our
chemical and life sciences analysis business. We have manufacturing and product
development centers in China, Germany, Japan and the United States and marketing
centers in Germany, the United States, and Singapore. Our chemical and life
sciences analysis business generated revenue of $1.1 billion in fiscal year
2000, $1.0 billion in fiscal year 1999, and $938 million in fiscal year 1998.
MARKETS
Strategic Directions International estimates that in 1998, worldwide
revenue in the analytical instrumentation market totaled approximately $15.9
billion. According to Strategic Directions International, growth of the overall
analytical instrumentation market between 1998 and 2001 is expected to be
approximately 8% annually. We estimate that our market represents approximately
30% of the total available analytical instrumentation market that we serve.
Primarily, our chemical analysis business serves the following markets:
- hydrocarbon processing;
- environmental; and
- pharmaceutical and biopharmaceutical.
Hydrocarbon Processing
The hydrocarbon processing industry encompasses the natural gas, petroleum
refining, petrochemical and chemical markets. We sell primarily gas
chromatographs and gas chromatography-mass spectrometry products and systems
into these markets. Petroleum refiners use our measurement solutions to analyze
crude oil composition and perform other raw material analysis, verify and
improve refining processes, and ensure the overall quality of gasoline, fuels,
lubricants and other products. Our gas chromatographs are used to monitor
consistent quality in the natural gas delivered to consumers and industry.
Petrochemical and chemical producers use our products to measure and control the
quality of their finished products and to verify the environmental safety of
their operations.
Environmental
We develop and market analytical instrumentation for the environmental
market for applications such as laboratory and field analysis and
characterization of chemical pollutants in air, water, soils, solid waste,
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agriculture and food products. Environmental industry customers include all
levels of government, the industrial and manufacturing sectors, engineering and
consulting companies, commercial testing laboratories, colleges and
universities. We believe there will be more demand for environmental
instrumentation in the Asia-Pacific, Latin America and Eastern Europe regions,
as these regions implement new and stricter environmental regulations.
Pharmaceutical and Biopharmaceutical
Our analytical and life sciences-instrument solutions are used by
pharmaceutical and biopharmaceutical companies in every phase of the drug
development process. This includes research into the basic causes of disease,
identification and development of new drugs, obtaining regulatory approval,
manufacturing and distribution. Strategic Directions International estimates
that these companies will spend approximately $3.8 billion on analytical
instrumentation in 2002.
STRATEGY
In order to maintain our leading position in the analytical instrumentation
market, our strategy is as follows:
Target high-growth opportunities in the pharmaceutical and biopharmaceutical
markets
In fiscal year 2000, we formed a new Life Sciences Business Unit to address
opportunities in the pharmaceutical market. Through our strategic relationship
with Caliper Technologies, we have developed instrumentation that enables
chemical analysis procedures to be performed within the Caliper LabChip device.
We have recently begun marketing the LabChip device, which uses a technology
called microfluidics to manipulate minute quantities of various fluids.
We will continue to focus resources on the development of
bio-instrumentation that increases understanding of the genetic cause of
diseases in order to speed the development and increase the efficacy of new
drugs.
Focus on growth opportunities in current markets
To address emerging markets in the Asia-Pacific, Latin America and Eastern
Europe regions, we are broadening our worldwide distribution capabilities and
developing less complex instrumentation with lower prices. Additionally, in
order to differentiate our product offerings and increase our market share in
developed markets, we intend to continue to grow our portfolio of services and
consumable products, enabling us to offer our customers more complete solutions.
Finally, we continue to develop gas chromatography and mass spectroscopy
products that are smaller and more portable to meet increasing demand for use of
these instruments outside of centralized laboratories.
Bring new products and technologies to market faster
We seek to bring new products and technologies to market both through
internal development and the strategic acquisition of technologies from third
parties. We are expanding our programs to offer customers early access to
products under development to ensure that these products are meeting customer
needs. In addition, our development of modular hardware and software platforms
allows us to bring new generations of products to market faster.
In addition to our internal efforts, we consider acquisitions to complement
our current products, solutions and technologies and to accelerate our entry
into strategic markets.
Leverage strategic relationships and alliances
We intend to build strategic relationships to enable us to develop products
and services that complement existing technologies and products in our target
markets. For example, through our relationship with Caliper Technologies, we are
conducting joint research and development in microfluidics.
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In addition, through our strategic alliances, we develop instruments that
work with our partners' products, enabling us to offer our customers a broader
range of products and solutions.
PRODUCTS
A key factor in our target markets is the need for new products that
increase productivity of the end customer. Our chemical and life sciences
analysis products, systems and services enable our customers to analyze water,
air and soil for monitoring and remediation; to understand the properties of
natural and man-made gases, liquids and chemically-based products; and to
advance knowledge of the genetic basis of disease and enable the development,
testing and use of new drugs. Our four main product lines, chromatography,
spectroscopy, bio-instrumentation and related consumables, are described below.
Gas Chromatography
We produce gas chromatography systems, both portable and otherwise. Gas
chromatographs are used to separate molecules of a gaseous mixture to determine
the quantity and identity of the molecules present. A gas chromatograph can
analyze gas samples as well as solids and liquids that can be converted to a
gaseous state. Most gas chromatographs have the approximate size and appearance
of a large microwave oven.
Our instruments are used in laboratories involved in research and
development, quality assurance, quality control and routine testing. Our
products are used to test the quality and safety of food, air and water; to
develop cleaner-burning fuels and more effective pharmaceuticals; and to test
for alcohol in blood, drugs in urine or explosive residues in crime scene
evidence.
Liquid Chromatography
Liquid chromatographs are used to separate molecules of a liquid mixture to
determine the quantity and identity of the molecules present. These instruments
are modular in construction and can be configured to form instruments that
perform specific analyses. Each module is about the size of a home videocassette
recorder.
High-performance liquid chromatographs are an essential tool in the
pharmaceutical industry for basic research, drug development and clinical trials
of new drugs. Other industry groups that utilize high-performance liquid
chromatographs include chemical development and manufacturing, industry and
government testing laboratories for safety, quality and nutritional content of
foods and beverages, athlete monitoring for illegal drug use and environmental
monitoring.
Mass Spectroscopy
Mass spectroscopy systems break molecules into their component parts and
analyze these parts. Our mass spectrometers range in size from that of a small
microwave oven to that of a medium-sized refrigerator.
Mass spectroscopy systems are typically used in combination with gas or
liquid chromatographs in the pharmaceutical, semiconductor and environmental
industries. The combined instruments are used to study and refine the chemical
structure of new drugs, to determine the presence of impurities in
semiconductors as they are manufactured, or to research the presence of heavy
metals and other unwanted substances in soil and water.
Bio-Instrumentation
In December 1999 we announced the launch of a DNA microarray program for
the life sciences that incorporates technologies from both Rosetta Inpharmatics
and OGT, among others. This program is intended to enable researchers to access
gene expression information. In addition, our GeneArray system allows a
researcher to use GeneChip arrays designed by Affymetrix to enable high-speed
detection and characterization of large amounts of genetic information.
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<PAGE> 23
The new Agilent 2100 bioanalyzer instrument systems that we have developed
through our relationship with Caliper Technologies integrate a large number of
chemical-analysis procedures onto a single chip. We develop and distribute
instrumentation that extracts and analyzes data from the microchip developed by
Caliper Technologies, using advanced microfluidics technology. Using miniature,
integrated chemical-processing systems etched into glass, silicon, quartz or
plastic, the microchip allows the steps customarily performed in conventional
instruments to be done using minute quantities of costly liquids in a fraction
of the usual time.
Consumables
We also offer consumable products, including chromatograph columns,
analytical reagents and other accessories and supplies used by our customers
during the analytical experimentation process. Columns are metal or glass tubes
containing various substances that are inserted into chromatographs to assist in
the process of separating compounds into their constituent parts. Reagents are
chemicals used to perform analysis on the resulting constituent parts. Other
accessories and supplies we provide range from rubber rings to syringes to
safety glasses.
Our offerings include both generic consumables, where we seek to
distinguish our products on price, selection and customer loyalty, and
proprietary consumables developed by us, where we offer exclusive technology,
performance and functionality.
CUSTOMERS
We sell our products and services to a broad array of customers in each of
the markets we serve. Our top customers by market segment are the following:
<TABLE>
<CAPTION>
HYDROCARBON PROCESSING ENVIRONMENTAL PHARMACEUTICAL
---------------------- ------------- --------------
<S> <C> <C>
Du Pont De Nemours Co E.I U.S. Federal Government Merck & Co., Inc
Bayer AG Government of Korea Roche Holdings, Inc
Basf AG United States Army AstraZeneca PLC
Monsanto Company US Department of Agriculture Aventis S.A.
Dow Chemical Co. Government of Australia Glaxo Wellcome PLC
Boehringer Ingelheim State of California Novartis AG
Exxon Corporation State of Georgia SmithKline Beecham PLC
Akzo State of Texas Johnson & Johnson
Pfizer, Inc.
American Home Products
</TABLE>
SALES, MARKETING AND SUPPORT
Our sales and support delivery channels are aligned by our key markets to
maximize market coverage and to optimize selling and support delivery
efficiency. We market our products to our customers through our direct sales
force, value-added resellers, manufacturers' representatives and distributors.
We use our direct sales force to market our products to all our
pharmaceutical and biopharmaceutical accounts, large and medium size hydrocarbon
processing customers and all environmental accounts. We supplement our direct
sales force with sales agents to provide broader geographic coverage and to
cover smaller accounts. We also have an active value-added reseller program to
augment our ability to provide more complete solutions to our customers. We sell
our consumable products through distributors, telesales and electronic commerce.
We offer a wide range of startup, operational, educational and compliance
support services for our chemical analysis measurement and data handling
systems. We deliver our support services to customers in a variety of ways,
including on-site assistance, return to us for repair or exchange, telephone
support and self diagnostic services provided over the Internet. Our support
services limit the amount of time an instrument is out of service, provide
increased system productivity, extend the instrument life and offer fast problem
21
<PAGE> 24
resolution. We also offer special industry-focused service bundles that are
designed to meet the specific needs of hydrocarbon processing, environmental,
pharmaceutical and biopharmaceutical customers to keep instruments fully
operational and compliant with the respective industry requirements.
MANUFACTURING
Our manufacturing strategy supports our diverse product range and
customer-centric focus. We assemble highly configurable products to individual
customer orders and make standard products to stock. We employ advanced
manufacturing techniques and supply chain management systems to reduce costs and
manufacturing cycle times. We selectively use partners to provide manufacturing
capabilities outside our core competencies, such as the manufacture of printed
circuit assemblies and the delivery of shipment logistics. We have manufacturing
facilities in California and Delaware in the United States, China, Germany and
Japan.
COMPETITION
The markets for analytical instruments in which we compete are
characterized by evolving industry standards and intense competition. Our
principal competitors include Perkin Elmer Corp., Applied Biosystems, Inc.,
Shimadzu Corporation, Thermo Electron, Inc. and Waters.
Our ability to compete effectively depends upon a number of factors
including our ability to:
- produce high-quality and reliable products;
- introduce new technologies and products in a timely manner;
- provide favorable overall cost of ownership; and
- provide product and service solutions that complement and support our
main product lines.
GOVERNMENT REGULATION
The chemical analysis product and related consumables marketed by our
chemical and life sciences analysis business are subject to regulation in the
United States by the Environmental Protection Agency under the Toxic Substances
Control Act, and by government agencies in other countries under similar laws.
The Toxic Substances Control Act regulations govern, among other things, the
testing, manufacture, processing and distribution of chemicals, the testing of
regulated chemicals for their effects on human health and safety and import and
export of chemicals. The act prohibits persons from manufacturing any chemical
in the United States that has not been reviewed by Environmental Protection
Agency for its effect on health and safety, and placed on an Environmental
Protection Agency inventory of chemical substances. 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. If we fail to comply with
the notification, record-keeping and other requirements in the manufacture or
distribution of our products, the Environmental Protection Agency can obtain an
order from a court that would prohibit the further distribution or marketing of
a product that contains a chemical that is out of compliance or we could face
fines, civil penalties or criminal prosecution.
BACKLOG
Agilent believes that backlog is not a meaningful indicator of future
business prospects due to the large volume of products delivered from our shelf
inventories, the shortening of product life cycles and the relative portion of
net revenue related to our service and support businesses. Therefore, we believe
that backlog information is not material to an understanding of our business.
RESEARCH AND DEVELOPMENT
We sell our products in several industries that are characterized by rapid
technology changes, frequent new product and service introductions and evolving
industry standards. Without the timely introduction of new
22
<PAGE> 25
products, services and enhancements, our products and services are likely to
become technologically obsolete over time, in which case revenue and operating
results would suffer. There can be no assurance that such new products and
services, if and when introduced, will achieve market acceptance. After the
products and services are developed, we must quickly manufacture and deliver
such products and services in sufficient volumes at acceptable costs to meet
demand.
Research and development expenditures were $1,258 million in fiscal year
2000, $997 million in fiscal year 1999, and $948 million in fiscal year 1998. We
anticipate that we will continue to have significant research and development
expenditures in order to maintain our competitive position with a continuing
flow of innovative, high-quality products and services.
INTELLECTUAL PROPERTY
Our general policy has been to seek patent and other intellectual property
protection for those inventions and improvements likely to be incorporated into
our products and services or to give us a competitive advantage. While we
believe that our patents and applications have value, in general no single
patent is in itself essential. In addition, we cannot assure you that any of our
proprietary rights will not be challenged, invalidated or circumvented, or that
our rights will provide significant competitive advantages.
INTERNATIONAL OPERATIONS
Our net revenue originating outside the United States, as a percentage of
our total net revenue, was approximately 55.8% in fiscal year 2000, 55.2% in
fiscal year 1999, and 54.4% in fiscal year 1998, the majority of which was from
customers other than foreign governments. Approximately 19% of our international
revenue in the last three years was derived from Japan.
Most of our sales in international markets are made by foreign sales
subsidiaries. In countries with low sales volumes, sales are made through
various representatives and distributors. However, we make certain sales in
international markets directly from the United States.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country's or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements, difficulty in staffing and managing
widespread operations, differing labor regulations and differing protection of
intellectual property. We are also exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales and assets and
liabilities denominated in currencies other than the United States dollar and
may also become subject to interest rate risk inherent in any debt, investment
and finance receivable portfolios we incur.
We do a portion of our businesses in Korea and Japan, which have been
subject to increased economic instability in recent years. The recurrence of
weakness in these economies or weakness in other international economies could
have a significant negative effect on our future operating results. However, we
believe that our international diversification provides stability to our
worldwide operations and reduces the impact on us of adverse economic changes in
any single country. Financial information about our international operations is
contained in Note 18, "Segment Information," of the consolidated financial
statements included in Item 8 of this report.
MATERIALS
Our manufacturing operations employ a wide variety of semiconductors,
electromechanical components and assemblies, and raw materials such as plastic
resins and sheet metal. We believe that the materials and supplies necessary for
our manufacturing operations are presently available in the quantities required.
We purchase materials, supplies and product subassemblies from a substantial
number of vendors. For many of our products, we have existing alternate sources
of supply, or such sources are readily available. In certain instances, however,
we enter into non-cancelable purchase commitments with, or make advance payments
to, certain suppliers to ensure supply. Portions of our manufacturing operations
are dependent on the ability of
23
<PAGE> 26
suppliers to deliver quality components, subassemblies and completed products in
time to meet critical manufacturing and distribution schedules. The failure of
suppliers to deliver these components, subassemblies and products in a timely
manner may adversely affect our operating results until alternate sources could
be developed. In addition, we periodically experience constrained supply of
certain component parts in some product lines as a result of strong demand in
the industry for those parts. Such constraints, if persistent, may adversely
affect our operating results. However, we believe that alternate suppliers or
design solutions could be arranged within a reasonable time so that material
long-term adverse impacts would be minimized.
ENVIRONMENTAL
Our research and development, manufacturing and distribution operations
involve the use of hazardous substances and are regulated under international,
federal, state and local laws governing health and safety and the environment.
We apply strict standards for protection of the environment and worker health
and safety to sites inside and outside the United States, even if not subject to
regulation imposed by foreign governments. We believe that our properties and
operations at our facilities comply in all material respects with applicable
environmental laws; however, the risk of environmental liabilities cannot be
completely eliminated and there can be no assurance that the application of
environmental and health and safety laws to our Company may not require our
Company to incur significant expenditures. We are also regulated under a number
of international, federal, state and local laws regarding recycling, product
packaging and product content requirements. These laws are gradually becoming
more stringent and may in the future cause us to incur significant expenditures.
Some of our operations are located on properties that are known to have
subsurface contamination that is undergoing remediation by Hewlett-Packard.
Hewlett-Packard has agreed to retain the liability for the contamination,
perform the required remediation and indemnify us with respect to claims arising
out of the contamination. The determination of the existence and cost of any
additional contamination caused by us could involve costly and time-consuming
negotiations and litigation. While we expect that Hewlett-Packard will meet its
remediation and indemnification obligations in this regard, there can be no
guarantee that it will do so. Under our agreement with Hewlett-Packard,
Hewlett-Packard will have access to these properties to perform the remediation.
Hewlett-Packard has agreed to minimize interference with on-site operations at
those properties during the course of the remediation, but there can be no
guarantee that our operations will not be interrupted or that we will not be
required to incur unreimbursed costs associated with the remediation.
Remediation could also harm on-site operations and the future use and value of
the properties.
In addition, some of these properties are undergoing remediation by
Hewlett-Packard under an order of an agency of the state in which the property
is located. Although Hewlett-Packard has agreed to indemnify us with respect to
that subsurface contamination, it is possible that one or more of the
governmental agencies will require us to be named on any of these orders. The
naming of our Company will not affect Hewlett-Packard's obligation to indemnify
us with regard to these matters.
We are liable and are indemnifying Hewlett-Packard for any contamination
found at all facilities transferred to us by Hewlett-Packard excluding the
properties undergoing remediation. In addition, we are indemnifying
Hewlett-Packard for any liability associated with past non-compliance with
environmental laws regulating ongoing operations at all properties transferred
to us by Hewlett-Packard, as well as at sold or discontinued businesses that
related to our businesses. While we are not aware of any material liabilities
associated with such indemnified matters, there is no guarantee that such
contamination or regulatory non-compliance does not exist, and will not expose
us to material liability in the future.
