filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Agilent Technologies, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Agilent Technologies, Inc. and its subsidiaries at October 31, 2016 and October 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for deferred income taxes and share-based payments in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS LLP | |
| San Jose, California | |
| December 20, 2016 |
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions, except per share data) | |||||||||||
| Net revenue: | |||||||||||
| Products | $ | 3,227 | $ | 3,146 | $ | 3,185 | |||||
| Services and other | 975 | 892 | 863 | ||||||||
| Total net revenue | 4,202 | 4,038 | 4,048 | ||||||||
| Costs and expenses: | |||||||||||
| Cost of products | 1,464 | 1,496 | 1,568 | ||||||||
| Cost of services and other | 541 | 501 | 504 | ||||||||
| Total costs | 2,005 | 1,997 | 2,072 | ||||||||
| Research and development | 329 | 330 | 358 | ||||||||
| Selling, general and administrative | 1,253 | 1,189 | 1,199 | ||||||||
| Total costs and expenses | 3,587 | 3,516 | 3,629 | ||||||||
| Income from operations | 615 | 522 | 419 | ||||||||
| Interest income | 11 | 7 | 9 | ||||||||
| Interest expense | (72 | ) | (66 | ) | (110 | ) | |||||
| Other income (expense), net | (10 | ) | 17 | (89 | ) | ||||||
| Income from continuing operations before taxes | 544 | 480 | 229 | ||||||||
| Provision (benefit) for income taxes | 82 | 42 | (3 | ) | |||||||
| Income from continuing operations | 462 | 438 | 232 | ||||||||
| Income (loss) from discontinued operations, net of tax expense (benefit) of $0, $(2) and $100 | $ | — | $ | (37 | ) | $ | 317 | ||||
| Net income | $ | 462 | $ | 401 | $ | 549 | |||||
| Net income per share - basic: | |||||||||||
| Income from continuing operations | $ | 1.42 | $ | 1.32 | $ | 0.70 | |||||
| Income (loss) from discontinued operations | — | (0.12 | ) | 0.95 | |||||||
| Net income per share - basic | $ | 1.42 | $ | 1.20 | $ | 1.65 | |||||
| Net income per share - diluted: | |||||||||||
| Income from continuing operations | $ | 1.40 | $ | 1.31 | $ | 0.69 | |||||
| Income (loss) from discontinued operations | — | (0.11 | ) | 0.93 | |||||||
| Net income per share - diluted | $ | 1.40 | $ | 1.20 | $ | 1.62 | |||||
| Weighted average shares used in computing net income per share: | |||||||||||
| Basic | 326 | 333 | 333 | ||||||||
| Diluted | 329 | 335 | 338 | ||||||||
| Cash dividends declared per common share | $ | 0.460 | $ | 0.400 | $ | 0.528 |
The accompanying notes are an integral part of these consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
| Years Ended October 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Net income | $ | 462 | $ | 401 | $ | 549 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized gain on investments, net of tax expense of $0, $0 and $1 | — | — | 11 | |||||||||
| Amounts reclassified into earnings related to investments, net of tax of $0, $0 and $0 | — | — | (1 | ) | ||||||||
| Gain (loss) on derivative instruments, net of tax expense (benefit) of $(4), $3 and $5 | (6 | ) | 8 | 8 | ||||||||
| Amounts reclassified into earnings related to derivative instruments, net of tax expense (benefit) of $0, $(6) and $0 | 3 | (12 | ) | 1 | ||||||||
| Foreign currency translation, net of tax expense (benefit) of $3, $(24) and $(8) | (8 | ) | (336 | ) | (269 | ) | ||||||
| Net defined benefit pension cost and post retirement plan costs: | ||||||||||||
| Change in actuarial net loss, net of tax benefit of $(42), $(17), and $(65) | (86 | ) | (38 | ) | (143 | ) | ||||||
| Change in net prior service benefit, net of tax benefit of $(8), $(6), and $(16) | (15 | ) | (11 | ) | (32 | ) | ||||||
| Other comprehensive loss | (112 | ) | (389 | ) | (425 | ) | ||||||
| Total comprehensive income | $ | 350 | $ | 12 | $ | 124 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions, except par value and share data) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 2,289 | $ | 2,003 | |||
| Short-term restricted cash and cash equivalents | — | 242 | |||||
| Accounts receivable, net | 631 | 606 | |||||
| Inventory | 533 | 541 | |||||
| Other current assets | 182 | 294 | |||||
| Total current assets | 3,635 | 3,686 | |||||
| Property, plant and equipment, net | 639 | 604 | |||||
| Goodwill | 2,517 | 2,366 | |||||
| Other intangible assets, net | 408 | 445 | |||||
| Long-term investments | 135 | 86 | |||||
| Other assets | 468 | 292 | |||||
| Total assets | $ | 7,802 | $ | 7,479 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 257 | $ | 279 | |||
| Employee compensation and benefits | 235 | 221 | |||||
| Deferred revenue | 269 | 258 | |||||
| Other accrued liabilities | 184 | 218 | |||||
| Total current liabilities | 945 | 976 | |||||
| Long-term debt | 1,912 | 1,655 | |||||
| Retirement and post-retirement benefits | 360 | 264 | |||||
| Other long-term liabilities | 339 | 414 | |||||
| Total liabilities | 3,556 | 3,309 | |||||
| Commitments and contingencies (Note 15) | |||||||
| Total equity: | |||||||
| Stockholders' equity: | |||||||
| Preferred stock; $0.01 par value; 125 million shares authorized; none issued and outstanding | — | — | |||||
| Common stock; $0.01 par value; 2 billion shares authorized; 614 million shares at October 31, 2016 and 611 million shares at October 31, 2015 issued | 6 | 6 | |||||
| Treasury stock at cost; 290 million shares at October 31, 2016 and 279 million shares at October 31, 2015 | (10,508 | ) | (10,074 | ) | |||
| Additional paid-in-capital | 9,159 | 9,045 | |||||
| Retained earnings | 6,089 | 5,581 | |||||
| Accumulated other comprehensive loss | (503 | ) | (391 | ) | |||
| Total stockholders' equity | 4,243 | 4,167 | |||||
| Non-controlling interest | 3 | 3 | |||||
| Total equity | 4,246 | 4,170 | |||||
| Total liabilities and equity | $ | 7,802 | $ | 7,479 |
The accompanying notes are an integral part of these consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
| Years Ended October 31, | |||||||||||
| 2016 | 2015 (As Adjusted) | 2014 (As Adjusted) | |||||||||
| (in millions) | |||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 462 | $ | 401 | $ | 549 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 246 | 253 | 384 | ||||||||
| Accelerated amortization of interest rate swap gain (due to early redemption of debt) | — | — | (22 | ) | |||||||
| Share-based compensation | 58 | 54 | 96 | ||||||||
| Deferred taxes | 3 | 70 | (192 | ) | |||||||
| Excess and obsolete inventory and inventory related charges | 20 | 30 | 79 | ||||||||
| Non-cash restructuring and asset impairment charges | 4 | 3 | 23 | ||||||||
| Impairment of equity method investment and loans | 25 | — | — | ||||||||
| Net gain on sale of investments | (1 | ) | — | (1 | ) | ||||||
| Net (gain) loss on sale of assets and divestitures | (1 | ) | 3 | (10 | ) | ||||||
| Other | 17 | 13 | 10 | ||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable, net | (33 | ) | (24 | ) | (119 | ) | |||||
| Inventory | (7 | ) | (24 | ) | (99 | ) | |||||
| Accounts payable | (15 | ) | (26 | ) | 50 | ||||||
| Employee compensation and benefits | 15 | 8 | 9 | ||||||||
| Interest rate swap payments | (10 | ) | — | — | |||||||
| Other assets and liabilities | 10 | (249 | ) | (26 | ) | ||||||
| Net cash provided by operating activities | 793 | 512 | 731 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Investments in property, plant and equipment | (139 | ) | (98 | ) | (205 | ) | |||||
| Proceeds from the sale of property, plant and equipment | — | 12 | 14 | ||||||||
| Proceeds from the sale of investment securities | 1 | — | 1 | ||||||||