We are being indemnified by Hewlett-Packard with respect to all
environmental liabilities for which Hewlett-Packard accrued a reserve and we are
not aware of any material and probable environmental liabilities being assumed
by us which are not subject to the indemnity.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names of our executive officers, and their ages, titles and biographies
as of December 26, 2000, appear below. All officers are elected for one-year
terms.
24
<PAGE> 27
EXECUTIVE OFFICERS:
Edward W. Barnholt, 57, Mr. Barnholt has served as our President and Chief
Executive Officer and as a director since May 1999. Before being named our Chief
Executive Officer, Mr. Barnholt served as General Manager of Hewlett-Packard's
Measurement Organization from 1998 to 1999, which included Hewlett-Packard's
Electronic Instruments Group, the Microwave and Communications Group, the
Communications Test Solutions Group, the Automated Test Group, the Chemical
Analysis Group, the Components Group and the Medical Products Group. From 1990
to 1998, he served as General Manager of Hewlett-Packard's Test and Measurement
Organization. He was elected a Senior Vice President of Hewlett-Packard in 1993
and an Executive Vice President in 1996. He is a director of KLA-Tencor
Corporation.
Byron Anderson, 57, has served as our Senior Vice President, Electronic
Products and Solutions since August 1999. Prior to assuming that position, Mr.
Anderson served as a vice president of Hewlett-Packard since November 1995 and
General Manager of the Microwave and Communications Group since September 1997.
In January 1991, Mr. Anderson was named General Manager of Hewlett-Packard's
Communications Test Business Unit, which became the Test Solutions Group in
1994.
Alain Couder, 54, Mr. Couder has served as our Executive Vice President and
Chief Operating Officer since February 2000. Prior to assuming this position,
Mr. Couder served as President, Chairman and Chief Executive Officer at Packard
Bell NEC from 1998 to 2000. Prior to joining Packard Bell NEC, Mr. Couder held
several management positions from 1991 through 1998, including Chief Operating
Officer in 1997 with Groupe Bull. From 1984 to 1991, Mr. Couder was a General
Manager in the computer business at Hewlett-Packard Company in the United States
and France.
William R. Hahn, 49, has served as our Senior Vice President,
Communications and Marketing since August 1999. Since October 1997, Mr. Hahn
served as the Sector Controller of Hewlett-Packard's Measurement Organization.
From September 1995 to October 1997, he served as Operations Manager for
Hewlett-Packard's interactive broadband program. From May 1993 to September
1995, Mr. Hahn served as Vice President of Finance and Manufacturing and Chief
Financial Officer at Aspect Communications.
Jean M. Halloran, 48, has served as our Senior Vice President, Human
Resources since August 1999. Since 1997, Ms. Halloran served as Director of
Corporate Education and Development for Hewlett-Packard. Prior to assuming this
position, from 1993 to 1997, Ms. Halloran acted as personnel manager for
Hewlett-Packard's Measurement Systems Organization. From 1990 to 1993, she acted
as group Personnel Manager for Hewlett-Packard's Medical Products Group. Ms.
Halloran joined Hewlett-Packard in 1980 in the Medical Products Group, where she
held a variety of positions in human resources, manufacturing and strategic
planning.
Dorothy D. Hayes, 50, has served as our Vice President and Controller since
August 1999. Prior to assuming that position, since October 1989, Ms. Hayes held
a number of positions at Hewlett-Packard. She served as Transition General
Manager from March to July 1999, Director of Internal Audit from July 1997 to
June 1999, Measurement Systems Organization Controller from February 1994 to
July 1997, Components Group Controller from September 1993 to February 1996 and
Corporate Financial Reporting Manager from October 1989 to September 1993.
Richard D. Kniss, 60, has served as our Senior Vice President, Chemical
Analysis Group since August 1999. Prior to assuming that position, since May
1995, Mr. Kniss was General Manager of Hewlett-Packard's Chemical Analysis Group
and was named a Vice President of Hewlett-Packard in June 1997. He served as
General Manager of the Optical Communication Division from 1984 to 1995.
D. Craig Nordlund, 51, was named our Senior Vice President, General Counsel
and Secretary in May 1999 and serves as an officer or director for a variety of
Agilent subsidiaries. Mr. Nordlund served as Associate General Counsel and
Secretary of Hewlett-Packard Company from 1987 to 1999. He is the immediate past
Chairman of the National American Society of Corporate Secretaries organization
and serves on the boards of the American Corporate Counsel Association, the
American Society of Corporate Secretaries, and the HP Employees Federal Credit
Union.
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<PAGE> 28
Stephen H. Rusckowski, 43, has served as our Senior Vice President,
Healthcare Solutions since October 1999. Prior to assuming that position, Mr.
Rusckowski held a number of positions at Hewlett-Packard. He served as General
Manager of the Cardiology Products Division from 1997 to 1999, General Manager
of the Healthcare Information Management Division from 1996 to 1997 and General
Manager of the Clinical Information Systems Division from 1994 to 1995. Mr.
Rusckowski joined Hewlett-Packard in 1984.
Thomas A. Saponas, 51, has served as our Senior Vice President and Chief
Technology Officer since August 1999. Prior to being named Chief Technology
Officer, from June 1998 to April 1999, Mr. Saponas was Vice President and
General Manager of Hewlett-Packard's Electronic Instruments Group. Mr. Saponas
has held a number of positions since the time he joined Hewlett-Packard. Mr.
Saponas served as General Manager of the Lake Stevens Division from August 1997
to June 1998 and General Manager of the Colorado Springs Division from August
1989 to August 1997. In 1986, he was a White House Fellow in Washington, D.C.
John E. Scruggs, 59, has served as our Senior Vice President, Automated
Test since August 1999. Prior to assuming that position, since January 1992, Mr.
Scruggs was General Manager of the Automated Test Group of Hewlett-Packard
within the Test and Measurement Organization. He was elected a Vice President of
Hewlett-Packard in November 1996.
William P. Sullivan, 51, has served as our Senior Vice President,
Semiconductor Products since August 1999. Prior to assuming that position, since
February 1998, he served as Vice President and General Manager of
Hewlett-Packard's Components Group. In 1997, Mr. Sullivan became General Manager
of the Communication Semiconductor Solutions Division. From 1995 to 1997, he was
General Manager of the Optical Communication Division. From April 1991 to
February 1995, Mr. Sullivan served as Research and Development Manager for the
Optical Communication Division.
Robert R. Walker, 50, has served as our Executive Vice President and Chief
Financial Officer since May 2000, and as our Senior Vice President and Chief
Financial Officer since May 1999. During 1997 and 1998, Mr. Walker served as
Vice President and General Manager of Hewlett-Packard's Professional Services
Business Unit. From 1993 to 1997, he led Hewlett-Packard's information systems
function. He became Chief Information Officer in 1995 and served in that
position until 1997. Mr. Walker was named a Vice President of Hewlett-Packard in
1995. From 1975 to 1993, Mr. Walker held a variety of financial positions in
Hewlett-Packard.
Thomas White, 43, has served as our Senior Vice President, Communications
Solutions since August 1999. From 1997 to August 1999, Mr. White served as Vice
President and General Manager of the Communications Solutions Group of
Hewlett-Packard. From 1996 to 1997, he served as General Manager of the Computer
Peripherals Bristol Division and, in 1994, he served as General Manager for the
Telecommunications Systems Division, South Queensferry, Scotland.
ITEM 2. PROPERTIES.
Our corporate headquarters are located in Palo Alto, California. We operate
Agilent Technologies Laboratories in Palo Alto, California, and we also have 35
manufacturing sites, including eleven primary sites. Of the primary sites, five
are located in the United States, and an additional six sites are located in
China, Germany, Japan, Malaysia, Singapore and the United Kingdom.
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<PAGE> 29
<TABLE>
<CAPTION>
SITE MAJOR ACTIVITY OWNED/LEASED
---- -------------- ------------
<S> <C> <C>
Palo Alto, CA -- Corporate Headquarters........... Corporate Owned
Administration
Palo Alto, CA -- Agilent Laboratories............. Research & Development Owned
Santa Clara, San Jose and Newark, CA.............. Manufacturing Primarily Owned
Loveland, CO...................................... Manufacturing Primarily Owned
Wilmington, DE (Little Falls Area)................ Manufacturing Primarily Owned
Andover, MA....................................... Manufacturing Owned
Spokane, WA....................................... Manufacturing Primarily Owned
Qingdao, China.................................... Manufacturing Leased
Boeblingen, Germany............................... Manufacturing Primarily Leased
Hachioji, Japan................................... Manufacturing Owned
Penang, Malaysia.................................. Manufacturing Owned
Singapore......................................... Manufacturing Leased
South Queensferry, United Kingdom................. Manufacturing Primarily Owned
</TABLE>
As of December 31, 2000, we owned or leased a total of approximately 196
million square feet of space worldwide. Agilent's sales and support occupy a
total of approximately 62.4 million square feet. Of that, we own approximately
9.3 million square feet and lease the remaining 53.1 million. Agilent's
manufacturing plants, research and development facilities and warehouse and
administrative facilities occupy approximately 133.5 million square feet of
space. Of that, approximately 92.1 million square feet was owned and the
remaining 41.4 million was leased. Information about each of our businesses
appears below:
Test and Measurement. Our test and measurement business has manufacturing
and research and development facilities in Australia, Canada, China, Germany,
Japan, Korea, Malaysia, Singapore, the United Kingdom and the United States, and
marketing centers in Hong Kong, the Netherlands, Japan and the United States,
and sales offices throughout the world.
Semiconductor Products. Our semiconductor products business operates eight
manufacturing sites located in California and Colorado in the United States,
Malaysia, Singapore and the United Kingdom. The majority of our silicon and
gallium arsenide wafer fabrication is done in the United States and Singapore,
while our assembly and test operations are in Malaysia, Singapore and the United
Kingdom. We have a research and development facility in Italy. We have regional
sales and customer support centers in Germany, Hong Kong, Japan, Singapore, the
United Kingdom and the United States, and sales offices throughout the world.
Healthcare Solutions. Our healthcare solutions business has five
manufacturing locations sited in California, Massachusetts and Washington in the
United States, China and Germany. We have marketing centers in Hong Kong, Japan,
Germany, California and Massachusetts, and sales offices throughout the world.
We have a development facility in Pennsylvania.
Chemical Analysis. Our chemical analysis business has manufacturing
facilities in California and Delaware in the United States, China, Germany and
Japan. We have marketing centers in Germany, the United States and Singapore,
and sales offices throughout the world.
ITEM 3. 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.
During the fourth quarter of fiscal 2000, there were no matters submitted
to a vote of securities holders, through the solicitation of proxies or
otherwise.
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<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is listed on the New York Stock Exchange with the ticker
symbol "A." Trading in our common stock began on November 18, 1999; as a result,
there was no historical stock price data for our 1999 fiscal year. For the 2000
fiscal year, the New York Stock Exchange reported the high and low prices per
quarter as follows:
<TABLE>
<CAPTION>
QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
High............................... $79 1/4 $159 $100 3/4 $ 63
Low................................ $ 40 $ 71 $40 3/4 $38 13/16
</TABLE>
As of December 26, 2000, there were 85,921 stockholders of record of common
stock. The closing share price for Agilent common stock on December 26, 2000, as
reported by the New York Stock Exchange, was $53.50. On November 23, 1999, we
paid Hewlett-Packard a dividend of the net proceeds of our initial public
offering of $2.1 billion. We currently intend to retain any future earnings to
fund the development and growth of our business and, going forward, we do not
anticipate paying any cash dividends in the foreseeable future.
We completed our initial public offering in November 1999. We registered
and sold shares of our common stock, par value $0.01 per share. The registration
statement under the Securities Act (Reg. No. 333-85249) for the offering became
effective on November 18, 1999.
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<PAGE> 31
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF EARNINGS DATA (1,
2, 3):
Net revenue.................................. $10,773 $8,331 $7,952 $7,785 $7,379
Earnings from operations..................... $ 1,053 $ 741 $ 442 $ 870 $ 875
Net earnings................................. $ 757 $ 512 $ 257 $ 543 $ 542
Basic net earnings per share................. $ 1.68 $ 1.35 $ 0.68 $ 1.43 $ 1.43
Diluted net earnings per share............... $ 1.66 $ 1.35 $ 0.68 $ 1.43 $ 1.43
Average shares used in computing basic net
earnings per share......................... 449 380 380 380 380
Average shares used in computing diluted net
earnings per share......................... 455 380 380 380 380
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA (1):
Working capital............................... $2,897 $1,857 $1,476 $1,408 $1,449
Total assets.................................. $8,425 $5,444 $4,987 $5,006 $4,720
Stockholders' equity.......................... $5,265 $3,382 $3,022 $3,110 $2,998
</TABLE>
-------------------------
(1) The historical financial information from 1996 through 1999 was carved out
from the historical financial information of Hewlett-Packard using the
historical results of operations and historical bases of the assets and
liabilities of the Hewlett-Packard businesses that comprise our company.
Therefore, the historical financial information from 1996 through 1999 is
not indicative of our future performance and does not reflect what our
financial position and results of operations would have been had we operated
as a separate, stand-alone entity during the periods presented.
(2) Consolidated statement of earnings data includes pre-tax restructuring
charges of approximately $21 million for the year ended October 31, 2000 and
$163 million for the year ended October 31, 1998. Consolidated statement of
earnings data for the year ended October 31, 1999 includes a pre-tax asset
impairment charge of $51 million relating to a building under construction
originally intended as a manufacturing facility for eight-inch CMOS
semiconductor wafers. See Note 11, "Restructuring, Asset Impairment and
Other Charges," of the consolidated financial statements.
(3) Consolidated statement of earnings data for the year ended October 31, 2000
includes the impact of the sale of certain portions of our U.S. portfolio of
lease assets to The CIT Group, Inc. Net proceeds from this sales transaction
were $234 million and we recognized $212 million in net revenue and $89
million in cost of products. See Note 3, "Acquisitions and Dispositions," of
the consolidated financial statements.
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<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K. The following discussion contains forward-looking
statements, including, without limitation, statements regarding the anticipated
completion of transactions and our liquidity position that involve risks and
uncertainties. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to certain factors,
including those discussed below in "Factors That May Affect Future Results" and
elsewhere in this Annual Report on Form 10-K.
OVERVIEW
On March 2, 1999, Hewlett-Packard Company (Hewlett-Packard) announced a
plan to create a separate company, subsequently named Agilent Technologies, that
comprised Hewlett-Packard's test and measurement, semiconductor products,
healthcare solutions and chemical analysis businesses, related portions of
Hewlett-Packard Laboratories, and associated infrastructure. On November 1,
1999, we began operating as a separate, stand-alone company. On November 18,
1999, we launched our initial public offering of 72,000,000 shares of common
stock at $30 per share. After the completion of our initial public offering in
November 1999, Hewlett-Packard owned approximately 84.1% of our outstanding
common stock. On November 23, 1999, we paid the net proceeds of the offering of
$2.1 billion to Hewlett-Packard as a dividend. 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 us. The dividend was distributed on June 2, 2000 to
Hewlett-Packard shareholders of record as of May 2, 2000. The distribution was
made on the basis of 0.3814 of an Agilent share for each Hewlett-Packard common
share outstanding.
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 our accounts receivable
and accounts payable, accrued payroll and related items and taxes payable,
except deferred taxes, and transferred to us some of the assets and liabilities
related to its business, including some of the accounts receivable, accounts
payable and other liabilities of Agilent Technologies Japan, Ltd. (formerly
Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard transferred to us
$521 million to fund our acquisition of Yokogawa Electric Corporation's 25%
minority equity ownership of Agilent Technologies Japan, Ltd. In December 1999,
Hewlett-Packard provided us with additional cash funding of approximately $200
million based on our and Hewlett-Packard's balance sheets as of October 31,
1999.
We have entered into various agreements with Hewlett-Packard related to
certain ongoing relationships between the companies. 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.
For a brief description of these agreements, see Note 14, "Transactions with
Hewlett-Packard," of the consolidated financial statements. The agreements
relate primarily to information technology, customer financing, accounting and
administrative, and building services. Under these agreements, we 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%.
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<PAGE> 33
Basis of Presentation
Our fiscal year end is October 31. Unless otherwise stated, all years and
dates refer to our fiscal year.
The 2000 consolidated financial statements reflect the results of
operations, changes in cash flows, and the financial position of our businesses.
We began accumulating retained earnings on November 1, 1999.
The 1999 and 1998 consolidated financial statements were prepared using
Hewlett-Packard's historical bases in the assets and liabilities and our
historical results of operations. The 1999 and 1998 consolidated financial
statements include allocations of certain Hewlett-Packard corporate expenses,
including centralized research and development, legal, accounting, employee
benefits, real estate, insurance services, information technology services,
treasury and other Hewlett-Packard corporate and infrastructure costs. The
expense allocations were determined on bases that Hewlett-Packard and we
considered to be a reasonable reflection of the utilization of services provided
to us or the benefit received by us. Therefore, the financial information
presented in this Financial Report for 1999 and 1998 is not indicative of our
financial position, results of operations or cash flows in subsequent periods
nor is it necessarily indicative of what our financial position, results of
operations or cash flows would have been had we been a separate, stand-alone
entity in those periods prior to 2000.
Restructuring, Asset Impairment and Other Charges
In August 2000, we announced a restructuring of our healthcare solutions
business. The restructuring resulted in a workforce reduction through severance
programs, as well as consolidation of our business operations. Since the
announcement, 396 regular employees located in the United States, Asia Pacific
and Europe have accepted severance packages and 200 temporary employees have
been terminated. We recognized a $21 million pre-tax restructuring charge
comprised of $13 million for estimated severance benefits and $8 million for
non-cash asset writedowns. Of this amount, $11 million was included in cost of
products, $4 million in cost of services and other. The remainder was included
in other operating expense line items. As of October 31, 2000, $2 million in
severance benefits has been paid and charged against the liability. The reminder
of the liability is expected to be utilized during 2001.
In 1999, we recognized an impairment loss of $51 million related to a
building that was under construction for the intended purpose of housing
manufacturing operations for eight-inch CMOS semiconductor wafers. At the time
construction was stopped, only the building shell was complete. After exhaustive
efforts to find a semiconductor manufacturing partner to utilize the building
for its initial intended use, management concluded that the highest fair value
to be realized from this building was based on selling it for use as an office
or general use facility. In 2000, we actively marketed the building shell
without success. In late 2000, in response to the increased demand in the
wireless semiconductor market and our need to increase gallium arsenide (GaAs)
manufacturing capacity, management decided to resume construction of a portion
of the building shell. When completed, this portion of the building will
manufacture six-inch GaAs semiconductor wafers. We anticipate that the completed
manufacturing facility will be put into service sometime in 2002, at which time
depreciation will commence.
During 1998, we recorded a pre-tax restructuring charge of $163 million
related to the transfer of the production of certain semiconductor wafers to a
third-party contractor. Of this amount, $138 million was included in cost of
products, $7 million in research and development and $18 million in selling,
general and administrative expenses. Included in this charge was $85 million for
non-cash asset writedowns of equipment that was subsequently abandoned or sold.
Also included in this charge was $78 million for employee severance benefits
that have been paid.
Also during 1998, we recorded a pre-tax charge of $37 million for the
writedown of an investment in convertible preferred stock of a medical products
company to its fair value because management had determined the impairment was
not temporary.
Sale of leasing portfolio to CIT
In the fourth quarter of 2000, we entered into a vendor financing agreement
with The CIT Group, Inc. (CIT), whereby CIT will provide equipment financing and
leasing services to our customers on a global basis.
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<PAGE> 34
Under the terms of the agreement, CIT established a wholly-owned subsidiary,
Agilent Financial Services, Inc. (AFS), and is offering financing products to
our customers under this name. CIT, through AFS, will be providing funding and
services related to equipment financing to customers in most of our businesses.
These services include credit review, document generation, pricing, invoicing
and collections. We also entered into an asset purchase agreement with CIT
pursuant to which we sold them certain portions of our U.S. portfolio of lease
assets during the fourth quarter of 2000. Net proceeds from this sales
transaction were $234 million and we recognized $212 million in net revenue and
$89 million in cost of products. We will be selling additional portions of our
portfolio of lease assets to CIT during 2001 pursuant to various asset purchase
agreements.
Sale of healthcare solutions business to Philips
In the first quarter of 2001, we agreed to sell our healthcare solutions
business to Koninklijke Philips Electronics, N.V. (Philips) for approximately
$1.7 billion. Most of our healthcare solutions business' operational facilities
and certain associated assets and liabilities will transfer to Philips.
Virtually all employees of our healthcare solutions business, including 100
percent of the healthcare solutions business-dedicated infrastructure employees,
will be offered employment by Philips or transferred to Philips, subject to
local statutory laws. The estimated amount of net assets to be transferred is
$400 million. We will be restricted from competing in the development,
manufacturing, selling or servicing of certain medical products for five years.
The sale is expected to be completed by mid-calendar year 2001 subject to
customary regulatory approvals and other closing conditions.
Acquisition of OSI
On January 5, 2001, we acquired Objective Systems Integrators, Inc. (OSI)
for approximately $684 million in cash. OSI is a leading provider of
next-generation operations-support-system software for communications service
providers and will become part of our test and measurement business.
Cyclical Business and General Economic Conditions
The sales of our products and services are dependent, to a large degree, on
customers whose industries are subject to cyclical trends in the demand for
their products. Shifts in the semiconductor market, electronics industry,
computer industry and telecommunications markets, as well as rapidly shifting
global economic conditions, have had significant impacts on our businesses. In
portions of some of these markets, we have started to see softening which could
harm our businesses. Our revenue and operating results for 2000 compared to 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 businesses and
in the economy. We expect some portions of our businesses to remain cyclical in
the future. Given that a high proportion of our costs are fixed, variability in
revenue as a result of these business cycles could disproportionately affect our
quarterly and annual results.
Economic Conditions in Asia
Beginning in the second half of 1998 and continuing into the first half of
1999, our revenue and operating results declined as a result of the downturn in
Asian economies, particularly in Korea and Japan. Many of our major customers,
particularly those in the semiconductor and electronics industries, delayed or
canceled purchases of our products. This had a significant impact on us,
particularly our test and measurement business. These conditions began to
improve in the second half of 1999 and, accordingly, our revenue and operating
results improved.
Impact of Foreign Currencies
We sell our products in many countries and a portion of our sales and a
portion of our costs and expenses are denominated in foreign currencies,
especially in the Japanese yen and the Euro. In 2000 compared to 1999, the U.S.
dollar strengthened against both the Japanese yen and the Euro, which had an
immaterial
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<PAGE> 35
effect on our net revenue and operating expense growth. Our foreign currency
exposures are hedged as part of our global risk management program, which is
designed to minimize exposure to foreign currency fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). This statement, as amended, establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives as assets or liabilities in our balance sheet and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 2000. We expect the adoption of FAS 133,
during first quarter of 2001, will result in a cumulative after tax expense of
$26 million. Additionally, an unrealized gain related to foreign currency
hedging of approximately $7 million, net of tax, will be recorded in other
comprehensive income in the consolidated balance sheet.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This
Staff Accounting Bulletin, as amended, is effective no later than the fourth
quarter of 2001. We currently do not believe the adoption will have a material
annual impact on our consolidated financial statements.
RESULTS OF OPERATIONS
Our results of operations for the years ended October 31, 2000, 1999 and
1998 in dollars and as a percentage of total net revenue follow.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
DOLLARS TOTAL NET REVENUE
--------------------------- -----------------------
YEARS ENDED OCTOBER 31,
------------------------------------------------------
2000 1999 1998 2000 1999 1998
------- ------ ------ ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Products............................. $ 9,420 $7,122 $6,898 87.4% 85.5% 86.7%
Services and other................... 1,353 1,209 1,054 12.6 14.5 13.3
------- ------ ------ ----- ----- -----
Total net revenue................. 10,773 8,331 7,952 100.0% 100.0% 100.0%
------- ------ ------ ----- ----- -----
Costs and expenses:
Cost of products..................... 4,745 3,675 3,888 44.0 44.1 48.9
Cost of services and other........... 777 713 624 7.2 8.6 7.8
Research and development............. 1,258 997 948 11.7 12.0 11.9
Selling, general and
administrative.................... 2,940 2,205 2,050 27.3 26.4 25.8
------- ------ ------ ----- ----- -----
Total costs and expenses.......... 9,720 7,590 7,510 90.2 91.1 94.4
------- ------ ------ ----- ----- -----
Earnings from operations............... 1,053 741 442 9.8 8.9 5.6
Other income (expense), net............ 111 46 (46) 1.0 .5 (.6)
------- ------ ------ ----- ----- -----
Earnings before taxes.................. 1,164 787 396 10.8 9.4 5.0
Provision for taxes.................... 407 275 139 3.8 3.3 1.8
------- ------ ------ ----- ----- -----
Net earnings........................... $ 757 $ 512 $ 257 7.0% 6.1% 3.2%
======= ====== ====== ===== ===== =====
Cost of products as a percentage of
products revenue..................... 50.4% 51.6% 56.4%
Cost of services and other as a
percentage of services revenue....... 57.4% 59.0% 59.2%
</TABLE>
Net revenue
Total net revenue increased 29.3 percent to $10.8 billion in 2000 from 1999
and 4.8 percent to $8.3 billion in 1999 from 1998. Excluding the sale of certain
portions of our U.S. portfolio of lease assets to CIT, net
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<PAGE> 36
revenue increased 26.8 percent in 2000 from 1999. The increase in 2000 was
spurred by continued growth in net revenue from the communications and
electronics markets. This was especially due to the robust demand for our test
and measurement and semiconductor products, more specifically for our wireless,
fiber-optics, networking and imaging components. Increased demand in Asia also
contributed to net revenue growth in 2000. These effects were partially offset
by a decline in net revenue from our healthcare solutions business. Net revenue
for 2000 from our chemical analysis business was essentially flat. The increase
in 1999 compared to 1998 was primarily due to growth in the communications
market, improvement in economic conditions in Asia and strengthening of the
semiconductor industry in general.
United States revenue increased 27.6 percent to $4.8 billion in 2000 and
increased 3.1 percent to $3.7 billion in 1999. International revenue increased
30.7 percent to $6.0 billion in 2000 and increased 6.2 percent to $4.6 billion
in 1999. Domestic growth came primarily from our businesses which serve the
communications and electronics markets which was partially offset by a slowdown
in our healthcare solutions business. The relatively higher net revenue growth
internationally was primarily attributable to increased demand in Asia,
particularly in Taiwan, Korea and Japan. There was minimal currency impact on
net revenue growth in 2000. In the last half of 1998 and the first half of 1999,
economic conditions in Asia adversely affected revenue from sales of our
products and services to customers in Korea and Japan. In addition, global
weakness in the semiconductor industry caused our product revenue to decline in
1998 and into the first half of 1999. These conditions began to improve in the
second half of 1999 and, accordingly, our revenue improved, both within the
United States and internationally.
In 2000 compared to 1999, revenue from products increased 32.3 percent
while revenue from services and other increased 11.9 percent. In 1999 compared
to 1998, revenue from products increased 3.2 percent while revenue from services
and other increased 14.7 percent. The relatively higher product revenue growth
in 2000 was primarily due to growth in our businesses which serve the
communications and electronics markets, a strengthening of the semiconductor
industry and increased demand in Asia. Generally, there is a lag between service
revenue growth and product revenue growth. This lag occurs because service
revenue increases as our installed base of products increases and warranty
periods expire. Lower product revenue growth in 1999 was primarily due to weak
economic conditions in Asia and weak demand in the semiconductor industry.
Earnings from operations
Earnings from operations increased 42.1 percent to $1.1 billion in 2000
from 1999 and increased 67.6 percent to $741 million in 1999 from 1998.
Excluding the sale of certain portions of our U.S. portfolio of lease assets to
CIT and the restructuring charges related to our healthcare solutions business,
earnings from operations increased 28.3 percent in 2000 from 1999. The increase
in 2000 was primarily due to strong results in the test and measurement and
semiconductor products businesses. These improved results were partially offset
by weak performance from our healthcare solutions business, flat performance
from our chemical analysis business, additional on-going costs associated with
operating on our own and previously planned research and development in the life
sciences. The increase in 1999 was due to higher net revenue combined with cost
savings of approximately $80 million as a result of the 1998 restructuring.
Also, 1999 results included a $51 million asset impairment charge related to a
building under construction for the intended purpose of housing manufacturing
operations for eight-inch CMOS semiconductor wafers.
As a percentage of net revenue, cost of products and services decreased 1.5
percentage points in 2000 from 1999 and decreased 4.0 percentage points in 1999
from 1998. Excluding the sale of certain portions of our U.S. portfolio of lease
assets to CIT and the 1999 impairment charge of $51 million, cost of products
and services as a percentage of net revenue decreased 0.6 percentage points in
2000 from 1999. The decrease in 2000 was primarily attributable to higher
volumes in the test and measurement and semiconductor products businesses as
well as a more profitable product mix in the semiconductor products business.
The decrease was partially offset by manufacturing inefficiencies related to
parts shortages, manufacturing consolidations and our healthcare solutions
business restructuring charges. In 1999, all four of our business segments
recorded improvement in cost of products and services and other as a percentage
of net revenue with semiconductor products accounting for the most significant
improvement due primarily to cost improvements resulting from the 1998
restructuring.
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<PAGE> 37
Operating expenses as a percentage of net revenue increased 0.6 percentage
points in 2000 from 1999 and 0.7 percentage points in 1999 from 1998. The
increase in 2000 was primarily due to higher infrastructure costs related to
operating on our own and higher marketing costs. The increase in 1999 was due to
higher advertising and branding expenses related to our becoming an independent
company. This effect was partially offset by higher net revenue.
Research and development expenses increased 26.2 percent in 2000 compared
to 1999 and 5.2 percent in 1999 compared to 1998. These increases reflect
ongoing efforts in developing new products and new technologies for the
wireless, networking and life sciences markets. Selling, general and
administrative expenses increased 33.3 percent in 2000 from 1999 and 7.6 percent
in 1999 from 1998. The increase in 2000 was primarily due to higher
infrastructure costs related to operating on our own as well as higher marketing
costs, including branding expenses. Also, goodwill amortization related to
recent acquisitions contributed to the increase in operating expenses in 2000.
In 1999, expense reductions resulting from the 1998 restructuring and other cost
containment measures were offset by costs, including product advertising and
branding expenses, related to our becoming a stand-alone entity.
Other income (expense), net
Other income (expense), net, increased $65 million to $111 million in 2000
from $46 million in 1999. The increase in 2000 was primarily due to
approximately $29 million of gain 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. Included in 1999 were gains of $54
million related to the divestiture of several portions of our businesses.
Provision for taxes
As a result of the impacts of the anticipated sale of our healthcare
solutions business, the acquisition of OSI and possible changes in our mix of
pre-tax earnings, our 2001 effective tax rate may change. Our future effective
tax rates will also continue to be subject to the impacts of business
acquisitions and dispositions, as well as changes in the mix of our pre-tax
earnings among jurisdictions with varying statutory rates.
TEST AND MEASUREMENT
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue.............................................. $6,108 $4,082 $4,100
Earnings from operations................................. 898 377 348
Operating margin......................................... 14.7% 9.2% 8.5%
</TABLE>
Net revenue
Net revenue from our test and measurement business increased 49.6 percent
to $6.1 billion in 2000 from 1999 and remained essentially unchanged in 1999
from 1998. Excluding the sale of our U.S. portfolio of lease assets to CIT, net
revenue increased 44.9 percent in 2000 from 1999. The increase in 2000 was
attributable to strong growth in the sales of our products into the optical,
wireless and networking markets. Also, third-party manufacturing contractors
added capacity to meet demand and increased their purchases of our test and
measurement products. Net revenue growth in 1999 was negatively affected by
weakness in the semiconductor industry and decreased demand in Asia. Due to
competitive pressures and difficult market conditions, we granted more pricing
discounts and customer allowances than in previous years. This impact was
partially offset by increased sales volumes of communications products and
optical networks in the second half of 1999 as market conditions improved.
Net revenue from products increased 55.8 percent in 2000 from 1999 and
decreased 3.0 percent in 1999 from 1998. Excluding the sale of certain portions
of our U.S. portfolio of lease assets to CIT, net revenue from
35
<PAGE> 38
products increased 50.1 percent in 2000 from 1999. Net revenue from services and
other increased 18.8 percent in 2000 from 1999 and 14.6 percent in 1999 from
1998. The relatively greater product revenue growth in 2000 was primarily due to
the growing communications market and the increased demand in Asia. Generally,
there is a lag between service revenue growth and product revenue growth. This
lag occurs because service revenue increases as our installed base of products
increases and warranty periods expire. Product revenue decreased in 1999
primarily due to weakness in the semiconductor industry and decreased demand in
Asia.
Earnings from operations
Earnings from operations from our test and measurement business increased
138.2 percent to $898 million in 2000 from 1999 and increased 8.3 percent to
$377 million in 1999 from 1998. The increase in 2000 resulted primarily from
higher net revenue as discussed above. In 1999, the increase resulted from lower
cost of products and services and other partially offset by higher operating
expenses as a percentage of revenue.
Cost of products and services as a percentage of net revenue decreased 1.2
percentage points in 2000 from 1999 and 2.0 percentage points in 1999 from 1998.
The decrease in 2000 was primarily due to higher net revenue partially offset by
manufacturing inefficiencies incurred in our efforts to meet customer demand.
The decrease in 1999 was due to cost savings resulting from the 1998
restructuring and was partially offset by the effect of lower volumes of
products sold, primarily wireless communication test equipment and automated
test equipment, and higher service revenue and the associated higher cost of
this revenue.
Operating expenses as a percentage of net revenue decreased 4.2 percentage
points in 2000 from 1999 and increased 1.2 percentage points in 1999 from 1998.
The decrease in 2000 was due to higher net revenue partially offset by higher
expenses. The increase in 1999 from 1998 was due to slightly lower net revenue
combined with higher levels of expense. In 1999, continued savings from cost
reduction programs initiated in the second half of 1998 partially offset this
trend. However, costs incurred as part of becoming a stand-alone entity,
particularly costs related to branding moved overall operating expenses higher.
Research and development expenses increased 23.8 percent in 2000 compared
to 1999 and were unchanged in 1999 compared to 1998. The increase in 2000
reflects increased activity in new product development in the communications
market. Selling, general and administrative expenses increased 40.3 percent in
2000 from 1999 and increased 3.4 percent in 1999 from 1998. The increase in 2000
was primarily due to higher infrastructure costs related to operating on our own
as well as higher selling and marketing costs including branding expenses. In
1999, cost reduction programs initiated in 1998 slowed overall expense growth
and significantly decreased some variable operating costs.
SEMICONDUCTOR PRODUCTS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue.............................................. $2,213 $1,722 $1,574
Earnings (loss) from operations.......................... 270 133 (106)
Operating margin......................................... 12.2% 7.7% (6.7)%
</TABLE>
Net revenue
Net revenue from our semiconductor products business increased 28.5 percent
to $2.2 billion in 2000 from 1999 and 9.4 percent to $1.7 billion in 1999 from
1998. The increase in 2000 was the result of strong growth in all semiconductor
products including wireless, networking and imaging components. Networking
component growth was the result of growth in the sales of fiber-optic
transceivers and high-speed networking products tailored for Metro Area Network
(MAN), as well as storage area networking products and Gigabit Ethernet Local
Area Network (LAN) applications. Imaging products for digital cameras and
optical mice also achieved particularly strong growth in 2000. The increase in
1999 was achieved despite the sale of the
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<PAGE> 39
power amplifier business in late 1998. If net revenue in 1998 were adjusted to
exclude revenue of the power amplifier business, net revenue would have
increased by 15.2 percent in 1999 over 1998. Net revenue growth in 1999
primarily reflects increased shipments of fiber optics products, application
specific integrated circuits (ASICs), motion control products, wireless
semiconductor products, and high-speed networking products. As a percentage of
net revenue for the semiconductor products business, revenue from sales to
Hewlett-Packard, consisting primarily of ASICs and motion control products, was
30.3 percent in 2000, 37.0 percent in 1999 and 34.5 percent in 1998.
In 2000, we expanded our existing joint venture relationship with Philips
to develop our manufacturing light-emitting diodes (LED) and transferred a
portion of our 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 LED
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 2000, was minimal. Adjusting the
1999 base for revenues relating to the LED business and our exit from the
microprocessor business, net revenue growth for 2000 would have been 40.3
percent.
Earnings (loss) from operations
Earnings from operations from our semiconductor products business increased
103.0 percent to $270 million in 2000 from 1999 and increased 225.5 percent to
$133 million in 1999 from 1998. The increase in 2000 resulted from higher net
revenue and lower cost of products as a percentage of net revenue, partially
offset by higher operating expenses. The increase in 1999 resulted from higher
revenue and cost savings from the 1998 restructuring.