| Proceeds from divestitures | — | 3 | 2 | ||||||||
| Payment to acquire cost method investment | (80 | ) | — | — | |||||||
| Payment to acquire equity method investment | — | (1 | ) | (25 | ) | ||||||
| Payment in exchange for convertible note | (1 | ) | (2 | ) | — | ||||||
| Loan to equity method investment | (3 | ) | — | — | |||||||
| Change in restricted cash, cash equivalents and investments, net | 245 | (240 | ) | (4 | ) | ||||||
| Acquisitions of businesses and intangible assets, net of cash acquired | (261 | ) | (74 | ) | (13 | ) | |||||
| Net cash used in investing activities | (238 | ) | (400 | ) | (230 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Issuance of common stock under employee stock plans | 62 | 58 | 188 | ||||||||
| Payment of taxes related to net share settlement of equity awards | (6 | ) | (13 | ) | (19 | ) | |||||
| Treasury stock repurchases | (434 | ) | (267 | ) | (200 | ) | |||||
| Payment of dividends | (150 | ) | (133 | ) | (176 | ) | |||||
| Issuance of senior notes | 299 | — | 1,099 | ||||||||
| Debt issuance costs | (2 | ) | — | (9 | ) | ||||||
| Repayment of senior notes | — | — | (1,000 | ) | |||||||
| Proceeds from debts and credit facility | 255 | — | 87 | ||||||||
| Repayment of debts and credit facility | (292 | ) | — | (87 | ) | ||||||
| Net transfer of cash and cash equivalents to Keysight | — | (734 | ) | — | |||||||
| Net cash used in financing activities | (268 | ) | (1,089 | ) | (117 | ) | |||||
| Effect of exchange rate movements | (1 | ) | (48 | ) | (31 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 286 | (1,025 | ) | 353 | |||||||
| Change in cash and cash equivalents within current assets of discontinued operations | — | 810 | — | ||||||||
| Cash and cash equivalents at beginning of year | 2,003 | 2,218 | 2,675 | ||||||||
| Cash and cash equivalents at end of year | $ | 2,289 | $ | 2,003 | $ | 3,028 | |||||
| Supplemental cash flow information: | |||||||||||
| Income tax payments, net | $ | 67 | $ | 129 | $ | 131 | |||||
| Interest payments | $ | 73 | $ | 71 | $ | 142 |
The accompanying notes are an integral part of these consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF EQUITY
| Common Stock | Treasury Stock | Accumulated Other Comprehensive Income/(Loss) | |||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Additional Paid-in Capital | Number of Shares | Treasury Stock at Cost | Retained Earnings | Total Stockholders' Equity | Non- Controlling Interests | Total Equity | |||||||||||||||||||||||||||||
| (in millions, except number of shares in thousands) | |||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2013 | 601,629 | $ | 6 | $ | 8,711 | (269,330 | ) | $ | (9,607 | ) | $ | 6,096 | $ | 91 | $ | 5,297 | $ | 3 | $ | 5,300 | |||||||||||||||||
| Components of comprehensive income, net of tax: | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 549 | — | 549 | — | 549 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (425 | ) | (425 | ) | — | (425 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 124 | 124 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.528 per common share) | — | — | — | — | — | (176 | ) | — | (176 | ) | — | (176 | ) | ||||||||||||||||||||||||
| Share-based awards issued | 6,261 | — | 170 | — | — | — | — | 170 | — | 170 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (3,594 | ) | (200 | ) | — | — | (200 | ) | — | (200 | ) | |||||||||||||||||||||||
| Adjustment to cumulative excess tax benefits realized from share based awards issued | — | — | (11 | ) | — | — | — | (11 | ) | (11 | ) | ||||||||||||||||||||||||||
| Tax benefits from share-based awards issued | — | — | 1 | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
| Share-based compensation | — | — | 96 | — | — | — | — | 96 | — | 96 | |||||||||||||||||||||||||||
| Balance as of October 31, 2014 | 607,890 | $ | 6 | $ | 8,967 | (272,924 | ) | $ | (9,807 | ) | $ | 6,469 | $ | (334 | ) | $ | 5,301 | $ | 3 | $ | 5,304 | ||||||||||||||||
| Components of comprehensive income, net of tax: | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 401 | — | 401 | — | 401 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (389 | ) | (389 | ) | — | (389 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 12 | 12 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.40 per common share) | — | — | — | — | — | (133 | ) | — | (133 | ) | — | (133 | ) | ||||||||||||||||||||||||
| Distribution of Keysight | — | — | (28 | ) | — | — | (1,156 | ) | 332 | (852 | ) | — | (852 | ) | |||||||||||||||||||||||
| Share-based awards issued | 2,964 | — | 44 | — | — | — | — | 44 | — | 44 | |||||||||||||||||||||||||||
| Tax benefits from share-based awards issued | — | — | 8 | — | — | — | — | 8 | — | 8 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (6,471 | ) | (267 | ) | — | — | (267 | ) | — | (267 | ) | |||||||||||||||||||||||
| Share-based compensation | — | — | 54 | — | — | — | — | 54 | — | 54 | |||||||||||||||||||||||||||
| Balance as of October 31, 2015 | 610,854 | $ | 6 | $ | 9,045 | (279,395 | ) | $ | (10,074 | ) | $ | 5,581 | $ | (391 | ) | $ | 4,167 | $ | 3 | $ | 4,170 | ||||||||||||||||
| Adjustment due to adoption of ASU 2016-09 | — | — | — | — | — | 196 | — | 196 | — | 196 | |||||||||||||||||||||||||||
| Components of comprehensive income, net of tax: | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 462 | — | 462 | — | 462 | |||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (112 | ) | (112 | ) | — | (112 | ) | ||||||||||||||||||||||||
| Total comprehensive income | 350 | 350 | |||||||||||||||||||||||||||||||||||
| Cash dividends declared ($0.46 per common share) | — | — | — | — | — | (150 | ) | — | (150 | ) | — | (150 | ) | ||||||||||||||||||||||||
| Share-based awards issued | 2,682 | — | 56 | — | — | — | — | 56 | — | 56 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (10,680 | ) | (434 | ) | — | — | (434 | ) | — | (434 | ) | |||||||||||||||||||||||
| Share-based compensation | — | — | 58 | — | — | — | — | 58 | — | 58 | |||||||||||||||||||||||||||
| Balance as of October 31, 2016 | 613,536 | $ | 6 | $ | 9,159 | (290,075 | ) | $ | (10,508 | ) | $ | 6,089 | $ | (503 | ) | $ | 4,243 | $ | 3 | $ | 4,246 |
The accompanying notes are an integral part of these consolidated financial statements.
AGILENT TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview. Agilent Technologies Inc. ("we", "Agilent" or the "company"), incorporated in Delaware in May 1999, is a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that includes instruments, software, services and consumables for the entire laboratory workflow.
Keysight Separation. On November 1, 2014, we completed the distribution of 100% of the outstanding common shares of Keysight Technologies, Inc. ("Keysight") to Agilent stockholders who received one share of Keysight common stock for every two shares of Agilent held as of the close of business on the record date, October 22, 2014. The historical results of operations and the financial position of Keysight are included in the consolidated financial statements of Agilent and are reported as discontinued operations within this Form 10-K.
Exit of Nuclear Magnetic Resonance Business. During the fourth quarter of fiscal year 2014, we made the decision to cease the manufacture and sale of our nuclear magnetic resonance (“NMR”) product line within our life sciences and applied markets segment. In connection with the exit from this business, we recorded approximately $6 million and $68 million in restructuring and other related costs in 2015 and 2014, respectively. The exit of the NMR business was completed in fiscal year 2016.