Cost of products as a percentage of net revenue decreased 6.7 percentage
points in 2000 from 1999 and decreased 13.5 percentage points in 1999 from 1998.
Adjusting for the 1999 impairment charge of $51 million and the transfer of a
portion of our LED business to Philips, cost of products as a percentage of net
revenue decreased 3.1 percentage points in 2000 from 1999. The decrease in 2000
was primarily related to increased volumes and a more favorable product mix.
Adjusting for both the 1999 impairment charge and the 1998 restructuring, cost
of products as a percentage of net revenue decreased 11.1 percentage points in
1999 from 1998. The decrease in 1999 resulted from increased sales volumes of
ASIC's and a more profitable product mix, especially higher volumes of fiber
optic communications products, motion control devices and microprocessors.
Operating expenses as a percentage of net revenue increased 2.2 percentage
points in 2000 from 1999 and decreased 1.0 percentage point in 1999 from 1998.
The increase in 2000 was primarily due to infrastructure costs related to
operating on our own and increased research and development costs. The decrease
in 1999 was primarily the result of higher net revenue.
Research and development expenses increased 37.9 percent in 2000 from 1999
and 10.5 percent in 1999 from 1998. The increases in both years reflect
increased development in the fiber optics, high-speed networking, and image and
position sensor products. Selling, general and administrative expenses increased
42.5 percent in 2000 and were unchanged in 1999 from 1998. The increase in 2000
was primarily due to higher infrastructure costs related to operating on our own
as well as higher selling and marketing costs, including branding expenses.
HEALTHCARE SOLUTIONS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue.............................................. $1,412 $1,501 $1,340
Earnings (loss) from operations.......................... (96) 125 62
Operating margin (deficit)............................... (6.8)% 8.3% 4.6%
</TABLE>
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In the first quarter of 2001, we announced an agreement to sell our
healthcare solutions business to Philips. See Overview section of the MD&A. This
sale is contingent upon customary regulatory approvals and other closing
conditions.
Net revenue
Net revenue from our healthcare solutions business decreased 5.9 percent to
$1.4 billion in 2000 from 1999 and increased 12.0 percent to $1.5 billion in
1999 from 1998. The decrease in 2000 was primarily due to a slow-down in capital
expenditures by U.S. hospitals and increased discounts. In addition, lower
volumes and an unfavorable currency impact in Europe contributed to the decline.
Also, some of our customers accelerated purchases into 1999 to avoid potential
Year 2000 issues. The increase in 1999 was primarily related to strong sales in
the second half of 1999 from cardiology products and patient monitoring products
partially offset by a decline from ultrasound imaging products. In the first
half of 1999, internal production constraints resulting from our transition to a
new enterprise resource planning system contributed to the decline in revenue
from the ultrasound imaging products and also affected the growth rate in
patient monitoring revenue. These implementation issues have subsequently been
resolved.
Earnings (loss) from operations
The healthcare solutions business had a loss of $96 million in 2000 as
compared to earnings of $125 million in 1999 and earnings of $62 million in
1998. Excluding restructuring charges in 2000, our healthcare solutions business
had a loss of $75 million. The decline in earnings in 2000 was due to lower net
revenue as well as higher costs and expenses. The increase in 1999 was primarily
due to higher net revenue, partially offset by higher costs and expenses.
Cost of products and services as a percentage of net revenue increased by
5.4 percentage points in 2000 from 1999 and decreased 1.9 percentage points in
1999 from 1998. The increase in 2000 was primarily attributable to lower net
revenue resulting from lower volumes and higher discounts as well as higher
infrastructure costs and branding expenses related to operating on our own. In
addition, costs relating to the restructuring and an unfavorable product mix
contributed to this increase. The decrease in 1999 was primarily due to lower
overhead, lower product installation costs and a more profitable product mix.
Operating expenses as a percentage of net revenue increased 9.8 percentage
points in 2000 from 1999 and decreased 1.8 percentage points in 1999 from 1998.
The increase in 2000 was primarily due to lower net revenue and higher
infrastructure costs and branding expenses related to operating on our own. In
addition, expenses relating to restructuring and increased goodwill charges
related to acquisitions in 2000 contributed to the increase. In 1999, the
decrease was due to higher net revenue partially offset by higher expenses.
Research and development expenses increased 10.1 percent in 2000 from 1999
and increased 7.0 percent in 1999 from 1998. The increase in 2000 was largely a
result of on-going development projects including the new automatic external
defibrillator, ultrasound imaging and web-enabled wireless patient monitoring
devices. The 1999 increase was largely a result of our efforts to develop new
automatic external defibrillator products. Selling, general and administrative
expenses increased 21.1 percent in 2000 from 1999 and 7.3 percent in 1999 from
1998. In 2000, the increase was primarily due to higher infrastructure costs and
branding expenses relating to operating on our own. Costs related to our
becoming a separate, stand-alone entity, including advertising expenses,
accounted for approximately half of the increase in 1999 from 1998. In addition,
expenses relating to the restructuring and increased goodwill amortization
charges related to 2000 acquisitions contributed to the increase. Most of the
remainder of the increase in 1999 was due to goodwill amortization charges
associated with the Heartstream acquisition in 1998.
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CHEMICAL ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------
2000 1999 1998
------ ------ ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net revenue................................................ $1,040 $1,026 $938
Earnings from operations................................... 24 112 75
Operating margin........................................... 2.3% 10.9% 8.0%
</TABLE>
Net revenue
Net revenue from our chemical analysis business was essentially flat at
$1.0 billion in 2000 and 1999 and increased 9.4 percent to $1.0 billion in 1999
from 1998. In 2000, revenue growth in our products sold to the pharmaceutical
and life sciences markets was partially offset by weakness in our traditional
chemical and environmental markets. New product releases contributed to
increased sales of our liquid chromatography and mass spectrometry products.
Services and other revenue was flat in 2000 from 1999. The net revenue increase
in 1999 was generated by growth across all product lines and included a 14.5
percent increase in services and other revenue. Demand within the pharmaceutical
industry was especially strong, leading to increased sales of our liquid
chromatography products. In addition, sales to our customers in Asia in the
second half of 1999 increased as economic conditions in the region continued to
improve.
Earnings from operations
Earnings from operations from our chemical analysis business decreased 78.6
percent to $24 million in 2000 from 1999 and increased 49.3 percent to $112
million in 1999 from 1998. The decrease in 2000 was primarily due to higher
infrastructure costs and branding expenses related to the costs of operating on
our own as well as planned research and development in life sciences to launch
new products. The increase in 1999 was due primarily to higher net revenue,
partially offset by higher costs and expenses.
Cost of products and services as a percentage of net revenue increased by
1.9 percentage points in 2000 from 1999 and decreased by 3.6 percentage points
in 1999 from 1998. In 2000, the increase was primarily due to lower volumes,
start-up costs for life sciences products as well as higher infrastructure costs
and branding expenses relating to operating on our own. In 1999, the improvement
was related to higher volumes, greater manufacturing efficiencies in our mass
spectrometer and liquid chromatography product lines and lower warranty costs.
In addition, greater efficiency within the service business accounted for 0.8
percentage points of the improvement.
Operating expenses as a percentage of net revenue increased 6.8 percentage
points in 2000 from 1999 and increased 0.6 percentage points in 1999 from 1998.
In 2000, the increase resulted primarily from increased life sciences research
and development activities, higher infrastructure costs and branding expenses
relating to operating on our own. The increase in 1999 resulted from greater
growth in expenses than in net revenue.
Research and development expenses increased 27.0 percent in 2000 from 1999
and 13.9 percent in 1999 from 1998. The increases reflected new product
development programs in the life sciences. Selling, general and administrative
expenses increased 17.5 percent in 2000 from 1999 and 10.6 percent in 1999 from
1998. The increase in 2000 was primarily due to higher infrastructure costs and
branding expenses related to operating on our own. In addition, the increase in
1999 was primarily due to higher marketing and field selling costs.
LIQUIDITY AND CAPITAL RESOURCES
Our financial position remains strong, with cash and cash equivalents of
$996 million at October 31, 2000.
Prior to November 1, 1999, cash receipts associated with our businesses
were transferred to Hewlett-Packard on a daily basis and Hewlett-Packard
provided funds to cover our disbursements. Accordingly, we reported no cash or
cash equivalents at October 31, 1999 and 1998. In accordance with our separation
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agreement with Hewlett-Packard, as of November 1, 1999, Hewlett-Packard retained
some of our assets and liabilities and transferred to us some of the assets and
liabilities related to its business. In November and December 1999,
Hewlett-Packard made cash payments to us totaling $1.3 billion to fund our
working capital and other needs of our operations as a separate, stand-alone
entity. In addition, Hewlett-Packard transferred approximately $0.5 billion to
fund our acquisition of Yokogawa Electric Corporation's (Yokagawa) 25% minority
interest in Agilent Technologies Japan, Ltd. The net proceeds of our initial
public offering of $2.1 billion were received in November 1999 and immediately
distributed to Hewlett-Packard as a dividend.
Of the total $1.8 billion received from Hewlett-Packard, $1.1 billion was
classified as net cash provided by financing activities and $0.7 billion was
classified among several categories as net cash provided by operating activities
in the consolidated statement of cash flows for the year ended October 31, 2000.
We generated cash from operations of $838 million in 2000 compared to $461
million in 1999 and $751 million in 1998. In 2000, cash from operations was
primarily a result of net earnings and from the sale of certain portions of our
U.S. portfolio of lease assets to CIT. In 1999 and 1998, cash from operations
was primarily a result of net earnings adjusted for non-cash charges for
depreciation and amortization. In addition, lower cash from operations in 1999
resulted from a significant increase in accounts receivable due to particularly
strong shipments in October 1999.
Net cash used by investing activities was $1,117 million in 2000 compared
to $309 million in 1999 and $272 million in 1998. In all periods, capital
expenditures for property, plant and equipment and business acquisitions
partially offset by proceeds from divestitures and the disposal of excess,
unused or retired assets constituted substantially all of our cash used in
investing activities. We used $691 million in 2000 to pay for the first and
second installments of the purchase of Yokagawa's minority interest in Agilent
Technologies Japan, Ltd and several other companies. We expect to purchase the
remaining 4.2% of Agilent Technologies Japan, Ltd's shares owned by Yokogawa
prior to January 31, 2001. Hewlett-Packard provided the funding for the Yokogawa
transaction in November 1999.
Future sales of our portfolio of lease assets to CIT are anticipated during
2001. We are currently negotiating the details of the future sales agreements.
The financial impacts are not determinable at this time.
In the first quarter of 2001, we entered into an agreement to sell our
healthcare solutions business to Philips for approximately $1.7 billion.
On January 5, 2001, we acquired OSI for approximately $684 million in cash.
Cash for this transaction was provided by cash on hand as well as proceeds of
our commercial paper and other short-term borrowing under our existing credit
facilities.
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
fluctuations related to global economies and markets. We believe that cash
generated from operations and our unused lines of credit will be sufficient to
satisfy our working capital, capital expenditure and research and development
funding requirements for the foreseeable future. However, we may require or
choose to obtain additional debt or equity financing in the future. We cannot
assure that additional financing, if needed, will be available on favorable
terms.
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
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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. 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 DOES NOT MATCH OUR MANUFACTURING CAPACITY, OUR
EARNINGS MAY SUFFER.
Demand for our products has put increased pressure on our manufacturing
capacity, especially in the wireless and fiber optic areas. If we are not able
to increase our manufacturing capacity in the time necessary to meet demand, 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 earnings and overall
business. Conversely, if demand for our products decreases, the fixed costs
associated with excess manufacturing capacity may adversely affect our earnings.
FAILURE OF SUPPLIERS TO DELIVER SUFFICIENT QUANTITIES OF PARTS IN A TIMELY
MANNER COULD ADVERSELY IMPACT OUR OPERATIONS
Certain parts may be available only from a single supplier or a limited
number of suppliers. In addition, suppliers may cease manufacturing certain
components that are difficult to replace without significant reengineering of
our products. Suppliers may also extend lead times, limit supplies or increase
prices due to capacity constraints or other factors. Our results may be
materially and adversely impacted if we do not receive sufficient parts to meet
our requirements in a timely manner.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, PARTICULARLY IN KOREA AND JAPAN, COULD ADVERSELY AFFECT OUR SALES.
Since we sell our products worldwide, our businesses are subject to risks
associated with doing business internationally. We anticipate that revenue from
international operations will continue to represent a substantial portion of our
total revenue. In addition, many of our manufacturing facilities and suppliers
are located outside the United States. Accordingly, our future results could be
harmed by a variety of factors, including:
- changes in foreign currency exchange rates;
- changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
- trade protection measures and import or export licensing requirements;
- potentially negative consequences from changes in tax laws;
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- difficulty in staffing and managing widespread operations;
- differing labor regulations;
- differing protection of intellectual property; and
- unexpected changes in regulatory requirements.
We do a 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.
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.
OUR OPERATING RESULTS COULD BE HARMED IF THE INDUSTRIES INTO WHICH WE SELL OUR
PRODUCTS ARE IN DOWNWARD CYCLES.
Several significant industries and markets into which we sell our products
are cyclical and are subject to general economic conditions. For example, in
1998 the operating results of our test and measurement and
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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, we are
starting to see a softening in portions of the telecommunications industry and
the computer industry. The computer industry is also 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. Any
significant downturn in our customers' markets or in general economic conditions
would likely result in a reduction in demand for our products and services and
could harm our businesses.
OUR ACQUISITIONS, STRATEGIC ALLIANCES, JOINT VENTURES AND DIVESTITURES MAY
RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED, WE MAY NOT BE ABLE
TO SUCCESSFULLY INTEGRATE THE COMPANIES WE ACQUIRE AND OUR EFFORTS MAY DIVERT
ATTENTION FROM OTHER BUSINESS OPERATIONS.
In the normal course of business, we frequently engage in discussions with
third parties relating to possible acquisitions, strategic alliances, joint
ventures and divestitures. Although completion of any one transaction may not
have a material effect on our financial position, results of operations or cash
flows taken as a whole, our financial results may differ from the investment
community's expectations in a given quarter. Divestiture of a part of our
business may result in the cancellation of orders and charges to earnings.
Acquisitions and strategic alliances may require us to integrate with a
different company culture, management team and business infrastructure. We may
also have to develop, manufacture and market products with our products in a way
that enhances the performance of the combined business or product line.
Depending on the size and complexity of an acquisition, our successful
integration of the entity into Agilent depends on a variety of factors,
including:
- the hiring and retention of key employees,
- management of facilities and employees in separate geographic areas, and
- the integration or coordination of different research and development and
product manufacturing facilities.
All of these efforts require varying levels of management resources, which
may divert our attention from other business operations.
OUR SEMICONDUCTOR TECHNOLOGY LICENSING AND SUPPLY ARRANGEMENTS WITH
HEWLETT-PACKARD LIMIT OUR ABILITY TO SELL TO OTHER COMPANIES AND COULD RESTRICT
OUR ABILITY TO EXPAND OUR BUSINESSES.
We do not have a license under Hewlett-Packard's patents, patent
applications and invention disclosures for, with some exceptions, inkjet
products, printer products (including printer supplies, accessories and
components), document scanners and computing products. In addition, our ICBD
Technology Ownership and License Agreement, which generally covers integrated
circuit technology that is used in integrated circuits for Hewlett-Packard's
printers, scanners and computers, provides that for a period of three years in
some cases and 10 years in other cases we are prohibited, with some exceptions,
from using this integrated circuit technology for the development and sale of
integrated circuits for use in inkjet products, printer products (including
printer supplies, accessories and components), document scanners and computing
products to third parties other than Hewlett-Packard.
Although we have entered into a supply agreement for the sale to
Hewlett-Packard of these kinds of integrated circuits, the supply agreement does
not require Hewlett-Packard to purchase a minimum amount of product from us. In
the event that Hewlett-Packard reduces its purchase of our integrated circuits,
we would be unable to address this reduction through sales of these kinds of
integrated circuits for these types of products to other customers.
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IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER PRODUCTS
DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER, OUR SEMICONDUCTOR
PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.
Historically, our semiconductor products business has sold products to
Hewlett-Packard and has engaged in product development efforts with divisions of
Hewlett-Packard. For 2000, Hewlett-Packard accounted for 6.5% of our total net
revenue and 30.3% of our semiconductor products business' net revenue,
respectively. In comparison, for 1999, Hewlett-Packard accounted for 10.0% of
our total net revenue and 37.0% of our semiconductor products business' net
revenue, respectively. For 1998, Hewlett-Packard accounted for 8.8% of our total
net revenue and 34.5% 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 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 CERTAIN 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. In the first quarter of 2001,
we announced a definitive agreement to sell our healthcare solutions business to
Philips. The sale is contingent upon customary regulatory approvals and other
closing conditions.
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.
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
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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.
Our semiconductor and other manufacturing processes involve the use of
substances regulated under various international, federal, state and local laws
governing the environment. We may be subject to liabilities for environmental
contamination, and these liabilities may be substantial. Although our policy is
to apply strict standards for environmental protection at our sites inside and
outside the United States, even if not subject to regulations imposed by foreign
governments, we may not be aware of all conditions that could subject us to
liability.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND OUR
FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT
CONTRACTS COULD HARM OUR BUSINESSES.
We have agreements relating to the sale of our products to government
entities and as a result we are subject to various statutes and regulations that
apply to companies doing business with the government. The laws governing
government contracts differ from the laws governing private contracts. For
example, many government contracts contain pricing terms and conditions that are
not applicable to private contracts. We are also subject to investigation for
compliance with the terms of government contracts. We have received and are
complying with formal requests for information by the government regarding our
sales of products to some of the government agencies with which we have
contracted. These requests may result in legal proceedings against us or
liability which may be significant.
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
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intellectual property rights of third parties, we may be unaware of intellectual
property rights of others that may cover some of our technology, products and
services. Moreover, in connection with future intellectual property infringement
claims, we will only have the benefit of asserting counterclaims based on
Hewlett-Packard's intellectual property portfolio in limited circumstances, and
we will only be able to offer licenses to Hewlett-Packard's intellectual
property in order to resolve claims in limited circumstances. 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.
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 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.
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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 through the end of 2001. 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 implementing new enterprise resource planning software applications to
manage some of our information systems.
THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY HEWLETT-PACKARD MAY NOT BE
SUFFICIENT TO MEET OUR NEEDS, AND WE MAY PAY INCREASED COSTS TO REPLACE THESE
SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD EXPIRE.
Hewlett-Packard has agreed to provide certain transitional services to us,
including services related to:
- information technology systems;
- buildings and facilities; and
- administrative services.
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.
OUR HISTORICAL 1999 AND 1998 FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
OUR RESULTS AS A SEPARATE COMPANY.
The historical 1999 and 1998 financial information we have included has
been carved out from Hewlett-Packard's consolidated financial statements and
does not reflect what our consolidated 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 and 1998 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.
47
<PAGE> 50
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; and
- the nature, quality and pricing of transitional services Hewlett-Packard
has agreed to provide us.
Nothing restricts Hewlett-Packard from competing with us other than some
restrictions on the use of patents licensed to Hewlett-Packard by us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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. Our exposure to exchange rate
risks has been managed on an enterprise-wide basis. This strategy utilizes
derivative financial instruments, including option and forward contracts, to
hedge certain foreign currency exposures, with the intent of offsetting gains
and losses that occur on the underlying exposures with gains and losses on the
derivative contracts hedging them. We do not currently and do not intend to
utilize derivative financial instruments for trading purposes.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
movement in foreign exchange rates to the hedging contracts and the underlying
exposures described above. As of October 31, 2000 and 1999, the analysis
indicated that these hypothetical market movements would not have a material
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements appear in Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
48
<PAGE> 51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information regarding our directors appears under "Election of Class I
Directors" on pages 6-8 of our Proxy Statement for the Annual Meeting of
Stockholders (the "Proxy Statement"), to be held February 23, 2001. That portion
of the Proxy Statement is incorporated by reference into this report.
Information regarding our executive officers appears in Item 1 of this report
under "Executive Officers of the Registrant."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Information about compliance with Section 16(a) of the Securities Exchange
Act of 1934 appears under "Section 16(a) Beneficial Ownership Reporting
Compliance" on page 16 of the Proxy Statement. That portion of the Proxy
Statement is incorporated by reference into this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information about compensation of our named executive officers appears
under "Executive Compensation" on pages 17-24 of the Proxy Statement.
Information about compensation of our directors appears under "Director
Compensation Arrangements and Stock Ownership Guidelines" on page 5 of the Proxy
Statement. Those portions of the Proxy Statement are incorporated by reference
into this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information about security ownership of certain beneficial owners and
management appears under "Common Stock Ownership of Certain Beneficial Owners
and Management" on pages 14-16 of the Proxy Statement. Those portions of the
Proxy Statement are incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statement of Management Responsibility...................... F-1
Report of Independent Accountants........................... F-2
Consolidated Balance Sheet at October 31, 2000 and 1999..... F-3
Consolidated Statement of Earnings for the three years ended
October 31, 2000.......................................... F-4
Consolidated Statement of Cash Flows for the three years
ended October 31, 2000.................................... F-5
Consolidated Statement of Stockholders' Equity for the three
years ended October 31, 2000.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
See Index to Exhibits. The Exhibits listed in the accompanying Index
to Exhibits are filed as part of this report.
(b) REPORTS ON FORM 8-K
None.
49
<PAGE> 52
STATEMENT OF MANAGEMENT RESPONSIBILITY
Agilent Technologies' management is responsible for the preparation,
integrity and objectivity of the consolidated financial statements and other
financial information presented in this report. The accompanying consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and reflect the effects of
certain estimates and judgments made by management.
Management maintains an effective system of internal control that is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with management's
authorization. The system is continuously monitored by direct management review
and by internal auditors who conduct audits throughout the company. We select
and train qualified people who are provided with and expected to adhere to
Agilent Technologies' standards of business conduct. These standards, which set
forth strong principles of business ethics and conduct, are a key element of our
control system.
Our consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants. Their audits were conducted
in accordance with auditing standards generally accepted in the United States of
America, and included a review of financial controls and tests of accounting
records and procedures as they considered necessary in the circumstances.
The Audit and Finance Committee of the Board of Directors, which consists
of outside directors, meets regularly with management, the internal auditors and
the independent accountants to review accounting, reporting, auditing and
internal control matters. The committee has direct and private access to both
the internal auditors and the independent accountants.
Edward W. Barnholt Robert R. Walker
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
F-1
<PAGE> 53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Agilent
Technologies, Inc. and its subsidiaries at October 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
November 20, 2000, except
for Note 19 which
is as of January 5, 2001
F-2
<PAGE> 54
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
2000 1999
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 996 $ --
Accounts receivable, net.................................. 2,201 1,635
Inventory, net............................................ 1,853 1,499
Other current assets...................................... 605 404
------ ------
Total current assets................................... 5,655 3,538
Property, plant and equipment, net.......................... 1,741 1,387
Goodwill and other intangible assets, net................... 557 142
Other assets................................................ 472 377
------ ------
Total assets........................................... $8,425 $5,444
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 857 $ 510
Notes payable and short-term debt......................... 110 --
Employee compensation and benefits........................ 699 550
Deferred revenue.......................................... 372 241
Other accrued liabilities................................. 720 380
------ ------
Total current liabilities.............................. 2,758 1,681
Other liabilities........................................... 402 381
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value; 125,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock; $.01 par value; 2,000,000,000 shares
authorized; 453,976,000 shares at October 31, 2000 and
380,000,000 shares at October 31, 1999 issued and
outstanding............................................ 5 4
Additional paid-in capital................................ 4,508 3,378
Retained earnings......................................... 757 --
Accumulated comprehensive loss............................ (5) --
------ ------
Total stockholders' equity............................. 5,265 3,382
------ ------
Total liabilities and stockholders' equity............. $8,425 $5,444
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 55
CONSOLIDATED STATEMENT OF EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------
2000 1999 1998
------- ------ ------
<S> <C> <C> <C>
Net revenue:
Products.................................................. $ 9,420 $7,122 $6,898
Services and other........................................ 1,353 1,209 1,054
------- ------ ------
Total net revenue...................................... 10,773 8,331 7,952
------- ------ ------
Costs and expenses:
Cost of products.......................................... 4,745 3,675 3,888
Cost of services and other................................ 777 713 624
Research and development.................................. 1,258 997 948
Selling, general and administrative....................... 2,940 2,205 2,050
------- ------ ------
Total costs and expenses............................... 9,720 7,590 7,510
------- ------ ------
Earnings from operations.................................... 1,053 741 442
Other income (expense), net................................. 111 46 (46)
------- ------ ------
Earnings before taxes....................................... 1,164 787 396
Provision for taxes......................................... 407 275 139
------- ------ ------
Net earnings................................................ $ 757 $ 512 $ 257
======= ====== ======
Basic net earnings per share................................ $ 1.68 $ 1.35 $ 0.68
======= ====== ======
Diluted net earnings per share.............................. $ 1.66 $ 1.35 $ 0.68
======= ====== ======
Average shares used in computing basic net earnings per
share..................................................... 449 380 380
======= ====== ======
Average shares used in computing diluted net earnings per
share..................................................... 455 380 380
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 56
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
2000 1999 1998
------- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 757 $ 512 $ 257
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 495 475 477
Deferred taxes......................................... (59) (12) (140)
Non-cash restructuring and asset impairment charges.... 8 51 85
Write-down of investments.............................. - - 37
Gain on sale of equity investments..................... (29) - -
Gain on divestitures................................... (123) (54) (21)
Changes in assets and liabilities:
Accounts receivable.................................. (555) (431) 18
Inventory............................................ (345) (40) (67)
Accounts payable..................................... 356 75 (60)
Taxes on earnings.................................... 235 - -
Other current assets and liabilities................. 156 (52) 130
Other, net........................................... (58) (63) 35
------- ----- -----
Net cash provided by operating activities......... 838 461 751
------- ----- -----
Cash flows from investing activities:
Investments in property, plant and equipment.............. (824) (434) (410)
Dispositions of property, plant and equipment............. 122 74 78
Sale of equity investments................................ 60 - -
Purchase of equity investments............................ (32) - -
Acquisitions, net of cash acquired........................ (691) (55) (2)
Proceeds from dispositions................................ 234 100 57
Other, net................................................ 14 6 5
------- ----- -----
Net cash used in investing activities............. (1,117) (309) (272)
------- ----- -----
Cash flows from financing activities:
IPO proceeds.............................................. 2,068 - -
IPO proceeds transferred to Hewlett-Packard............... (2,068) - -
Issuance of common stock under employee stock plans....... 84 - -
Proceeds from notes payable and short-term borrowings..... 110 - -
Financing from (transfer to) Hewlett-Packard.............. 1,081 (152) (479)
------- ----- -----
Net cash provided by (used in) financing
activities...................................... 1,275 (152) (479)
------- ----- -----
Change in cash and cash equivalents......................... 996 - -
Cash and cash equivalents at beginning of year.............. - - -
------- ----- -----
Cash and cash equivalents at end of year.................... $ 996 $ - $ -
======= ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 57
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
ADDITIONAL STOCKHOLDER'S OTHER TOTAL
NUMBER OF PAR PAID-IN NET RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES VALUE CAPITAL INVESTMENT EARNINGS LOSS EQUITY
--------- ----- ---------- ------------- -------- ------------- -------------
(IN MILLIONS, EXCEPT NUMBER OF SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of October 31,
1997........................ -- $-- $ -- $ 3,110 $ -- $-- $ 3,110
Net earnings.................. -- -- -- 257 -- -- 257
Transfer of net assets from
Hewlett-Packard Company
related to the Heartstream
acquisition................. -- -- -- 134 -- -- 134
Net cash transfers to Hewlett-
Packard Company............. -- -- -- (479) -- -- (479)
-------- -- ------- ------- ---- --- -------
Balance as of October 31,
1998........................ -- -- -- 3,022 -- -- 3,022
Net earnings.................. -- -- -- 512 -- -- 512
Net cash transfers to Hewlett-
Packard Company............. -- -- -- (152) -- -- (152)
Transfer to common stock and
additional paid-in
capital..................... 380,000 4 3,378 (3,382) -- -- --
-------- -- ------- ------- ---- --- -------
Balance as of October 31,
1999........................ 380,000 4 3,378 -- -- -- 3,382
Net earnings.................. -- -- -- -- 757 -- 757
Shares issued in the IPO...... 72,000 1 2,067 -- -- -- 2,068
Proceeds from IPO transferred
to Hewlett-Packard.......... -- (1) (2,067) -- -- -- (2,068)
Shares issued for employee
benefit plans and other..... 1,976 1 109 -- -- -- 110
Cash funding from Hewlett-
Packard..................... -- -- 1,858 -- -- -- 1,858
Transfer of net assets to
Hewlett-Packard............. -- -- (853) -- -- -- (853)
Tax benefit associated with
stock option exercises...... -- -- 16 -- -- -- 16
Other comprehensive loss...... -- -- -- -- -- (5) (5)
-------- -- ------- ------- ---- --- -------
Balance as of October 31,
2000........................ 453,976 $5 $ 4,508 $ -- $757 $(5) $ 5,265
======== == ======= ======= ==== === =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OVERVIEW AND BASIS OF PRESENTATION
Agilent Technologies, Inc. (Agilent) was incorporated in Delaware in May
1999 as a wholly-owned subsidiary of Hewlett-Packard Company (Hewlett-Packard).
Agilent authorized 125,000,000 shares of $.01 par value preferred stock and
2,000,000,000 shares of $.01 par value common stock and issued 10,000,000 shares
of common stock to Hewlett-Packard. No shares of preferred stock were issued and
outstanding.
Effective October 21, 1999, Agilent's board of directors declared a
38-for-one stock split in the form of a stock dividend. As of result of the
stock split, common stock issued and outstanding increased to 380,000,000
shares. Shares outstanding and net earnings per share amounts have been adjusted
for all periods.
On November 18, 1999, Agilent 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 Hewlett-Packard as a dividend on November
23, 1999. 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 (the distribution date),
to Hewlett-Packard shareholders of record as of May 2, 2000. The distribution
was made on the basis of 0.3814 of an Agilent share for each Hewlett-Packard
common share outstanding.
Agilent's fiscal year end is October 31. Unless otherwise stated, all years
and dates refer to Agilent's fiscal year.
The consolidated 1999 and 1998 financial information was prepared using
Hewlett-Packard'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 and 1998 financial information includes allocations
of certain Hewlett-Packard corporate expenses, including centralized research
and development, legal, accounting, employee benefits, real estate, insurance
service, information technology services, treasury and other Hewlett-Packard
corporate and infrastructure costs. The expense allocations were determined on
bases that Hewlett-Packard and Agilent considered to be a reasonable reflection
of the utilization of services provided or the benefit received by Agilent.
Therefore, the 1999 and 1998 financial information included herein is not
indicative of the consolidated financial position, results of operations or cash
flows of Agilent in the future or what they would have been had Agilent operated
as a separate, stand-alone entity during 1999 and 1998. In 1999, Agilent entered
into interim service level agreements with Hewlett-Packard for information
technology, financial, accounting, building, legal and other services. See Note
14, "Transactions with Hewlett-Packard."
Effective November 1, 1999, Agilent began operating as a stand-alone
company. In November 1999, Hewlett-Packard transferred to Agilent a majority of
the assets and liabilities relating to its businesses and also provided Agilent
with cash funding of approximately $1.1 billion. Hewlett-Packard 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 Agilent Technologies Japan, Ltd.
(formerly called Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard
transferred to Agilent $521 million to fund its acquisition of Yokogawa Electric
Corporation's 25% ownership of Agilent Technologies Japan, Ltd. In December
1999, Hewlett-Packard provided Agilent with additional cash funding of
approximately $200 million based on its and Hewlett-Packard's balance sheets as
of October 31, 1999.
Of the total $1.8 billion of funding received from Hewlett-Packard in 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 consolidated statement of cash flows for the year
ended October 31, 2000.
F-7
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain amounts in the consolidated statement of earnings for 1999 and 1998
have been reclassified to conform to the presentation in 2000.
Principles of consolidation. The consolidated financial statements include
the accounts of Agilent and its wholly- and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of estimates. The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in Agilent's consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue recognition. Revenue from product sales, net of trade discounts and
allowances, is recognized at the time the product is shipped or upon
installation and customer acceptance, if the acceptance criteria are
substantive. Provisions are established for estimated costs that may be incurred
for product warranties and post-sales support. Revenue from services, including
operating leases, is recognized over the contractual period or as services are
rendered and accepted by the customer.
Goodwill and purchased intangible assets. Goodwill and purchased intangible
assets are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives of the
respective assets, generally three to ten years.
Advertising. Advertising costs are expensed as incurred and amounted to
$188 million in 2000, $130 million in 1999 and $94 million in 1998.
Taxes on earnings. Income tax expense for 2000 is based on earnings before
taxes. Prior to June 3, 2000, Agilent's operating results were included in
Hewlett-Packard's consolidated U.S. and state income tax returns and in tax
returns of certain Hewlett-Packard foreign subsidiaries. The provision for taxes
in Agilent's consolidated financial statements has been determined on a
separate-return basis. Deferred tax assets and liabilities are recognized
principally for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts.
Net earnings per share. Basic net earnings per share is computed by
dividing net earnings (numerator) by the weighted average number of common
shares outstanding (denominator) during the period excluding the dilutive effect
of stock options and other employee stock plans. Diluted net earnings per share
gives effect to all potentially dilutive common stock equivalents 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.
Cash and cash equivalents. Agilent classifies investments as cash
equivalents if the original maturity of an investment is three months or less.
Cash equivalents are stated at cost, which approximates fair value. Prior to
2000, Hewlett-Packard managed cash and cash equivalents on a centralized basis.
Cash receipts associated with Agilent's businesses were transferred to
Hewlett-Packard on a daily basis and Hewlett-Packard funded Agilent's
disbursements. For this reason, Agilent had cash balances of zero in previous
years.
Fair Value of Financial Instruments. The carrying values of certain of the
Company's financial instruments, including cash and cash equivalents, accrued
compensation, and other accrued liabilities, approximate fair value because of
their short maturities. The fair values of investments are determined using
quoted market prices for those securities or similar financial instruments.
Concentration of credit risk. Agilent sells the majority of its products
through its direct sales force. No single customer accounted for 10% or more of
the combined accounts receivable balance at October 31, 2000 and 1999. Credit
risk with respect to accounts receivable is generally diversified due to the
large number of entities comprising Agilent's customer base and their dispersion
across many different industries and
F-8
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
geographies. Agilent performs ongoing credit evaluations of its customers'
financial condition, and requires collateral, such as letters of credit and bank
guarantees, in certain circumstances.
Derivative Instruments. Agilent enters into foreign exchange contracts,
primarily forwards and purchased options, to hedge exposures to changes in
foreign currency exchange rates. These contracts are designated at inception as
hedges of the related foreign currency exposures, which include committed and
anticipated foreign currency sales and assets and liabilities that are
denominated in currencies other than the U.S. dollar. To achieve hedge
accounting, contracts must reduce the foreign currency exchange rate risk
otherwise inherent in the amount and duration of the hedged exposures and comply
with established risk management policies; hedging contracts generally mature
within six months. Agilent does not use derivative financial instruments for
speculative or trading purposes.
When hedging sales-related exposure, foreign exchange contract expirations
are set so as to occur in the same month the hedged shipments occur, allowing
realized gains and losses on the contracts to be recognized in net revenue in
the same periods in which the related revenues are recognized. Premiums paid
related to purchased option contracts are amortized to income over the life of
the contract. When hedging balance sheet exposure, realized gains and losses on
foreign exchange contracts are recognized in other income (expense), net in the
same period as the realized gains and losses on remeasurement of the foreign
currency denominated assets and liabilities occur. Discounts or premiums on
forward contracts are amortized to income over the life of the contract. The
gains and losses, which have not been material, are included in cash flows from
operating activities in the consolidated statement of cash flows.
Inventory. Inventory is valued at standard cost which approximates actual
cost computed on a first-in, first-out basis, not in excess of market value.
Property, plant and equipment. Property, plant and equipment are stated at
cost less accumulated depreciation. Additions, improvements and major renewals
are capitalized; maintenance, repairs and minor renewals are expensed as
incurred. Depreciation is provided using accelerated methods, principally over
fifteen to forty years for buildings and improvements and three to ten years for
machinery and equipment, including equipment leased to customers under operating
leases. Depreciation of leasehold improvements is provided using the
straight-line method over the life of the asset or the term of the lease or the
asset, whichever is shorter.