Basis of presentation. The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and is in conformity with U.S. generally accepted accounting principles ("GAAP"). Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.
Principles of consolidation. The consolidated financial statements include the accounts of the company and our 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 U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, valuation of goodwill and purchased intangible assets, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions and accounting for income taxes.
Revenue recognition. We enter into agreements to sell products (hardware and/or software), services and other arrangements (multiple element arrangements) that include combinations of products and services.
We recognize revenue, net of trade discounts and allowances, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer for products, or when the service has been provided. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. At the time of the transaction, we evaluate the creditworthiness of our customers to determine the appropriate timing of revenue recognition. Provisions for discounts, warranties, returns, extended payment terms, and other adjustments are provided for in the period the related sales are recorded.
Product revenue. Our product revenue is generated predominantly from the sales of various types of analytical instrumentation. Product revenue, including sales to resellers and distributors, is reduced for estimated returns when appropriate. For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete.
Where software is licensed separately, revenue is recognized when the software is delivered and has been transferred to the customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs.
We also evaluate whether collection of the receivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist on which a portion of the total fee would be allocated based on vendor-specific objective evidence.
Service revenue. Revenue from services includes extended warranty, customer and software support including, Software as a Service (SaaS) due to recent acquisitions, consulting including companion diagnostics and training and education. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. For example, customer support contracts are recognized ratably over the contractual period, while training revenue is recognized as the training is provided to the customer. In addition, the four revenue recognition criteria described above must be met before service revenue is recognized.
Revenue recognition for arrangements with multiple deliverables. Our multiple-element arrangements are generally comprised of a combination of measurement instruments, installation or other start-up services, and/or software and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized upon delivery once title and risk of loss pass to the customer. Delivery of installation, start-up services and other services varies based on the complexity of the equipment, staffing levels in a geographic location and customer preferences, and can range from a few days to a few months. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Revenue from the sale of software products that are not required to deliver the tangible product's essential functionality are accounted for under software revenue recognition rules which require vendor specific objective evidence (VSOE) of fair value to allocate revenue in a multiple element arrangement. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.
We have evaluated the deliverables in our multiple-element arrangements and concluded that they are separate units of accounting if the delivered item or items have value to the customer on a standalone basis and for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on VSOE if available, third-party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met.
We use VSOE of selling price in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service were sold on a standalone basis. We determine ESP for a product or service by using historical selling prices which reflect multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through consultation with and approval by management. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve changes may occur in ESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.
For sales arrangements that include equipment lease along with other products or services, revenue is allocated to the different elements based on the Revenue Recognition for Multiple Element Arrangements. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a capital (sales-type) lease using lease classification guidance.
Deferred revenue. Deferred revenue represents the amount that is allocated to undelivered elements in multiple element arrangements. We limit the revenue recognized to the amount that is not contingent on the future delivery of products or services or meeting other specified performance conditions.
Accounts receivable, net. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable has been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on customer specific experience and the aging of such receivables, among other factors. The allowance for doubtful accounts as of October 31, 2016 and 2015 was not material.
We do not have any off-balance-sheet credit exposure related to our customers. Accounts receivable are also recorded net of product returns.
Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue, and the associated expense is recorded in cost of products for all periods presented.
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. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based on estimates about future demand. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our excess inventory review process includes analysis of sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory.
Goodwill and purchased intangible assets. Under the authoritative guidance we have the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The accounting standard gives an entity the option to first assess qualitative factors to determine whether performing the two-step test is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not (i.e. greater than 50% chance) that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test will be required. Otherwise, no further testing will be required.
The guidance includes examples of events and circumstances that might indicate that a reporting unit's fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity's operating environment or industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events such as an expectation that a reporting unit will be sold or a sustained decrease in the stock price on either an absolute basis or relative to peers.
If it is determined, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the provisions of authoritative guidance require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. The second step (if necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets and liabilities within each reporting unit. As defined in the authoritative guidance, a reporting unit is an operating segment, or one level below an operating segment. We aggregate components of an operating segment that have similar economic characteristics into our reporting units.
In fiscal year 2016, we assessed goodwill impairment for our three reporting units which consisted of three segments: life sciences and applied markets, diagnostics and genomics and Agilent CrossLab. We performed a qualitative test for goodwill impairment of the three reporting units, as of September 30, 2016. Based on the results of our qualitative testing, we believe that it is more-likely-than-not- that the fair value of these reporting units are greater than their respective carrying values. Each quarter we review the events and circumstances to determine if goodwill impairment is indicated. There was no impairment of goodwill during the years ended October 31, 2016, 2015 and 2014.
Purchased intangible assets consist primarily of acquired developed technologies, proprietary know-how, trademarks, and customer relationships and are amortized using the best estimate of the asset's useful life that reflect the pattern in which the economic benefits are consumed or used up or a straight-line method ranging from 6 months to 15 years. In-process research and development ("IPR&D") is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Agilent will record a charge for the value of the related intangible asset to Agilent's consolidated statement of operations in the period it is abandoned.
Agilent's indefinite-lived intangible assets are IPR&D intangible assets. The accounting guidance allows a qualitative approach for testing indefinite-lived intangible assets for impairment, similar to the issued impairment testing guidance for goodwill and allows the option to first assess qualitative factors (events and circumstances) that could have affected the significant inputs used in determining the fair value of the indefinite-lived intangible asset to determine whether it is more-likely-than-not (i.e. greater than 50% chance) that the indefinite-lived intangible asset is impaired. An organization may choose to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to calculating its fair value. We performed a qualitative test for impairment of indefinite-lived intangible assets as of September 30, 2016. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of these indefinite-lived intangible assets is greater than their respective carrying values. Each quarter we review the events and circumstances to determine if impairment of indefinite-lived intangible asset is indicated. Based on triggering events in the years ended October 31, 2016, 2015 and 2014, we recorded an impairment of $4 million, $3 million and $4 million, respectively due to the cancellation of certain IPR&D projects. In addition,
in the year ended October 31, 2014, we also recorded $12 million of impairment of other intangibles due to the exit of our NMR business.
Share-based compensation. For the years ended 2016, 2015 and 2014, we accounted for share-based awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our Employee Stock Purchase Plan ("ESPP") and performance share awards under Agilent Technologies, Inc. Long-Term Performance Program ("LTPP") using the estimated grant date fair value method of accounting. Under the fair value method, we recorded compensation expense, in continuing operations, for all share-based awards of $60 million in 2016, $55 million in 2015 and $59 million in 2014. For the stock option grants in 2015 and long term performance plan grants in 2016 and 2015 we used a volatility measure derived from a selection of our peer companies. In prior periods, we used Agilent stock historical volatility. We currently consider this method to not be reflective of our future volatility due to the separation of Keysight. See Note 4, "Share-based compensation" for additional information.
Retirement and post-retirement plans. Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees. Assumptions used to determine the benefit obligations and the expense for these plans are derived annually. See Note 13, “Retirement plans and post-retirement pension plans” for additional information.
Taxes on income. Income tax expense or benefit is based on income or loss before taxes. 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. See Note 5, "Income Taxes" for more information.
Warranty. Our standard warranty terms typically extend for one year from the date of delivery. We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product revenue. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. See Note 14, "Guarantees".
Advertising. Advertising costs are generally expensed as incurred and amounted to $30 million in 2016, $25 million in 2015 and $31 million in 2014.
Research and development. Costs related to research, design and development of our products are charged to research and development expense as they are incurred.
Sales taxes. Sales taxes collected from customers and remitted to governmental authorities are not included in our revenue.
Net income per share. Basic net income per share is computed by dividing net income - the numerator - by the weighted average number of common shares outstanding - the denominator - during the period excluding the dilutive effect of stock options and other employee stock plans. Diluted net income per share gives effect to all potential common shares outstanding during the period unless the effect is anti-dilutive. The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense are assumed proceeds to be used to repurchase hypothetical shares. See Note 6, "Net Income Per Share".
Cash, cash equivalents and short term investments. We classify investments as cash equivalents if their original or remaining maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.
As of October 31, 2016, approximately $2,181 million of our cash and cash equivalents is held outside of the U.S. in our foreign subsidiaries. Under current tax laws, the cash could be repatriated to the U.S. but most of it would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. Our cash and cash equivalents mainly consist of short term deposits held at major global financial institutions, institutional money market funds, and similar short duration instruments with original maturities of 90 days or less. We continuously monitor the creditworthiness of the financial institutions and institutional money market funds in which we invest our funds.
We classify investments as short-term investments if their original maturities are greater than three months and their remaining maturities are one year or less. Currently, we have no short-term investments.
Variable interest entities. We make a determination upon entering into an arrangement whether an entity in which we have made an investment is considered a Variable Interest Entity (“VIE”). The company evaluates its investments in privately held companies on an ongoing basis. We have determined that as of October 31, 2016 there were no VIE’s required to be consolidated in the company’s consolidated financial statements because we do not have a controlling financial interest in any of the VIE’s that we have invested in nor are we the primary beneficiary. We account for these investments under either the equity or cost method, depending on the circumstances. We periodically reassess whether we are the primary beneficiary of a VIE. The reassessment process considers whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. We also reconsider whether entities previously determined not to be VIEs have become VIEs, based on changes in facts and circumstances including changes in contractual arrangements and capital structure. During 2016, we wrote down an equity method investment to its fair value of zero, resulting in an impairment charge of $18 million. In addition, we recorded an impairment of $7 million of uncollectible loans related to this equity method investment. As of October 31, 2016, the carrying value of our investments in VIE’s was $80 million with a maximum exposure of $80 million. The investments are included on the long term investments line of the consolidated balance sheet.
During the year ended October 31, 2016, Agilent made a preferred stock investment in Lasergen for $80 million. Agilent’s initial ownership stake was 48 percent and we have also joined the board of Lasergen and signed a collaboration agreement. We have the option to acquire all of the remaining shares of Lasergen until March 2, 2018, for additional consideration of $105 million. Lasergen is a VIE, however, we do not consolidate the entity in our financial statements because we do not have the power to direct the activities of the VIE that most significantly impact the VIE's economic performance. Because of the nature of the preferred stock of Lasergen that we own, we account for this investment under the cost method. As of October 31, 2016, both the carrying value and maximum exposure of the Lasergen investment was $80 million. The maximum exposure is equal to the carrying value because we do not have future funding commitments.
Fair value of financial instruments. The carrying values of certain of our financial instruments including cash and cash equivalents, accounts receivable, accounts payable, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair value of long-term equity investments is determined using quoted market prices for those securities when available. For those long-term equity investments accounted for under the cost or equity method, their carrying value approximates their estimated fair value. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid. The fair value of our long-term debt, calculated from quoted prices which are primarily Level 1 inputs under the accounting guidance fair value hierarchy, exceeds the carrying value by approximately $96 million and $30 million as of October 31, 2016 and 2015, respectively. The fair value of foreign currency contracts used for hedging purposes is estimated internally by using inputs tied to active markets. These inputs, for example, interest rate yield curves, foreign exchange rates, and forward and spot prices for currencies are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. See also Note 11, "Fair Value Measurements" for additional information on the fair value of financial instruments.
Concentration of credit risk. Financial instruments that potentially subject Agilent to significant concentration of credit risk include money market fund investments, time deposits and demand deposit balances. These investments are categorized as cash and cash equivalents. In addition, Agilent has credit risk from derivative financial instruments used in hedging activities and accounts receivable. We invest in a variety of financial instruments and limit the amount of credit exposure with any one financial institution. We have a comprehensive credit policy in place and credit exposure is monitored on an ongoing basis.
Credit risk with respect to our accounts receivable is diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount and we sell the majority of our products through our direct sales force. Credit risk is mitigated through collateral such as letter of credit, bank guarantees or payment terms like cash in advance. No single customer accounted for more than 10 percent of combined accounts receivable as of October 31, 2016, or 2015.
Derivative instruments. Agilent is exposed to global foreign currency exchange rate and interest rate risks in the normal course of business. We enter into foreign exchange hedging contracts, primarily forward contracts and purchased options and, in the past, interest rate swaps to manage financial exposures resulting from changes in foreign currency exchange rates and interest rates. In the vast majority of cases, these contracts are designated at inception as hedges of the related foreign currency or interest exposures. Foreign currency exposures include committed and anticipated revenue and expense transactions and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary. Interest rate exposures are associated with the company's fixed-rate debt. For option contracts, we exclude time value from the measurement of effectiveness. To qualify for hedge accounting, contracts must reduce the foreign currency exchange rate and interest rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management policies; foreign exchange hedging contracts generally mature within twelve months and interest rate swaps, if any, mature at the same time as the maturity
of the debt. In order to manage foreign currency exposures in a few limited jurisdictions we may enter into foreign exchange contracts that do not qualify for hedge accounting. In such circumstances, the local foreign currency exposure is offset by contracts owned by the parent company. We do not use derivative financial instruments for speculative trading purposes.
All derivatives are recognized on the balance sheet at their fair values. For derivative instruments that are designated and qualify as a fair value hedge, changes in value of the derivative are recognized in the consolidated statement of operations in the current period, along with the offsetting gain or loss on the hedged item attributable to the hedged risk. For derivative instruments that are designated and qualify as a cash flow hedges, changes in the value of the effective portion of the derivative instrument is recognized in comprehensive income (loss), a component of stockholders' equity. Amounts associated with cash flow hedges are reclassified and recognized in income when either the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. Derivatives not designated as hedging instruments are recorded on the balance sheet at their fair value and changes in the fair values are recorded in the income statement in the current period. Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet. Changes in the fair value of the ineffective portion of derivative instruments are recognized in earnings in the current period. Ineffectiveness in 2016, 2015 and 2014 was not material. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities.
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. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger, and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated over the lesser of their useful lives or the remaining term of the lease and machinery and equipment over three to ten years. We use the straight-line method to depreciate assets.
Leases. We lease buildings, machinery and equipment under operating leases for original terms ranging generally from one year to twenty years. Certain leases contain renewal options for periods up to six years. In addition, we lease equipment to customers in connection with our diagnostics business using both capital and operating leases. As of October 31, 2016 and 2015 our diagnostics and genomics segment has approximately $15 million and $11 million, respectively, of lease receivables related to capital leases and approximately $23 million and $31 million, respectively, of net assets for operating leases. We depreciate the assets related to the operating leases over their estimated useful lives.
Capitalized software. We capitalize certain internal and external costs incurred to acquire or create internal use software. Capitalized software is included in property, plant and equipment and is depreciated over three to five years once development is complete.
Impairment of long-lived assets. We continually monitor 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 occur, we assess 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 undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Employee compensation and benefits. Amounts owed to employees, such as accrued salary, bonuses and vacation benefits are accounted for within employee compensation and benefits. The total amount of accrued vacation benefit was $92 million and $86 million as of October 31, 2016, and 2015, respectively.
Foreign currency translation. We translate and remeasure balance sheet and income statement items into U.S. dollars. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates at the balance sheet date; revenue and expenses are translated using monthly exchange rates which approximate to average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity.
For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for non-monetary assets and capital accounts which are remeasured at historical exchange rates. Revenue and expenses are generally remeasured at monthly exchange rates which approximate average exchange rates in effect during each period. Gains or losses from foreign currency remeasurement are included in consolidated net income. Net gains or losses resulting from foreign currency transactions, including hedging gains and losses, are reported in other income (expense), net and was $5 million loss for fiscal year 2016, $9 million loss for 2015 and $4 million loss for 2014, respectively.