Impairment of long-lived assets. Agilent continually monitors events and
changes in circumstances that could indicate carrying amounts of long-lived
assets, including intangible assets, may not be recoverable. When such events or
changes in circumstances are present, Agilent assesses the recoverability of
long-lived assets by determining whether the carrying value of such assets will
be recovered through undiscounted expected future cash flows. If the total of
the future cash flows is less than the carrying amount of those assets, Agilent
recognizes an impairment loss based on the excess of the carrying amount over
the fair value of the assets.
Foreign currency translation. Agilent uses the U.S. dollar as its
functional currency. Foreign currency assets and liabilities are remeasured into
U.S. dollars at current exchange rates except for inventory, property, plant and
equipment, other assets and deferred revenue which are remeasured at historical
exchange rates. Revenue and expenses are generally translated at average
exchange rates in effect during each period, except for those expenses related
to balance sheet amounts that are remeasured at historical exchange rates. Gains
or losses from foreign currency remeasurement are included in consolidated net
earnings. In 2000, the effect of foreign currency exchange rate fluctuations on
Agilent's cash and cash equivalents denominated in foreign currencies was not
material.
Recent accounting pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS 133). This
statement, as amended, establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the balance sheet and
F-9
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 2000. Agilent expects the adoption of FAS
133, during first quarter of 2001, will result in a cumulative after tax expense
of $26 million. Additionally, an unrealized gain related to foreign currency
hedging of approximately $7 million, net of tax, will be recorded in other
comprehensive income in the consolidated balance sheet.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." In
June 2000, the SEC delayed the implementation date of this Staff Accounting
Bulletin. This Staff Accounting Bulletin is effective no later than the fourth
quarter of Agilent's year 2001. Agilent currently does not believe that the
adoption will have a material annual impact on its consolidated financial
statements.
3. ACQUISITIONS AND DISPOSITIONS
Acquisitions. During 2000, 1999 and 1998, Agilent acquired several
companies that were not significant to its financial position, results of
operations or cash flows. All of these acquisitions were accounted for under the
purchase method. The results of operations of the acquired companies were
included prospectively from the date of acquisition and the acquisition cost was
allocated to the acquired tangible and identifiable intangible assets and
liabilities based on fair market values at the date of acquisition. Residual
amounts were recorded as goodwill. In-process research and development
write-offs have not been significant. Goodwill is amortized on a straight-line
basis over its estimated economic life, generally three to five years except as
discussed below. The net book value of goodwill associated with acquisitions was
$338 million at October 31, 2000 and $142 million at October 31, 1999.
In July 1999, Hewlett-Packard entered into an agreement with Yokogawa
Electric Corporation (Yokogawa) to acquire Yokogawa's 25% equity interest in
Agilent Technologies Japan, Ltd. for approximately $521 million. Under the terms
of the separation agreement, Agilent assumed Hewlett-Packard's obligations.
Agilent will acquire Yokogawa's minority interest through a series of purchase
transactions. In the initial step, which occurred in January 2000, Agilent
purchased approximately 10.4% of Agilent Technologies Japan, Ltd. shares from
Yokogawa for approximately $206 million. In the second step, which occurred in
April 2000, Agilent purchased approximately 10.4% of additional Agilent
Technologies Japan, Ltd. shares from Yokogawa for approximately $216 million.
Agilent will purchase the remaining 4.2% of Agilent Technologies Japan, Ltd.
shares owned by Yokogawa by January 31, 2001. Hewlett-Packard has provided the
funding for all steps of this transaction. An independent valuation has been
performed to determine the portion of the Yokogawa purchase price attributable
to Agilent's business and the remaining Hewlett-Packard 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 is attributable to goodwill and is amortized over 10
years. The net book value of goodwill associated with the two payments for the
purchase of approximately 20.8% of Agilent Technologies Japan, Ltd. shares from
Yokogawa was approximately $219 million at October 31, 2000. The remainder of
the purchase price was allocated to tangible assets.
Dispositions. In the fourth quarter of 2000, Agilent entered into a vendor
financing agreement with The CIT Group, Inc. (CIT), whereby CIT will provide
equipment financing and leasing services to Agilent's customers on a global
basis. Under the terms of the agreement, CIT established a wholly-owned
subsidiary, Agilent Financial Services, Inc. (AFS), and is offering financing
products to Agilent's customers under this name. CIT, through AFS, will be
providing funding and services related to equipment financing to customers in
most of Agilent's businesses. These services include credit review, document
generation, pricing, invoicing and collections. Agilent also entered into an
asset purchase agreement with CIT pursuant to which Agilent has sold them
certain portions of its U.S. portfolio of lease assets during the fourth quarter
of 2000. Net proceeds from this sales transaction were $234 million and Agilent
recognized $212 million in net revenue and $89 million in cost of products.
Agilent will be selling additional portions of its portfolio of lease assets to
CIT during 2001 pursuant to various asset purchase agreements.
F-10
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2000, 1999 and 1998, Agilent sold assets related to portions of its
businesses to third parties. Gross proceeds from these dispositions were $2
million in 2000, $121 million in 1999 and $57 million in 1998. Gains from the
dispositions are included in other income (expense), net, in the consolidated
statement of earnings and were not material in 2000, totaled $54 million in 1999
and $21 million in 1998.
Unaudited pro forma statement of earnings information has not been
presented because the effects of these acquisitions and divestitures were not
material on either an individual or aggregated basis.
4. FINANCIAL INSTRUMENTS
Derivative instruments. The notional amount of all outstanding foreign
currency option and forward contracts outstanding was $1.8 billion at October
31, 2000 and $2.5 billion at October 31, 1999. The contracts related to
exposures in approximately 20 foreign currencies. The notional amount represents
the future cash flows under contracts to both purchase and sell foreign
currencies and is not a measure of market or credit exposure. Unrealized gains
and losses on hedging contracts amounted to $28 million and $28 million,
respectively, at October 31, 2000; and $81 million and $16 million,
respectively, at October 31, 1999. Unamortized premiums and realized gains
deferred under currency options were not material.
5. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted net earnings per share computations for the periods presented
below.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OCTOBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
Net earnings.............................................. $ 757 $ 512 $ 257
Denominators:
Basic weighted average shares............................. 449 380 380
Potentially dilutive common stock equivalents -- stock
options and other employee stock plans................. 6 -- --
----- ----- -----
Diluted weighted average shares........................... 455 380 380
Net earnings per share:
Basic..................................................... $1.68 $1.35 $0.68
Diluted................................................... $1.66 $1.35 $0.68
</TABLE>
Options to purchase 14,596,000 shares of common stock at a weighted average
price of $79 per share were outstanding during 2000 but were not included in the
computation of diluted net earnings per share because the options' exercise
price was greater than the average market price of the common shares. The
options, which expire in 2010, were still outstanding at the end of 2000.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes in 2000 was $546 million. No amounts were paid
for income taxes in 1999 and 1998 as Hewlett-Packard made such payments on
Agilent's behalf. Cash paid for interest was not material in 2000, 1999 and
1998.
Non-cash transactions in 2000 primarily related to the issuance of common
stock under various employee stock plans in the amount of $44 million and
acquisitions in the amount of $25 million.
F-11
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMPREHENSIVE EARNINGS
Other comprehensive earnings are not material for all years presented and
therefore are not presented separately.
8. INVENTORY, NET
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Finished goods............................................. $ 471 $ 639
Work in progress........................................... 343 286
Raw materials.............................................. 1,039 574
------ ------
$1,853 $1,499
====== ======
</TABLE>
9. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Land....................................................... $ 157 $ 91
Buildings and leasehold improvements....................... 1,648 1,492
Machinery and equipment.................................... 2,165 2,074
------ ------
3,970 3,657
Accumulated depreciation................................... (2,229) (2,270)
------ ------
$1,741 $1,387
====== ======
</TABLE>
Agilent leases certain of its products to customers under operating leases.
Equipment on operating leases was $201 million at October 31, 2000 and $219
million at October 31, 1999 and is included in machinery and equipment.
Accumulated depreciation related to equipment on operating leases was $49
million at October 31, 2000 and $73 million at October 31, 1999. At October 31,
2000, minimum future rentals on noncancelable operating leases with original
terms of one year or longer were not material.
10. TAXES ON EARNINGS
The provision for income taxes is comprised of:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
U.S. federal taxes:
Current................................................... $121 $ 92 $161
Deferred.................................................. (42) (15) (133)
Non-U.S. taxes:
Current................................................... 322 189 115
Deferred.................................................. (18) 3 (8)
State taxes................................................. 24 6 4
---- ---- ----
$407 $275 $139
==== ==== ====
</TABLE>
F-12
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The significant components of deferred tax assets, which required no
valuation allowance, and deferred tax liabilities included on the consolidated
balance sheet are:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------------------------
2000 1999
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Inventory................................... $157 $ 7 $134 $ 4
Property, plant and equipment............... 71 5 34 7
Warranty reserves........................... 34 -- 21 --
Retiree medical benefits.................... 70 -- 83 --
Other retirement benefits................... 15 54 -- 70
Employee benefits, other than retirement.... 220 22 178 15
Unremitted earnings of foreign
subsidiaries.............................. -- 160 -- 119
Other....................................... 110 19 106 15
---- ---- ---- ----
$677 $267 $556 $230
==== ==== ==== ====
</TABLE>
The current portion of the net deferred tax asset is $304 million at
October 31, 2000 and $232 million at October 31, 1999 and is included in other
current assets.
Tax benefits of $16 million in 2000 associated with the exercise of stock
options and other stock-based compensation was allocated to stockholders' equity
and no provision benefit was recognized.
The differences between the U.S. federal statutory income tax rate and
Agilent's effective tax rate are:
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................. 2.1 0.7 0.9
Lower rates in other jurisdictions, net..................... (3.5) (3.4) (1.4)
Other, net.................................................. 1.4 2.7 0.5
---- ---- ----
35.0% 35.0% 35.0%
==== ==== ====
</TABLE>
The domestic and foreign components of earnings before taxes are:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-------------------------
2000 1999 1998
------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
U.S. operations............................................. $ 68 $204 $ 78
Non-U.S. operations......................................... 1,096 583 318
------ ---- ----
$1,164 $787 $396
====== ==== ====
</TABLE>
As a result of certain employment and capital investment actions undertaken
by Agilent, income from manufacturing activities in certain countries is subject
to reduced tax rates, and in some cases is wholly exempt from taxes for years
through 2007. The income tax benefits attributable to the tax status of these
subsidiaries are estimated to be $41 million in 2000, $31 million in 1999 and
$21 million in 1998.
Agilent has not provided for U.S. federal income and foreign withholding
taxes on $761 million of cumulative undistributed earnings of non-U.S.
subsidiaries as of October 31, 2000. Such earnings are intended
F-13
<PAGE> 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to be reinvested for an indefinite period of time. Where excess cash has
accumulated in Agilent's non-U.S. subsidiaries and it is advantageous for tax or
foreign exchange reasons, subsidiary earnings are remitted.
See Note 14, "Transactions with Hewlett-Packard," for a description of the
tax sharing agreement between Agilent and Hewlett-Packard.
11. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CHARGES
In August 2000, Agilent announced a restructuring of its healthcare
solutions business. The restructuring resulted in a workforce reduction through
severance programs, as well as consolidation of its business operations. Since
the announcement, 396 regular employees located in the United States, Asia
Pacific and Europe have accepted severance packages and 200 temporary employees
have been terminated. Agilent recognized a $21 million pre-tax restructuring
charge comprised of $13 million for estimated severance benefits and $8 million
for non-cash asset writedowns. Of this amount, $11 million was included in cost
of products, $4 million in cost of services and other. The remainder was
included in other operating expense line items. As of October 31, 2000, $2
million in severance benefits has been paid and charged against the liability.
The reminder of the liability is expected to be utilized during 2001.
In 1999, Agilent recognized an impairment loss of $51 million related to a
building that was under construction for the intended purpose of housing
manufacturing operations for eight-inch CMOS semiconductor wafers. At the time
construction was stopped, only the building shell was complete. After exhaustive
efforts to find a semiconductor manufacturing partner to utilize the building
for its initial intended use, management concluded that the highest fair value
to be realized from this building was based on selling it for use as an office
or general use facility. In 2000, Agilent actively marketed the building shell
without success. In late 2000, in response to the increased demand in the
wireless semiconductor market and the need to increase gallium arsenide (GaAs)
manufacturing capacity, management decided to resume construction of a portion
of the building shell. When completed, this portion of the building will
manufacture six-inch GaAs semiconductor wafers. Agilent anticipates that the
completed manufacturing facility will be put into service sometime in 2002, at
which time depreciation will commence.
During 1998, Agilent recorded a pre-tax restructuring charge of $163
million related to the transfer of the production of certain semiconductor
wafers to a third-party contractor. Of this amount, $138 million was included in
cost of products, $7 million in research and development and $18 million in
selling, general and administrative expenses. Included in this charge was $85
million for non-cash asset writedowns of equipment that was subsequently
abandoned or sold. Also included in this charge was $78 million for employee
severance benefits that have been paid.
Also during 1998, Agilent recorded a pre-tax charge of $37 million for the
writedown of an investment in convertible preferred stock of a medical products
company to its fair value because management had determined the impairment was
not temporary.
12. STOCK BASED COMPENSATION
Employee Stock Purchase Plans. Prior to February 2, 2000, virtually all
Agilent employees were able to contribute up to ten percent of their base
compensation to the quarterly purchase of Hewlett-Packard's common stock under
the Hewlett-Packard Stock Purchase Plan (the legacy plan). Under the provisions
of the legacy plan, employee contributions to purchase shares were partially
matched with shares contributed by Hewlett-Packard. These matching shares
generally vested over two years. After February 2, 2000, Agilent implemented the
Agilent Employee Stock Purchase Plan (the Agilent plan) that was similar to the
legacy plan and that allowed eligible employees to contribute up to ten percent
of their base compensation to the purchase of Agilent common stock. Under the
provisions of the Agilent plan, employee contributions were partially matched
with shares contributed by Agilent. These matching shares also generally vested
over two years. On June 2, 2000, all unvested matching shares of Hewlett-Packard
stock held by our employees were forfeited and replaced by similar shares of
Agilent common stock. Compensation expense for the matching
F-14
<PAGE> 66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provision for both the legacy plan and the Agilent plan was measured using the
fair value of shares on the date of purchase by Hewlett-Packard for the legacy
plan and by Agilent for the Agilent plan and was recognized by Agilent over the
two-year vesting period. Compensation expense under both plans was $38 million
in 2000, $44 million in 1999 and $33 million in 1998. Amounts from 1999 and 1998
were allocated from Hewlett-Packard. At October 31, 2000, 9,802,100 shares of
Agilent common stock had been authorized for issuance under the Agilent plan and
2,748,062 of these shares had been issued.
Effective October 31, 2000, purchases and contributions under the Agilent
plan ceased. All unvested matching shares under the Agilent plan will maintain
their original vesting terms based on the employee's continued employment with
Agilent. Vesting of these matching shares will be completed no later than
October 31, 2002.
Effective November 1, 2000, Agilent adopted a new plan, the Agilent
Technologies, Inc. Employee Stock Purchase Plan (new plan). Under the provisions
of the new plan, eligible employees may contribute up to 10% of their base
compensation to purchase shares of Agilent common stock at 85% of the lower of
the fair market value at the entry date or purchase date as defined by the new
plan. As of November 1, 2000, 35,000,000 shares of Agilent common stock were
registered for issuance under the new plan.
Incentive Compensation Plans. Prior to November 1999, certain of Agilent's
employees participated in Hewlett-Packard's stock-based incentive compensation
plans under which they received stock options and other equity based awards. On
September 17, 1999, Agilent adopted the Agilent Technologies, Inc. 1999 Stock
Plan (the Agilent stock plan) and subsequently reserved 67,800,000 shares of
Agilent common stock for issuance under the plan. Stock options, stock
appreciation rights, stock awards and cash awards may be granted under the
Agilent stock plan. Options granted under the Agilent stock plan may be either
"incentive stock options," as defined in section 422 of the Internal Revenue
Code, or non-statutory. Options generally vest at a rate of 25 percent per year
over a period of four years from the date of grant. The exercise price for
incentive stock options may not be less than 100 percent of the fair market
value of the underlying Agilent stock on the date the stock award is granted.
Effective June 2000, a majority of the Hewlett-Packard awards held by
Agilent employees were converted to Agilent awards of equivalent value. The
conversion of Hewlett-Packard options into Agilent options was done in such a
manner that (1) the aggregate intrinsic value of the options immediately before
and after the exchange is the same, (2) the ratio of the exercise price per
option to the market value per option is not reduced, and (3) the vesting
provisions and options period of the replacement Agilent options are the same as
the original vesting terms and option period of the Hewlett-Packard options.
At October 31, 2000, shares available for option and restricted stock
grants were 40,000,870. In 2000, discounted options totaling 27,300 shares were
granted. Another 2,138,649 discounted options were granted as a result of the
conversion of Hewlett-Packard awards held by Agilent employees. The stock based
compensation expense related to Agilent employees' discounted options, stock
appreciation rights and restricted stock was $24 million in 2000, and was not
material in 1999 and 1998. Amounts for 1999 and 1998 were allocated from
Hewlett-Packard.
F-15
<PAGE> 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes option activity during the year ended
October 31, 2000:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000) EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding options at the beginning of year........ -- $--
Converted from Hewlett-Packard...................... 17,667 31
Granted............................................. 30,202 59
Exercised........................................... (645) 23
Cancelled........................................... (1,333) 59
------ ---
Outstanding at end of year.......................... 45,891 $48
====== ===
Options exercisable at year-end..................... 10,914 $26
Weighted-average fair value of options granted and
converted during the year......................... $48
</TABLE>
The following table summarizes information about options outstanding at
October 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES (000) LIFE EXERCISE PRICE (000) EXERCISE PRICE
------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0 - 25................. 4,711 3.2 years $ 12 4,405 $ 5
$26 - 50................ 25,192 8.5 years 37 6,032 33
$51 - 75................ 1,645 9.3 years 65 276 61
$76 - 100............... 14,026 9.4 years 78 197 78
$101 and over........... 317 9.4 years 117 4 119
------ ---- ------ ----
45,891 $ 48 10,914 $ 26
====== ==== ====== ====
</TABLE>
Pro Forma Information. Agilent has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," for stock-based compensation granted to Agilent employees.