- NEW ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-17 Balance Sheet Classification of Deferred Taxes, to simplify accounting for deferred taxes. Beginning on November 1, 2017 and including the interim periods following that date, we will be required to present all deferred tax balances as non-current. Existing GAAP guidance requires us to record deferred tax balances as either current or non-current in accordance with the classification of the underlying attributes. Early adoption of this guidance is permitted and may be applied either prospectively or retrospectively to all periods presented. We adopted this guidance at the end of the period ended April 30, 2016 prospectively and therefore, the October 31, 2016 consolidated balance sheet reflects the new disclosure requirements but prior periods have not been adjusted.
In March 2016, the FASB issued ASU 2016-09 Improvements to Employee Share-Based Payment Accounting, that changes the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. In addition, cash flows related to excess tax benefits will no longer be separately classified as a financing activity apart from other income tax cash flows. The standard also allows us to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flows statement, and provides an accounting policy election to account for forfeitures as they occur. The amendments also remove the requirement to delay the recognition of an excess tax benefit until it reduces current taxes payable. Under the new guidance the benefit will be recorded when it arises with a cumulative effect adjustment to opening retained earnings for previously unrecognized benefits. The new guidance is effective for us beginning November 1, 2017. We elected to early adopt the new guidance in the third quarter of fiscal year 2016, on a retrospective basis.
The impact of adoption was the recognition of tax shortfalls of $2 million in our provision for income taxes for fiscal year 2016. Additional amendments to the accounting for income taxes was the recognition of the windfall tax benefits as a cumulative effect adjustment to opening retained earnings of $196 million together with an increase in deferred tax assets included in other assets of $98 million, an increase in additional paid in capital of $4 million, a reduction in other accrued liabilities of $1 million and a decrease of $99 million in other long term liabilities. There was no impact from minimum statutory withholding tax requirements to retained earnings as of November 1, 2015. We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The adoption of the new guidance did not have a significant impact on the calculation of diluted weighted average shares.
We elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively to all periods presented. The presentation requirements for cash flows impacted our previously reported consolidated statement of cash flows for fiscal years 2015 and 2014 as follows:
| Year Ended October 31, 2015 | Year Ended October 31, 2014 | ||||||||||||||
| As Reported | As Adjusted | As Reported | As Adjusted | ||||||||||||
| (in millions) | |||||||||||||||
| Consolidated Statement of Cash Flows: | |||||||||||||||
| Net cash provided by operating activities | $ | 491 | $ | 512 | $ | 711 | $ | 731 | |||||||
| Net cash used in financing activities | $ | (1,068 | ) | $ | (1,089 | ) | $ | (97 | ) | $ | (117 | ) |
New Accounting Pronouncements Not Yet Adopted
In April 2014, the FASB issued amendments to the guidance on discontinued operations. The guidance changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, expenses of discontinued operations and of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for
discontinued operations reporting. The new guidance is effective for Agilent prospectively for all disposals (or classifications as held for sale) of components of an entity that occur after November 1, 2016.
The disposal of Keysight meets the definition of a discontinued operation under both the existing and amended accounting guidance. The historical results of operations and the financial position of Keysight are included in the consolidated financial statements of Agilent and are reported as discontinued operations within this Form 10-K.
In May 2014, the FASB issued amendments to the accounting guidance related to revenue recognition, Topic 606, Revenue from contracts with customers. The objective of the amendments was to significantly enhance comparability and clarify principles of revenue recognition practices across entities, industries, jurisdictions and capital markets. In July 2015, the FASB amended the effective date. In March 2016, the FASB clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB clarified certain aspects of identifying performance obligations and licensing implementation guidance. In May 2016, the FASB provided additional guidance related to disclosure of remaining performance obligations, as well as other amendments to guidance on collectibility, non-cash consideration and the presentation of sales and other similar taxes collected from customers. The amendments are effective for us beginning fiscal 2019. Early adoption is permitted for us beginning November 1, 2017. The company expects to adopt this guidance on November 1, 2018. We are currently in the assessment phase to determine the adoption method and are evaluating the impact of these amendments on our consolidated financial statements and disclosures.
In April 2015, the FASB issued amendments to simplify the presentation of debt issuance costs. The amendments require that debt issuance costs related to a recognized debt liability to presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs remain unchanged. The amendments are effective for us beginning November 1, 2016, and for interim periods within that year. We do not expect the impact of adopting the amendments to be material on our consolidated financial statements and disclosures.
In September 2015, the FASB issued guidance intended to simplify accounting for adjustments to provisional amounts recorded in connection with business combinations. Beginning in November 1, 2017 and in the interim periods from November 1, 2018, adjustments will be recorded in the period that they are determined rather than applied retrospectively via revision to the period of acquisition and each period thereafter. We do not expect this guidance to have a material impact on our consolidated financial statements and disclosures.
In January 2016, the FASB issued amendments to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The provisions under this amendment are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is not permitted. We are evaluating the impact of adopting this guidance on our consolidated financial statements and disclosures.
In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. The new guidance is effective for us beginning November 1, 2020, and for interim periods within that year. Early adoption is permitted and we will be required to adopt using a modified retrospective approach. We are evaluating the timing of adoption and the impact of this guidance on our consolidated financial statements and disclosures.
In March 2016, the FASB issued amendments to simplify the transition to the equity method of accounting. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments are effective for us beginning November 1, 2017, and for interim periods within that year. We currently do not expect material impact of this amendment on our consolidated financial statements and disclosures.
In August 2016, the FASB issued amendments to address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is permitted. If we decide to early adopt the amendments, we will be required to adopt all of the amendments in the same period. We are evaluating the timing of our adoption and the impact of the amendments on our consolidated statement of cash flows and disclosures.
In October 2016, the FASB issued amendments to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is permitted and should be applied on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning of the period of adoption. We are evaluating the timing of our adoption and the impact of the amendments on our consolidated financial statements and disclosures.
In November 2016, the FASB issued amendments to require amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for us beginning November 1, 2018, and for interim periods within that year. Early adoption is permitted. We are evaluating the timing of our adoption and the impact of the amendments on our consolidated statement of cash flows and disclosures.
Other amendments to GAAP in the U.S. that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
- DISCONTINUED OPERATIONS
On September 19, 2013, Agilent announced its intention to separate its electronic measurement business, Keysight, which was previously a separate reportable segment, into a stand-alone publicly traded company. Keysight was incorporated in Delaware as a wholly-owned subsidiary of Agilent on December 6, 2013. On November 1, 2014, we completed the distribution of 100% of the outstanding common stock of Keysight to Agilent stockholders, who received one share of Keysight common stock for every two shares of Agilent common stock held as of the close of business on the record date, October 22, 2014. The separation agreement ensured that Keysight had approximately $700 million of total cash and cash equivalents immediately following distribution. For the year ended October 31, 2015, we transferred a total amount of cash and cash equivalents of $734 million to Keysight.
The historical results of operations and statement of financial position of Keysight have been presented as discontinued operations in the consolidated financial statements and prior periods have been restated. Discontinued operations include results of Keysight's business except for certain allocated corporate overhead costs and certain costs associated with transition services provided by Agilent to Keysight. Discontinued operations also includes other costs incurred by Agilent to separate Keysight. These costs include transaction charges, advisory and consulting fees and information system expenses.
The following table summarizes results from discontinued operations of Keysight included in the consolidated statement of operations:
| Years Ended October 31, | ||||||||
| 2015 | 2014 | |||||||
| (in millions) | ||||||||
| Net revenue | $ | — | $ | 2,933 | ||||
| Costs and expenses | 39 | 2,521 | ||||||
| Operating income (loss) | (39 | ) | 412 | |||||
| Other income (expense), net | — | 5 | ||||||
| Income (loss) from discontinued operations before tax | (39 | ) | 417 | |||||
| Provision (benefit) for income taxes | (2 | ) | 100 | |||||
| Net income (loss) from discontinued operations | $ | (37 | ) | $ | 317 |
Net income (loss) from discontinued operations includes transaction, information systems and other costs to effect the separation of $39 million and $178 million for the years ended October 31, 2015 and 2014, respectively. In the year ended October 31, 2015 only those costs incurred to effect the separation have been included. No income or expense has been recorded for the Keysight business after separation from Agilent on November 1, 2014.
In addition, $332 million of accumulated other comprehensive loss, net of income taxes, primarily related to pension and other post-retirement benefits plans and currency translation was also transferred to Keysight together with $28 million of additional paid in capital related to share based compensation windfall tax benefits. The removal of Keysight net assets and equity related adjustments is presented as a reduction in Agilent's retained earnings and represents a non cash financing activity excluding cash
transferred. See Note 5 “Income Taxes” for tax implications and adjustments due to the distribution and Note 4 “Share Based Compensation” for changes to share based compensation awards as a result of the distribution of Keysight.
Under the terms of the Transition Services Agreement, we agreed to provide administrative, site services, information technology systems and various other corporate and support services to Keysight over the period of 12-18 months after the separation on a cost or cost-plus basis. The most significant component of the service income is the provision of IT services that was completed by the end of the second quarter of 2015. In total we recorded income for all services provided to Keysight of approximately $12 million in fiscal year 2015. In addition, Agilent expects to receive lease income together with site service income from Keysight over the next 3-4 years of approximately $12 million per year. In the year ended October 31, 2016 and 2015 other income (expense), net includes $12 million and $25 million of income in respect of the provision of services to, and lease income from Keysight.
- SHARE-BASED COMPENSATION
Agilent accounts for share-based awards in accordance with the provisions of the accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our ESPP and performance share awards granted to selected members of our senior management under the LTPP based on estimated fair values.
Description of Share-Based Plans
Employee stock purchase plan. Effective November 1, 2000, we adopted the ESPP. The ESPP allows eligible employees to contribute up to ten percent of their base compensation to purchase shares of our common stock at 85 percent of the closing market price at purchase date. Shares authorized for issuance in connection with the ESPP are subject to an automatic annual increase of the lesser of one percent of the outstanding shares of common stock of Agilent on November 1, or an amount determined by the Compensation Committee of our Board of Directors. Under the terms of the ESPP, in no event shall the number of shares issued under the ESPP exceed 75 million shares.
Under our ESPP, employees purchased 696,178 shares for $23 million in 2016, 346,472 shares for $12 million in 2015 and 1,604,406 shares for $73 million in 2014. As of October 31, 2016, the number of shares of common stock authorized and available for issuance under our ESPP was 45,168,192.
Incentive compensation plans. On November 19, 2008 and March 11, 2009, the Compensation Committee of Board of Directors and the stockholders, respectively, approved the Agilent Technologies, Inc. 2009 Stock Plan (the "2009 Stock Plan") to replace the Company's 1999 Stock Plan and 1999 Stock Non-Employee Director Stock Plan and subsequently reserved 25 million shares of Company common stock that may be issued under the 2009 Plan, plus any shares forfeited or cancelled under the 1999 Stock Plan. The 2009 Stock Plan provides for the grant of awards in the form of stock options, stock appreciation rights ("SARs"), restricted stock, restricted stock units ("RSUs"), performance shares and performance units with performance-based conditions on vesting or exercisability, and cash awards. The 2009 Plan has a term of ten years. As of October 31, 2016, 10,316,082 shares were available for future awards under the 2009 Stock Plan.
Stock options granted under the 2009 Stock Plans 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 and generally have a maximum contractual term of ten years. The exercise price for stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted. No options were granted during the year ended October 31, 2016.
Effective November 1, 2003, the Compensation Committee of the Board of Directors approved the LTPP, which is a performance stock award program administered under the 2009 Stock Plan, for the company's executive officers and other key employees. Participants in this program are entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets are met. Certain LTPP awards are generally designed to meet the criteria of a performance award with the performance metrics and peer group comparison based on the Total Stockholders’ Return (“TSR”) set at the beginning of the performance period. Effective November 1, 2015, the Compensation Committee of the Board of Directors approved another type of performance stock award, for the company's executive officers and other key employees. Participants in this program are also entitled to receive unrestricted shares of the company's stock after the end of a three-year period, if specified performance targets based on Operating Margin (“OM”) over the three-year period are met. All LTPP awards granted after November 1, 2015, are subject to a one-year post-vest holding period.
Based on the performance metrics the final LTPP award may vary from zero to 200 percent of the target award. The maximum contractual term for awards under the LTPP program is three years and the maximum award value cannot exceed 300 percent of the grant date target value. We consider the dilutive impact of these programs in our diluted net income per share calculation only to the extent that the performance conditions are expected to be met.
We also issue restricted stock units under our share-based plans. The estimated fair value of the restricted stock unit awards granted under the Stock Plans is determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield. Restricted stock units generally vest, with some exceptions, at a rate of 25 percent per year over a period of four years from the date of grant.
In connection with the separation of Keysight Technologies on November 1, 2014 and in accordance with the Employee Matters Agreement we made certain adjustments to the exercise price and number of our share-based compensation awards with the intention of preserving the intrinsic value of the awards prior to the separation. Exercisable and non-exercisable stock options converted to those of the entity where the employee is working post-separation. Restricted stock units awards and long-term performance plan grants were adjusted to provide holders restricted stock units and long-term performance plan grants in the company that employs such employee following the separation. These adjustments to our stock-based compensation awards did not have a material impact on compensation expense.
Impact of Share-based Compensation Awards
We have recognized compensation expense based on the estimated grant date fair value method under the authoritative guidance. For all share-based awards we have recognized compensation expense using a straight-line amortization method. As the guidance requires that share-based compensation expense be based on awards that are ultimately expected to vest, estimated share-based compensation has been reduced for estimated forfeitures.
The impact on our results for share-based compensation was as follows:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Cost of products and services | $ | 14 | $ | 11 | $ | 13 | |||||
| Research and development | 6 | 5 | 7 | ||||||||
| Selling, general and administrative | 40 | 39 | 39 | ||||||||
| Share-based compensation expense in continuing operations | 60 | 55 | 59 | ||||||||
| Share-based compensation expense in discontinued operations | — | — | 39 | ||||||||
| Total share-based compensation expense | $ | 60 | $ | 55 | $ | 98 |
At October 31, 2016 and 2015 there was no share-based compensation capitalized within inventory. The weighted average grant date fair value of options, granted in 2015 and 2014 was $10.58 and $18.73 per share, respectively. No stock options were granted in 2016.
Included in the 2016, 2015 and 2014 expense is incremental expense for acceleration of share-based compensation related to the announced workforce reduction plan of zero, $2 million and $1 million, respectively. Upon termination of the employees impacted by workforce reduction, the non-vested Agilent awards held by these employees immediately vests. Employees have a period of up to three months in which to exercise the Agilent options before such options are cancelled.
Valuation Assumptions
For all periods presented, the fair value of share based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. For all periods presented, shares granted under the LTPP (TSR) were valued using a Monte Carlo simulation. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the fair market value at the purchase date.
The estimated fair value of restricted stock unit awards and LTPP (OM) was determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield and as appropriate, a discount related to the one-year post vesting. The compensation cost for LTPP (OM) reflects the cost of awards that are probable to vest at the end of the performance period.