Accordingly, compensation expense is recognized only when options are granted
with a discounted exercise price. Any compensation expense is recognized ratably
over the associated service period, which is generally the option vesting term.
Pro forma net earnings and net earnings per share information, as required
by SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined
as if Agilent had accounted for employee stock options granted to Agilent
employees under SFAS No. 123's fair value method. The fair value of these
options was estimated at grant date using a Black-Scholes option pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
(1) (2) (2)
<S> <C> <C> <C>
Risk-free interest rate................................. 5.75% 5.53% 5.38%
Dividend yield.......................................... 0% 1.00% 1.00%
Volatility.............................................. 67% 30% 30%
Expected option life.................................... 7 years 7 years 7 years
</TABLE>
-------------------------
(1) Assumptions for Agilent options awarded during 2000.
(2) Assumptions for Hewlett-Packard Options for the years 1999 and 1998.
F-16
<PAGE> 68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the four-year average vesting period of the
options. The pro forma effect of recognizing compensation expense in accordance
with SFAS No. 123 would have been to reduce Agilents' reported net earnings by
$281 million in 2000, $38 million in 1999, and $20 million in 1998. Had
compensation expense been recorded by Agilent in accordance with SFAS No. 123,
the effect would have been to reduce basic net earnings per share by $0.63 and
diluted net earnings per share by $0.62 in 2000. In comparison, the effect would
have been to reduce both basic and diluted net earnings per share by $0.10 and
$0.05 in 1999 and 1998, respectively. These pro forma amounts include amortized
fair values attributable to options granted after October 31, 1995 only, and
therefore are not representative of future pro forma amounts.
13. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
General. Substantially all of Agilent's employees are covered under various
Agilent defined benefit plans. Additionally, Agilent sponsors postretirement
health care and life insurance benefits to U.S. employees.
Spin-off from Hewlett-Packard. On or before June 2, 2000, Agilent assumed
responsibility for pension, deferred profit-sharing, 401(k) and other
postretirement benefits from Hewlett-Packard for current and former employees
whose last work assignment prior to the distribution date was with Agilent.
These current and former employees are collectively referred to as "Agilent
Employees." In the U.S., the Hewlett-Packard Company Retirement Plan and
Deferred Profit-Sharing Plan Master Trust, was converted to the Group Trust for
the Hewlett-Packard Company Deferred Profit-Sharing Plan and Retirement Plan and
the Agilent Technologies, Inc. Deferred Profit-Sharing Plan and Retirement Plan
(the "Group Trust") and a pro rata share of the assets of the Group Trust were
assigned to the Agilent Retirement Plan Trust and the Agilent Deferred
Profit-Sharing Trust. Outside the U.S., generally, a pro rata share of the
Hewlett-Packard pension assets, if any, were transferred or otherwise assigned
to the Agilent entity in accordance with local law or practice. The pro rata
share was in the same proportion as the projected benefit obligation for Agilent
Employees was to the total projected benefit obligation of Hewlett-Packard and
Agilent combined. For all the periods presented, the consolidated financial
statements include the trust assets, liabilities and expenses that were assigned
to Agilent.
Pension and deferred profit-sharing plans. Worldwide pension and deferred
profit-sharing costs were $88 million in 2000, $142 million in 1999 and $123
million in 1998. 1999 and 1998 amounts were allocations from Hewlett-Packard
Plans.
U.S. employees who meet eligibility criteria are provided benefits under
Agilent's Retirement Plan ("Retirement Plan"). Defined benefits are generally
based on an employee's average pay during the final five years of employment and
length of service. For eligible service through October 31, 1993, the benefit
payable under the defined benefit plan is reduced by any amounts due to the
eligible employee under Agilent's fixed and frozen defined contribution deferred
profit-sharing plan (DPSP), which has been closed to new participants.
The combined status of the Retirement Plan and DPSP for U.S. Agilent
Employees follows.
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Fair value of plan assets.................................. $2,379 $1,907
Retirement benefit obligation.............................. $2,309 $1,864
</TABLE>
Eligible employees outside the U.S. generally receive retirement benefits
under various retirement plans based upon factors such as years of service and
employee compensation levels. Eligibility is generally determined in accordance
with local statutory requirements.
F-17
<PAGE> 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Postretirement Benefit Plans. In addition to receiving pension benefits,
Agilent Employees may participate in Agilent's medical and life insurance plans
that provide benefits to U.S. retired employees. Substantially all of Agilent's
current U.S. employees could become eligible for these benefits, and the
existing benefit obligation relates primarily to those employees. Once
participating in the medical plan, retirees may choose from managed-care and
indemnity options, with their contributions dependent on options chosen and
length of service.
401(k) plan. Agilent's U.S. eligible employees may participate in Agilent
Savings Accumulation Plan (ASAP), a clone of the Tax Savings Capital
Accumulation Plan (TAXCAP), as of June 2, 2000, which was established as a
supplemental retirement program. Hewlett-Packard's savings plans' assets and
liabilities related to Agilent Employees were transferred to Agilent effective
June 2, 2000. Beginning February 1, 1998, enrollment in TAXCAP/ASAP became
automatic for employees who meet eligibility requirements unless they decline
participation. Under the TAXCAP/ASAP program, Agilent matches contributions by
employees up to a maximum of 4 percent of an employee's annual compensation.
Prior to November 1, 2000, the maximum combined contribution to the Employee
Stock Purchase Plan and ASAP was 25 percent of an employee's annual eligible
compensation subject to certain regulatory and plan limitations. Agilent's
expense related to TAXCAP/ASAP was $54 million in 2000, $49 million in 1999 and
$47 million in 1998. 1999 and 1998 amounts were allocations from
Hewlett-Packard.
Components of net periodic cost. For the years ended October 31, 2000, 1999
and 1998, net pension and postretirement benefit costs for Agilent are comprised
of:
<TABLE>
<CAPTION>
PENSIONS
--------------------------------------- U.S. POSTRETIREMENT
U.S. PLANS NON-U.S. PLANS BENEFIT PLANS
------------------ ------------------ ---------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period........................................ $ 74 $ 72 $ 69 $ 51 $ 54 $ 40 $ 10 $ 10 $10
Interest cost on benefit obligation............. 35 25 20 39 38 33 18 14 13
Expected return on plan assets.................. (51) (30) (25) (58) (57) (41) (33) (17) (15)
Amortization and deferrals:
Actuarial (gain) loss......................... (12) 3 -- (1) (4) (11) (10) (6) (4)
Transition obligation (asset)................. (3) (3) (3) -- -- -- -- -- --
Prior service cost............................ 2 2 2 1 1 1 (4) (3) (4)
---- ---- ---- ---- ---- ---- ---- ---- ---
Net plan costs.................................. $ 45 $ 69 $ 63 $ 32 $ 32 $ 22 $(19) $ (2) $--
==== ==== ==== ==== ==== ==== ==== ==== ===
</TABLE>
F-18
<PAGE> 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Funded status. As of October 31, 2000 and 1999 (assigned to Agilent), the
funded status of the defined benefit and postretirement benefit plans is:
<TABLE>
<CAPTION>
U.S. DEFINED NON-U.S. DEFINED U.S. POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS BENEFIT PLANS
------------- ----------------- --------------------
2000 1999 2000 1999 2000 1999
----- ---- ------ ------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Change in fair value of plan assets:
Fair value -- beginning of year......... $ 477 $343 $706 $ 705 $ 306 $ 189
Addition of plans....................... -- -- -- 7 -- --
Actual return on plan assets............ 172 152 99 48 110 79
Employer contributions.................. 13 60 84 65 -- 1
Participants' contributions............. -- -- 7 8 5 4
Change in population estimate........... 16 (60) 8 (100) 15 40
Benefits paid........................... (23) (18) (10) (15) (10) (7)
Currency impact......................... -- -- (87) (12) -- --
----- ---- ---- ----- ----- -----
Fair value -- end of year............... 655 477 807 706 426 306
----- ---- ---- ----- ----- -----
Change in benefit obligation:
Benefit obligation -- beginning of
year................................. 434 420 773 750 238 204
Addition/reclassification of plans...... -- -- -- 6 14 --
Service cost............................ 74 72 51 54 10 10
Interest cost........................... 35 25 39 38 18 14
Participants' contributions............. -- -- -- -- 5 4
Plan amendment.......................... -- -- -- -- 59 --
Change in population estimate........... 12 (40) 7 (99) 5 31
Actuarial (gain) loss................... 53 (25) 48 35 (22) (18)
Benefits paid........................... (23) (18) (10) (15) (10) (7)
Currency impact......................... -- -- (87) 4 -- --
----- ---- ---- ----- ----- -----
Benefit obligation -- end of year....... 585 434 821 773 317 238
----- ---- ---- ----- ----- -----
Plan assets in excess of (less than)
benefit obligation...................... 70 43 (14) (67) 109 68
Unrecognized net actuarial (gain) loss.... (160) (97) 102 105 (304) (199)
Unrecognized prior service cost (benefit)
related to plan changes................. 10 11 8 10 3 (58)
Unrecognized net transition asset*........ -- (3) (1) (1) -- --
----- ---- ---- ----- ----- -----
Net prepaid (accrued) costs............... $ (80) $(46) $ 95 $ 47 $(192) $(189)
===== ==== ==== ===== ===== =====
</TABLE>
-------------------------
* Amortized over 15 years for the U.S. plan and over periods ranging from 10 to
22 years for the non-U.S. plans.
Plan assets consist primarily of listed stocks and bonds.
F-19
<PAGE> 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Defined benefit plans whose benefit obligations are in excess of the fair
value of the plan assets are:
<TABLE>
<CAPTION>
NON-U.S.
U.S. EXCESS DEFINED
BENEFIT PLANS BENEFIT PLANS
OCTOBER 31, OCTOBER 31,
-------------- --------------
2000 1999 2000 1999
----- ----- ----- -----
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C> <C>
Aggregate benefit obligation........................ $(50) $(22) $(541) $(681)
Aggregate fair value of plan assets................. -- -- 506 608
</TABLE>
The non-current portion of the liability for retirement and postretirement
benefits plans is included in other liabilities and totaled $221 million at
October 31, 2000 and $239 million at October 31, 1999.
Assumptions. The assumptions used to measure the benefit obligations and to
compute the expected long-term return on assets for Agilent's defined benefit
and postretirement benefit plans are:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------
2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
U.S. defined benefit plan:
Discount rate............................................ 7.5% 7.25% 6.5%
Average increase in compensation levels.................. 6.0% 5.0% 5.0%
Expected long-term return on assets...................... 9.0% 9.0% 9.0%
Non-U.S. defined benefit plans:
Discount rate............................................ 3.0 - 6.5% 3.3 - 6.0% 3.0 - 6.5%
Average increase in compensation levels.................. 3.5 - 5.5% 3.5 - 5.3% 3.75 - 5.0%
Expected long-term return on assets...................... 6.1 - 8.5% 6.1 - 8.5% 6.5 - 8.5%
U.S. postretirement benefits plans:
Discount rate............................................ 7.5% 7.25% 6.5%
Expected long-term return on assets...................... 9.0% 9.0% 9.0%
Current medical cost trend rate.......................... 7.75% 8.2% 8.65%
Ultimate medical cost trend rate......................... 5.5% 5.5% 5.5%
Medical cost trend rate decreases to ultimate rate in
year.................................................. 2007 2007 2007
</TABLE>
Assumed health care trend rates could have a significant effect on the
amounts reported for health care plans. A one-percentage point change in the
assumed health care cost trend rates for the year ended October 31, 2000 would
have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Effect on total service and interest cost
components..................................... $ 6 $ (4)
Effect on postretirement benefit obligations..... 44 (34)
</TABLE>
14. TRANSACTIONS WITH HEWLETT-PACKARD
On June 2, 2000, all Agilent shares owned by Hewlett-Packard were
distributed as a stock dividend to Hewlett-Packard shareholders of record as of
May 2, 2000. As a result of this action, Hewlett-Packard is no longer a related
party to Agilent as of June 2, 2000.
Agilent's net revenue from sales of products to Hewlett-Packard was $341
million for the period from November 1, 1999 through June 2, 2000. Agilent's net
revenue from sales of products to Hewlett-Packard was $832 million in 1999 and
$696 million in 1998.
F-20
<PAGE> 72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 2000, 1999 and 1998, Agilent purchased certain products from
Hewlett-Packard. These products were purchased for inclusion in Agilent products
sold to third parties and for internal use. In 2000, Agilent purchased products
from Hewlett-Packard at prices that management believes approximated the prices
an unrelated party would have paid. These purchases from Hewlett-Packard
amounted to approximately $122 million in the period from November 1, 1999
through June 2, 2000. Agilent purchased products from Hewlett-Packard in the
amount of $61 million in 1999 and $86 million in 1998. Purchases from Hewlett-
Packard at cost for internal use totaled $99 million in 1999 and $65 million in
1998.
Agilent's costs and expenses during the years ended October 31, 1999 and
1998 included allocations from Hewlett-Packard for centralized research and
development, legal, accounting, employee benefits, real estate, insurance
services, information technology services, treasury and other Hewlett-Packard
corporate and infrastructure costs. These allocations were determined on bases
that Hewlett-Packard 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 consolidated statements of earnings for the
years ended October 31, 1999 and 1998 follow.
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
--------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Costs of products and services.............................. $188 $197
Research and development.................................... 150 143
Selling, general and administrative......................... 432 440
</TABLE>
Agilent has entered into interim service level agreements with
Hewlett-Packard covering the provision of various services, including
information technology, financial, accounting, building, legal and other
services by Hewlett-Packard 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 Hewlett-Packard. 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 be changed in order that the lessor will receive fair
market rental value for the rental component of the building services and cost
plus 10% for information technology and other services and non-rental components
of building services. The total cost of services Agilent received from
Hewlett-Packard was approximately $267 million from November 1, 1999 through
June 2, 2000. The total cost of services Hewlett-Packard received from Agilent
was approximately $95 million in the same period.
For purposes of governing certain of the ongoing relationships between
Agilent and Hewlett-Packard at November 1, 1999 (the separation date) and
thereafter, Agilent and Hewlett-Packard have entered into various agreements. A
brief description of each of the agreements follows. Each of these agreements
was 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 Hewlett-Packard 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 their accounting principles and resolve disputes
in particular ways.
F-21
<PAGE> 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
General Assignment and Assumption Agreement. The General Assignment and
Assumption Agreement identifies the assets that Hewlett-Packard transferred to
Agilent and the liabilities that Agilent assumed from Hewlett-Packard in the
separation. In general, the assets that were transferred and the liabilities
that were assumed are those that appear on the consolidated balance sheet at
October 31, 1999, after adjustment for certain assets and liabilities that were
retained by Hewlett-Packard.
Indemnification and Insurance Matters Agreement. Effective as of the
separation date, Agilent and Hewlett-Packard 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 Hewlett-Packard 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, Hewlett-Packard and Agilent
will each indemnify the other against liability for specified environmental
matters. Agilent reimbursed Hewlett-Packard 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 Hewlett-Packard 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 Hewlett-Packard for
its active, inactive and former employees. However, in certain cases, certain of
its employees will continue to participate in the Hewlett-Packard benefit plans.
The transfer to Agilent of employees at certain of Hewlett-Packard'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
Hewlett-Packard's and Agilent's obligations concerning various tax liabilities.
The tax sharing agreement provides that Hewlett-Packard 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 the
separation date. In addition, the tax sharing agreement provides that
Hewlett-Packard and Agilent make payments between them such that the amount of
taxes to be paid by Hewlett-Packard and Agilent after the separation date will
be determined, subject to specified adjustments, as if Hewlett-Packard and
Agilent and each of their subsidiaries included in Hewlett-Packard'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 Hewlett-Packard and
Agilent. In addition, Agilent will bear 18% of unanticipated taxes related to
the distribution where neither party is at fault.
The tax sharing agreement provides that Agilent will indemnify
Hewlett-Packard 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 (IRS) in connection
with the private letter ruling that has been issued to Hewlett-Packard from the
IRS regarding the tax-free nature of the distribution of Agilent's stock by
Hewlett-Packard to Hewlett-Packard'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 Hewlett-Packard leased and owned properties
that Hewlett-Packard transferred to or shares with Agilent. The agreement
describes the manner in which Hewlett-Packard 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 Hewlett-Packard.
F-22
<PAGE> 74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Master IT Service Level Agreement. The Master IT Service Level Agreement
governs the provision of information technology services by Hewlett-Packard and
Agilent to each other, on an interim basis, until November 1, 2001, unless
extended for specific services or otherwise indicated in the agreement. The
services include data processing and telecommunications services, such as voice
telecommunications and data transmission. Specified charges for such services
are generally intended to allow the providing company to recover the direct and
indirect costs of providing the services, plus 5% until November 1, 2001 and
such costs plus 10% thereafter. The Master IT Service Level Agreement also
covers the provision of certain additional information technology services
identified from time to time after the separation date that were inadvertently
or unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the separation agreement, so long as the
provision of such services would not significantly disrupt the providing
company's operations or significantly increase the scope of the agreement.
In addition, the Master IT Service Level Agreement provides for the
replication of some computer systems, including hardware, software, data storage
or maintenance and support components. Generally, the party needing the
replicated system bears the costs and expenses of replication. Generally, the
party purchasing new hardware or licensing new software bears the costs and
expenses of purchasing the new hardware or obtaining the new software licenses.
Intellectual Property Agreements. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement, the Master
Trademark Ownership and License Agreement and the ICBD Technology Ownership and
License Agreement together are referred to as the Intellectual Property
Agreements. Under the Intellectual Property Agreements, Hewlett-Packard
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. Hewlett-Packard 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. Hewlett-Packard 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 Hewlett-Packard trademarks, and
this license is royalty-bearing after five years.
Environmental Matters Agreement. Hewlett-Packard 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 Hewlett-Packard had accrued a reserve as of the separation date. The
purpose of the environmental Matters Agreement is to address, in a general way,
Hewlett-Packard's and Agilent's rights and obligations with respect to that
investigation and remediation.
15. NOTE PAYABLE AND SHORT-TERM DEBT
Notes payable and short-term debt. Notes payable and short-term debt as of
October 31, 2000 consisted of notes payable to banks of $106 million and other
short-term debt of $4 million dollars. The average interest rate for the notes
payable to banks is 7.0%. For 1999, there were no notes payable or short-term
debt balances as working capital needs were provided by Hewlett-Packard.