The following assumptions were used to estimate the fair value of employee stock options and LTPP grants.
| Years Ended October 31, | ||||||
| 2016 | 2015 | 2014 | ||||
| Stock Option Plans: | ||||||
| Weighted average risk-free interest rate | — | 1.75% | 1.69% | |||
| Dividend yield | — | 1% | 1% | |||
| Weighted average volatility | — | 28% | 39% | |||
| Expected life | — | 5.5 years | 5.8 years | |||
| LTPP: | ||||||
| Volatility of Agilent shares | 24% | 25% | 36% | |||
| Volatility of selected peer-company shares | 14%-50% | 12%-57% | 13%-57% | |||
| Price-wise correlation with selected peers | 35% | 37% | 47% |
Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option’s expected life and the price volatility of the underlying stock. Due to the separation of Keysight on November 1, 2014, expected volatility for grants of options in 2015 was based on a 5.5 year average historical stock price volatility of a group of our peer companies. For the volatility of our 2016 and 2015 LTPP (TSR) grants, we used the 3-year average historical stock price volatility of a group of our peer companies. We believe our historical volatility prior to the separation of Keysight is no longer relevant to use. For the grants of options and LTPP (TSR) prior to November 1, 2014, the expected stock price volatility assumption was determined using the historical volatility of Agilent’s stock over the most recent historical period equivalent to the expected life of the stock options and LTPP (TSR).
All LTPP awards granted in 2016 to our senior management employees have a one-year post-vest holding restriction. The estimated discount associated with post-vest holding restrictions is calculated using the Finnerty model. The model calculates the potential lost value if the employee were able to sell the shares during the lack of marketability period, instead of being required to hold the shares. The model used the 3-year average historical stock price volatility of a group of our peer companies and an expected dividend yield to compute the discount. The grants made during 2016 have a discount of 5.5 percent while computing the fair value.
Share-based Payment Award Activity
Employee Stock Options
The following table summarizes employee stock option award activity of our employees and directors for 2016.
| Options Outstanding | Weighted Average Exercise Price | |||||
| (in thousands) | ||||||
| Outstanding at October 31, 2015 | 5,712 | $ | 31 | |||
| Granted | — | $ | — | |||
| Exercised | (1,547 | ) | $ | 25 | ||
| Cancelled/Forfeited/Expired | (59 | ) | $ | 33 | ||
| Outstanding at October 31, 2016 | 4,106 | $ | 33 |
Forfeited and expired options from total cancellations in 2016 were as follows:
| Options Cancelled | Weighted Average Exercise Price | |||||
| (in thousands) | ||||||
| Forfeited | 31 | $ | 38 | |||
| Expired | 28 | $ | 28 | |||
| Total Options Cancelled during 2016 | 59 | $ | 33 |
The options outstanding and exercisable for equity share-based payment awards at October 31, 2016 were as follows:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||||||
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | Number Exercisable | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||||||||||
| (in thousands) | (in years) | (in thousands) | (in thousands) | (in years) | (in thousands) | ||||||||||||||||||||
| $0 - 25 | 361 | 2.4 | $ | 18 | $ | 9,268 | 361 | 2.4 | $ | 18 | $ | 9,268 | |||||||||||||
| $25.01 - 30 | 1,633 | 5.0 | $ | 26 | 28,095 | 1,324 | 4.7 | $ | 26 | 22,741 | |||||||||||||||
| $30.01 - 40 | 898 | 7.1 | $ | 39 | 3,995 | 439 | 7.1 | $ | 39 | 1,957 | |||||||||||||||
| $40.01 - over | 1,214 | 8.0 | $ | 41 | 3,259 | 302 | 8.0 | $ | 41 | 815 | |||||||||||||||
| 4,106 | 6.1 | $ | 33 | $ | 44,617 | 2,426 | 5.2 | $ | 29 | $ | 34,781 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the company's closing stock price of $43.57 at October 31, 2016, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. The total number of in-the-money awards exercisable at October 31, 2016 was approximately 2.4 million.
The following table summarizes the aggregate intrinsic value of options exercised and the fair value of options granted in 2016, 2015 and 2014:
| Aggregate Intrinsic Value | Weighted Average Exercise Price | Per Share Value Using Black-Scholes Model | |||||||||
| (in thousands) | |||||||||||
| Options exercised in fiscal 2014 | $ | 98,075 | $ | 30 | |||||||
| Black-Scholes per share value of options granted during fiscal 2014 | $ | 19 | |||||||||
| Options exercised in fiscal 2015 | $ | 33,258 | $ | 24 | |||||||
| Black-Scholes per share value of options granted during fiscal 2015 | $ | 11 | |||||||||
| Options exercised in fiscal 2016 | $ | 26,913 | $ | 25 | |||||||
| Black-Scholes per share value of options granted during fiscal 2016 | $ | — |
As of October 31, 2016, the unrecognized share-based compensation costs for outstanding stock option awards, net of expected forfeitures, was approximately $2 million which is expected to be amortized over a weighted average period of 1.7 years. The amount of cash received from the exercise of share-based awards granted was $62 million in 2016, $58 million in 2015 and $188 million in 2014. See Note 5, "Income Taxes" for the tax impact on share-based award exercises.
Non-vested Awards
The following table summarizes non-vested award activity in 2016 primarily for our LTPP and restricted stock unit awards.
| Shares | Weighted Average Grant Price | |||||
| (in thousands) | ||||||
| Non-vested at October 31, 2015 | 2,417 | $ | 36 | |||
| Granted | 1,732 | $ | 40 | |||
| Vested | (607 | ) | $ | 35 | ||
| Forfeited | (94 | ) | $ | 39 | ||
| Change in LTPP shares in the year due to not meeting performance conditions | (386 | ) | $ | 28 | ||
| Non-vested at October 31, 2016 | 3,062 | $ | 40 |
As of October 31, 2016, the unrecognized share-based compensation costs for non-vested restricted stock awards, net of expected forfeitures, was approximately $45 million which is expected to be amortized over a weighted average period of 2.5 years. The total fair value of restricted stock awards vested was $21 million for 2016, $31 million for 2015 and $54 million for 2014.
In the third quarter of fiscal year 2016, the company elected to early adopt new guidance that changes the accounting for certain aspects of share-based payments to employees. For additional details related to the new guidance see Note 2, "New Accounting Pronouncements."
- INCOME TAXES
The domestic and foreign components of income from continuing operations before taxes are:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| U.S. operations | $ | 27 | $ | 77 | $ | (72 | ) | ||||
| Non-U.S. operations | 517 | 403 | 301 | ||||||||
| Total income from continuing operations before taxes | $ | 544 | $ | 480 | $ | 229 |
The provision (benefit) for income taxes is comprised of:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| U.S. federal taxes: | |||||||||||
| Current | $ | (1 | ) | $ | (91 | ) | $ | 17 | |||
| Deferred | 19 | 97 | (80 | ) | |||||||
| Non-U.S. taxes: | |||||||||||
| Current | 77 | 62 | 176 | ||||||||
| Deferred | (14 | ) | (27 | ) | (111 | ) | |||||
| State taxes, net of federal benefit: | |||||||||||
| Current | 3 | 1 | — | ||||||||
| Deferred | (2 | ) | — | (5 | ) | ||||||
| Total provision (benefit) | $ | 82 | $ | 42 | $ | (3 | ) |
The income tax provision (benefit) does not reflect potential future tax savings resulting from excess deductions associated with our various share-based award plans.