Line of Credit. In November 1999, Agilent executed two revolving credit
agreements totaling $500 million, with $250 million expiring in one year and
$250 million expiring in five years. Interest is based on the Citicorp base
rate, a margin over LIBOR, or a fixed rate based on competitive bids. Under the
agreements, Agilent must not exceed a defined debt to earnings ratio. As of
November 3, 2000, the Company has executed an amended and restated agreement for
$250 million expiring in one year. The five year revolving credit line was
extended for an additional year on November 5, 2000.
16. COMMITMENTS
Operating lease commitments. Agilent leases certain real and personal
property from unrelated third parties under noncancelable operating leases.
Future minimum lease payments under these leases at
F-23
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
October 31, 2000 were $79 million for 2001, $74 million for 2002, $62 million
for 2003, $55 million for 2004, $50 million for 2005 and $44 million thereafter.
Certain leases require Agilent to pay property taxes, insurance and routine
maintenance, and include escalation clauses. Rent expense was $74 million in
2000, $107 million in 1999 and $111 million in 1998.
Transition service agreements. Since November 1999, Agilent obtains various
services from Hewlett-Packard. See Note 14, "Transactions with Hewlett-Packard."
Agilent Technologies Japan. On July 6, 1999, Hewlett-Packard entered into
an agreement with Yokogawa to acquire Yokogawa's 25% equity interest in Agilent
Technologies Japan, Ltd. for approximately $521 million. Under the terms of the
separation agreement, Agilent assumed Hewlett-Packard's obligations. Agilent has
purchased approximately 20.8% of Agilent Technologies Japan Ltd. shares from
Yokogawa for $422 million as of October 31, 2000. Agilent will purchase the
remaining 4.2% by January 31, 2001 for approximately $111 million.
17. CONTINGENCIES
Agilent is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, that arise in the
ordinary course of business. There are no such matters pending that Agilent
expects to be material in relation to its business, consolidated financial
condition, results of operations or cash flows. See Note 14, "Transactions with
Hewlett-Packard," for a discussion of Agilent's indemnification agreement with
Hewlett-Packard.
18. SEGMENT INFORMATION
Description of segments. Agilent is a diversified technology company that
provides enabling solutions to customers in high growth markets within the
communications, electronics, life sciences and healthcare industries. Agilent
designs and manufactures test, measurement and monitoring instruments, systems
and solutions and semiconductors and optical components.
Agilent organizes its business operations into four major groups-test and
measurement, semiconductor products, healthcare solutions and chemical analysis,
each of which comprises a reportable segment. The segments were determined based
primarily on how management views and evaluates Agilent's operations. Other
factors, including customer base, homogeneity of products, technology and
delivery channels, were also considered in determining Agilent's reportable
segments. Agilent measures segment performance based on earnings from
operations.
Agilent includes the following businesses:
- test and measurement, which provides test instruments, standard and
customized test, measurement and monitoring systems for the design,
manufacture and support of electronic and communication devices, and
software for the design of high-frequency electronic and communication
devices. The test and measurement business includes operating segments
that have been aggregated based on the similarity of the nature of their
products and services, their production processes, their class of
customers, their distribution methods and their economic characteristics;
- semiconductor products, which provides fiber optic communications devices
and assemblies, integrated circuits for wireless applications,
application-specific integrated circuits, optoelectronics and image
sensors;
- healthcare solutions, which provides patient monitoring, ultrasound
imaging and cardiology products and systems; and
- chemical analysis, which provides analytical instruments, systems and
services for chromatography, spectroscopy and bio-instrumentation.
F-24
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment revenue and profit. The accounting policies used to derive
reportable segment results are generally the same as those described in Note 2,
"Summary of Significant Accounting Policies." Internal revenue and earnings from
operations include transactions between segments that are intended to reflect an
arm's length transfer at the best price available for comparable external
customers.
A significant portion of the segments' expenses arise from shared services
and infrastructure that Agilent (Hewlett-Packard for 1999 and 1998) has
historically provided to the segments in order to realize economies of scale and
to efficiently use resources. These expenses include costs of centralized
research and development, legal, accounting, employee benefits, real estate,
insurance services, information technology services, treasury and other Agilent
corporate (Hewlett-Packard in 1999 and 1998) and infrastructure costs. These
expenses are allocated to the segments and the allocations have been determined
on bases that Agilent considered to be a reasonable reflection of the
utilization of services provided to or benefits received by the segments. A
different result could be arrived at for any segment if costs were specifically
identified to each segment.
The following tables reflect the results of Agilent's reportable segments
under Agilent's management system. These results are not necessarily a depiction
that is in conformity with accounting principles generally accepted in the
United States of America. The performance of each segment is measured based on
several metrics, including earnings from operations. These results are used, in
part, by management, in evaluating the performance of, and in allocating
resources to, each of the segments.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR HEALTHCARE CHEMICAL TOTAL
MEASUREMENT PRODUCTS SOLUTIONS ANALYSIS SEGMENTS
----------- ------------- ---------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED OCTOBER 31, 2000:
External revenue.................. $6,108 $2,213 $1,412 $1,040 $10,773
Internal revenue.................. -- 51 -- -- 51
------ ------ ------ ------ -------
Total net revenue................. $6,108 $2,264 $1,412 $1,040 $10,824
====== ====== ====== ====== =======
Depreciation and amortization
expense......................... $ 168 $ 142 $ 34 $ 23 $ 367
====== ====== ====== ====== =======
Earnings (loss) from operations... $ 898 $ 270 $ (96) $ 24 $ 1,096
====== ====== ====== ====== =======
YEAR ENDED OCTOBER 31, 1999:
External revenue.................. $4,082 $1,722 $1,501 $1,026 $ 8,331
Internal revenue.................. 4 40 1 -- 45
------ ------ ------ ------ -------
Total net revenue................. $4,086 $1,762 $1,502 $1,026 $ 8,376
====== ====== ====== ====== =======
Depreciation and amortization
expense......................... $ 152 $ 156 $ 35 $ 16 $ 359
====== ====== ====== ====== =======
Earnings from operations.......... $ 377 $ 133 $ 125 $ 112 $ 747
====== ====== ====== ====== =======
YEAR ENDED OCTOBER 31, 1998:
External revenue.................. $4,100 $1,574 $1,340 $ 938 $ 7,952
Internal revenue.................. -- 39 -- -- 39
------ ------ ------ ------ -------
Total net revenue................. $4,100 $1,613 $1,340 $ 938 $ 7,991
====== ====== ====== ====== =======
Depreciation and amortization
expense......................... $ 133 $ 205 $ 28 $ 15 $ 381
====== ====== ====== ====== =======
Earnings (loss) from operations... $ 348 $ (106) $ 62 $ 75 $ 379
====== ====== ====== ====== =======
</TABLE>
F-25
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECONCILIATION TO AGILENT, AS REPORTED.
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------
2000 1999 1998
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net revenue:
Total reportable segments................................. $10,824 $8,376 $7,991
Elimination of internal revenue........................... (51) (45) (39)
------- ------ ------
Total net revenue, as reported......................... $10,773 $8,331 $7,952
======= ====== ======
Earnings before taxes:
Total reportable segments' earnings from operations....... $ 1,096 $ 747 $ 379
Corporate and unallocated................................. (43) (6) 63
Other income (expense), net............................... 111 46 (46)
------- ------ ------
Total earnings before taxes, as reported............... $ 1,164 $ 787 $ 396
======= ====== ======
Depreciation and amortization expense:
Total reportable segments................................. $ 367 $ 359 $ 381
Corporate and unallocated................................. 128 116 96
------- ------ ------
Total depreciation and amortization expense, as
reported............................................. $ 495 $ 475 $ 477
======= ====== ======
</TABLE>
Corporate and unallocated expenses primarily relate to employee related
benefit programs. The expenses for these programs are recorded by the segments
at a pre-determined rate and are adjusted at the corporate level to reflect the
actual rate. This adjustment is not allocated to the segments. Corporate and
unallocated expenses also include certain unallocated depreciation and goodwill
amortization.
Major customers. No customer represented 10% or more of Agilent's total net
revenue in 2000 and 1998. In 1999, Hewlett-Packard accounted for approximately
10% of Agilent's total net revenue. See Note 14, "Transactions with
Hewlett-Packard." No other customer represented 10% or more of Agilent total net
revenue in any period presented.
Segment assets and other items. Segment assets directly managed by the
segment primarily consist of account receivable, inventory, property, plant and
equipment and certain other current and non-current assets. In some cases,
several segments may occupy the same location and therefore will share a common
building and certain machinery and equipment. In these cases, there will not be
a precise correlation between a segment's earnings from operations and the
segment's assets. Capital expenditures for each segment also reflect the asset
assignment by segment.
Corporate-held assets not allocated to the segments include property, plant
and equipment assigned to corporate functions, equity investments managed at the
corporate level, cash held at corporate, deferred tax assets and other current
and non-current assets managed at the corporate level.
F-26
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The equity investment totals disclosed for each segment represent equity
investments directly managed by the segment.
<TABLE>
<CAPTION>
TEST AND SEMICONDUCTOR HEALTHCARE CHEMICAL TOTAL
MEASUREMENT PRODUCTS SOLUTIONS ANALYSIS SEGMENTS
----------- ------------- ---------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
AS OF OCTOBER 31, 2000:
Assets............................ $3,637 $1,565 $794 $595 $6,591
Capital expenditures,
year-to-date.................... 389 161 21 21 592
Investment in equity-method
investees....................... 16 46 -- 20 82
AS OF OCTOBER 31, 1999:
Assets............................ $2,555 $1,014 $958 $528 $5,055
Capital expenditures,
year-to-date.................... 185 96 15 9 305
Investment in equity-method
investees....................... 13 15 -- 12 40
AS OF OCTOBER 31, 1998:
Assets............................ $2,188 $1,134 $847 $517 $4,686
Capital expenditures,
year-to-date.................... 155 162 22 8 347
Investment in equity-method
investees....................... 11 19 -- -- 30
</TABLE>
RECONCILIATION TO AGILENT, AS REPORTED.
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Assets:
Total reportable segments.............................. $6,591 $5,055 $4,686
Unallocated corporate assets........................... 1,834 389 301
------ ------ ------
Total assets, as reported.............................. $8,425 $5,444 $4,987
====== ====== ======
</TABLE>
GEOGRAPHIC INFORMATION.
<TABLE>
<CAPTION>
UNITED REST OF THE
STATES JAPAN WORLD TOTAL
------ ------ ----------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revenue (based on location of customer):
Year ended October 31, 2000........................ $4,766 $1,140 $4,867 $10,773
Year ended October 31, 1999........................ 3,735 874 3,722 8,331
Year ended October 31, 1998........................ 3,623 880 3,449 7,952
Long-lived assets (all non-current assets):
October 31, 2000................................... $1,470 $ 356 $ 944 $ 2,770
October 31, 1999................................... 1,147 258 501 1,906
October 31, 1998................................... 1,180 242 490 1,912
</TABLE>
F-27
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SUBSEQUENT EVENTS
On November 17, 2000, Agilent agreed to sell its healthcare solutions
business to Koninklijke Philips Electronics, N.V. (Philips) for approximately
$1.7 billion. Most of Agilent's healthcare solutions business' operational
facilities and certain of its associated assets and liabilities will transfer to
Philips. Virtually all employees of Agilent's healthcare solutions business,
including 100 percent of the healthcare solutions business-dedicated
infrastructure employees, will be offered employment by Philips or transferred
to Philips, subject to local statutory laws. The estimated amount of net assets
to be transferred is $400 million. Agilent will be restricted from competing in
the development, manufacturing, selling or servicing of certain medical products
for five years. The sale is expected to be completed by mid-calendar year 2001
subject to customary regulatory approvals and other closing conditions.
On January 5, 2001, Agilent acquired Objective Systems Integrators, Inc.
(OSI) for approximately $684 million in cash. OSI is a leading provider of
next-generation operations-support-system software for communications service
providers and will become part of Agilent's test and measurement business.
QUARTERLY SUMMARY
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
--------------- --------- -------------------- --------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
2000
Net revenue................................... $2,246 $2,485 $2,670 $3,372
Cost of products and services and other....... $1,160 $1,261 $1,369 $1,732
Earnings from operations...................... $ 171 $ 214 $ 210 $ 458
Net earnings.................................. $ 131 $ 166 $ 155 $ 305
Basic net earnings per share.................. $ 0.30 $ 0.37 $ 0.34 $ 0.67
Diluted net earnings per share................ $ 0.30 $ 0.36 $ 0.34 $ 0.66
Average shares used in computing basic net
earnings per share.......................... 439 452 453 454
Average shares used in computing diluted net
earnings per share.......................... 440 457 461 462
Range of closing stock prices on NYSE......... $40 - 79 1/4 $71 - 159 $40 3/4 - 100 3/4 $38 13/16 - 63
1999
Net revenue................................... $1,786 $2,010 $2,087 $2,448
Cost of products and services and other....... $ 974 $1,019 $1,103 $1,292
Earnings from operations...................... $ 101 $ 240 $ 195 $ 205
Net earnings.................................. $ 74 $ 157 $ 135 $ 146
Basic and diluted net earnings per share...... $ 0.19 $ 0.41 $ 0.36 $ 0.39
Average shares used in computing basic and
diluted net earnings per share.............. 380 380 380 380
</TABLE>
F-28
<PAGE> 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AGILENT TECHNOLOGIES, INC.
Date: January 17, 2001
By /s/ D. CRAIG NORDLUND
----------------------------------------
D. Craig Nordlund
Senior Vice President, General Counsel
and Secretary
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature
appears below constitutes and appoints D. Craig Nordlund and Marie Oh Huber, or
either of them, his or her attorneys-in-fact, for such person in any and all
capacities, to sign any amendments to this report and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact, or substitute or substitutes, may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ EDWARD W. BARNHOLT President, Chief Executive January 12, 2001
----------------------------------------------------- Officer and Director
Edward W. Barnholt (Principal Executive
Officer)
/s/ GERALD GRINSTEIN Chairman of the Board January 16, 2001
----------------------------------------------------- of Directors
Gerald Grinstein
/s/ ROBERT R. WALKER Executive Vice President January 12, 2001
----------------------------------------------------- and Chief Financial
Robert R. Walker Officer (Principal
Financial Officer)
/s/ DOROTHY D. HAYES Vice President, Controller January 12, 2001
----------------------------------------------------- and Chief Accounting
Dorothy D. Hayes Officer (Principal
Accounting Officer)
/s/ JAMES G. CULLEN Director January 12, 2001
-----------------------------------------------------
James G. Cullen
/s/ THOMAS E. EVERHART Director January 12, 2001
-----------------------------------------------------
Thomas E. Everhart
/s/ ROBERT J. HERBOLD Director January 10, 2001
-----------------------------------------------------
Robert J. Herbold
</TABLE>
50
<PAGE> 81
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WALTER B. HEWLETT Director January 14, 2001
-----------------------------------------------------
Walter B. Hewlett
/s/ HEIDI KUNZ Director January 14, 2001
-----------------------------------------------------
Heidi Kunz
/s/ DAVID M. LAWRENCE Director January 14, 2001
-----------------------------------------------------
David M. Lawrence, M.D.
Director
-----------------------------------------------------
A. Barry Rand
/s/ RANDALL L. TOBIAS Director January 10, 2001
-----------------------------------------------------
Randall L. Tobias
</TABLE>
51
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Master Separation and Distribution Agreement between
Hewlett-Packard and the Company effective as of August 12,
1999. Incorporated by reference from Exhibit 2.1 of the
Company's Registration Statement on Form S-1, Registration
No. 333-85249 ("S-1").
2.2 General Assignment and Assumption Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.2 of the Company's S-1.
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 S-1.
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 S-1.
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 S-1.
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 S-1.
2.7 Employee Matters Agreement between Hewlett-Packard and the
Company. Incorporated by reference from Exhibit 2.7 of the
Company's S-1.
2.8 Tax Sharing Agreement between Hewlett-Packard and the
Company. Incorporated by reference from Exhibit 2.8 of the
Company's S-1.
2.9 Master IT Service Level Agreement between Hewlett-Packard
and the Company. Incorporated by reference from Exhibit 2.9
of the Company's S-1.
2.10 Real Estate Matters Agreement between Hewlett-Packard and
the Company. Incorporated by reference from Exhibit 2.10 of
the Company's S-1.
2.11 Environmental Matters Agreement between Hewlett-Packard and
the Company. Incorporated by reference from Exhibit 2.11 of
the Company's S-1.
2.12 Master Confidential Disclosure Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.12 of the Company's S-1.
2.13 Indemnification and Insurance Matters Agreement between
Hewlett-Packard and the Company. Incorporated by reference
from Exhibit 2.13 of the Company's S-1.
2.14 Non U.S. Plan. Incorporated by reference from Exhibit 2.14
of the Company's S-1.
2.15 Five Year Credit Agreement dated as of November 5, 1999.
Incorporated by reference from Exhibit 2.15 of the Company's
S-1.
2.16 Amended and Restated 364-Day Credit Agreement dated November
3, 2000. Incorporated by reference from Exhibit (d)(11) of
the Company's Form SC TO-T/A as filed with the Commission on
January 3, 2001.
3.1 Amended and Restated Certificate of Incorporation.
Incorporated by reference from Exhibit 3.1 of the Company's
S-1.
3.2 Bylaws. Incorporated by reference from Exhibit 3.2 of the
Company's S-1.
4.1 Preferred Stock Rights Agreement between the Company and
Harris Trust and Savings Bank dated as of May 12, 2000.
Incorporated by reference from Exhibit 1 of the Company's
Form 8-A, filed on May 17, 2000.
10.1 Employee Stock Purchase Plan. Incorporated by reference from
Exhibit 10.1 of the Company's S-1.*
10.2 1999 Stock Plan. Incorporated by reference from Exhibit 10.2
of the Company's S-1.*
10.3 1999 Non-Employee Director Stock Plan. Incorporated by
reference from Exhibit 10.3 of the Company's S-1.*
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 S-1.
</TABLE>
52
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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
S-1.*
10.6 Executive Deferred Compensation Plan. Incorporated by
reference from the Company's Form 10-K filed January 25,
2000.*
10.7 Employee Stock Purchase Plan. Incorporated by reference from
the Company's Form S-8 filed September 29, 2000.*
21.1 Subsidiaries of the Company as of October 31, 2000.
23.1 Consent of Independent Accountants.
24.1 Powers of Attorney. Contained in the signature page of this
Annual Report on Form 10-K.
</TABLE>
-------------------------
* Indicates management contract or compensatory plan, contract or arrangement.
53