The significant components of deferred tax assets and deferred tax liabilities included on the consolidated balance sheet are:
| October 31, | |||||||||||||||
| 2016 | 2015 | ||||||||||||||
| Deferred Tax Assets | Deferred Tax Liabilities | Deferred Tax Assets | Deferred Tax Liabilities | ||||||||||||
| (in millions) | |||||||||||||||
| Inventory | $ | 13 | $ | — | $ | 13 | $ | — | |||||||
| Intangibles | — | 92 | — | 95 | |||||||||||
| Property, plant and equipment | 16 | — | 17 | — | |||||||||||
| Warranty reserves | 14 | — | 11 | — | |||||||||||
| Pension benefits and retiree medical benefits | 136 | — | 93 | — | |||||||||||
| Employee benefits, other than retirement | 28 | — | 26 | — | |||||||||||
| Net operating loss, capital loss, and credit carryforwards | 293 | — | 173 | — | |||||||||||
| Unremitted earnings of foreign subsidiaries | — | 53 | — | 33 | |||||||||||
| Share-based compensation | 41 | — | 39 | — | |||||||||||
| Deferred revenue | 42 | — | 41 | — | |||||||||||
| Other | 12 | — | 4 | — | |||||||||||
| Subtotal | 595 | 145 | 417 | 128 | |||||||||||
| Tax valuation allowance | (129 | ) | — | (131 | ) | — | |||||||||
| Total deferred tax assets or deferred tax liabilities | $ | 466 | $ | 145 | $ | 286 | $ | 128 |
The increase in 2016 as compared to 2015 for the deferred tax asset relating to pension benefits is due mainly to the tax effect of changes in pension plans recognized in other comprehensive income (loss). The increase in net operating losses and
tax credits is due mainly to the early adoption of Accounting Standard Update (“ASU”) 2016-09 “Improvements to Employees Share-Based Payment Accounting".
Agilent records U.S. income taxes on the undistributed earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside the U.S. As of October 31, 2016 the Company recognized a $53 million deferred tax liability for the overall residual tax expected to be imposed upon the repatriation of unremitted foreign earnings that are not considered permanently reinvested. As of October 31, 2016, the cumulative amount of undistributed earnings considered indefinitely reinvested was $5.5 billion. No deferred tax liability has been recognized on the basis difference created by such earnings since it is our intention to utilize those earnings in the company’s foreign operations. Because of the availability of U.S. foreign tax credits, the determination of the unrecognized deferred tax liability on these earnings is not practicable.
In November 2015, the FASB issued guidance to simplify accounting for deferred taxes. Beginning on November 1, 2017 and including the interim periods following that date, we will be required to present all deferred tax balances as non-current. Prior GAAP guidance required us to record deferred tax balances as either current or non-current in accordance with the classification of the underlying attributes. Early adoption of this guidance was permitted and could be applied either prospectively or retrospectively to all periods presented. We adopted this guidance at the end of the period ended April 30, 2016 prospectively. Therefore, the October 31, 2016 consolidated balance sheet reflects the new disclosure requirements but prior periods have not been adjusted.
The breakdown between current and long-term deferred tax assets and deferred tax liabilities was as follows for the years 2016 and 2015:
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Current deferred tax assets (included within other current assets) | $ | — | $ | 84 | |||
| Long-term deferred tax assets (included within other assets) | 386 | 180 | |||||
| Current deferred tax liabilities (included within other accrued liabilities) | — | (10 | ) | ||||
| Long-term deferred tax liabilities (included within other long-term liabilities) | (65 | ) | (96 | ) | |||
| Total | $ | 321 | $ | 158 |
Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. As of October 31, 2016, we continued to maintain a valuation allowance of $129 million until sufficient positive evidence exists to support reversal. The valuation allowance is mainly related to deferred tax assets for California R&D credits, net operating losses in the Netherlands and capital losses in the U.S. and Australia.
At October 31, 2016, we had federal net operating loss carryforwards of approximately $19 million and $142 million tax credit carryforwards. The federal net operating losses expire in years beginning 2020 through 2034. At October 31, 2016, we had state net operating loss carryforwards of approximately $200 million which expire in years beginning 2017 through 2033, if not utilized. In addition, we had net state tax credit carryforwards of $36 million that do not expire. All of the federal and some of the state net operating loss carryforwards are subject to change of ownership limitations provided by the Internal Revenue Code and similar state provisions. At October 31, 2016, we also had foreign net operating loss carryforwards of approximately $296 million. Of this foreign loss, $148 million will expire in years beginning 2017 through 2026, if not utilized. The remaining $148 million has an indefinite life. Some of the foreign losses are subject to annual loss limitation rules. These annual loss limitations in the U.S. and foreign jurisdictions may result in the expiration or reduced utilization of the net operating losses.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued amendments that change the accounting for certain aspects of share-based payments to employees. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Under the new guidance the benefit will be recorded when it arises with a cumulative effect adjustment to opening retained earnings for previously unrecognized benefits. The new guidance is effective for us beginning November 1, 2017, with early adoption permitted. We elected to early adopt the new guidance in the third quarter of fiscal year 2016, on a retrospective basis, which required us to reflect any adjustments as of November 1, 2015, the beginning of the annual period that includes the interim period of adoption. The impact of adoption on previously reported quarterly results was the recognition of tax shortfalls of $2 million in our provision for income taxes for the first quarter of fiscal year 2016. Additional amendments to the accounting for income taxes on previously reported quarterly results was the recognition of the windfall tax benefits as a cumulative effect adjustment to opening retained earnings of $196 million together with an increase in deferred tax assets included in other assets of $98 million, an increase in additional paid in
capital of $4 million, a reduction in other accrued liabilities of $1 million and a decrease of $99 million in other long term liabilities. See Note 2 "New Accounting Pronouncements" for additional information.
The differences between the U.S. federal statutory income tax rate and our effective tax rate are:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Profit before tax times statutory rate | $ | 190 | $ | 167 | $ | 80 | |||||
| State income taxes, net of federal benefit | 2 | (8 | ) | (7 | ) | ||||||
| Non-U.S. income taxed at different rates | (68 | ) | (72 | ) | (39 | ) | |||||
| Change in unrecognized U.S. tax benefits | (27 | ) | (116 | ) | (111 | ) | |||||
| Repatriation of foreign earnings | — | 68 | 75 | ||||||||
| Valuation allowances | 18 | (2 | ) | 2 | |||||||
| Adjustments to earnings of foreign subsidiaries | (11 | ) | — | — | |||||||
| Adjustment to income taxes payable | — | — | (6 | ) | |||||||
| Other, net | (22 | ) | 5 | 3 | |||||||
| Provision (benefit) for income taxes | $ | 82 | $ | 42 | $ | (3 | ) | ||||
| Effective tax rate | 15.1 | % | 8.7 | % | (1.3 | )% |
Agilent enjoys tax holidays in several different jurisdictions, most significantly in Singapore. The tax holidays provide lower rates of taxation on certain classes of income and require various thresholds of investments and employment or specific types of income in those jurisdictions. The tax holidays are due for renewal between 2018 and 2023. As a result of the incentives, the impact of the tax holidays decreased income taxes by $86 million, $65 million, and $27 million in 2016, 2015, and 2014, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $0.26, $0.19, and $0.08 in 2016, 2015 and 2014, respectively.
For 2016, the company’s effective tax rate from continuing operations was 15.1%. The income tax expense from continuing operations was $82 million. The income tax provision from continuing operations for the year ended October 31, 2016 included net discrete tax expense of $17 million. The net discrete tax expense for the year ended October 31, 2016 included $5 million of tax benefit for the extension of the U.S. research and development tax credit attributable to the company's prior fiscal year, $6 million of tax expense related to the curtailment gain recognized with respect to the U.S. retirement plan and Supplemental Benefits Plan, $18 million of tax expense related to the establishment of a valuation allowance on an equity method impairment that would generate a capital loss when realized, and a net $2 million of other discrete tax benefit. Included in the net $2 million discrete tax benefit are $9 million of out-of-period correcting tax expense entries recorded in the second and fourth quarters of fiscal year 2016 associated with German return-to-provision corrections. These are offset by an $11 million out-of-period correcting tax benefit associated with an adjustment to the deferred tax liability for unremitted foreign earnings. The out-of-period corrections were determined to be immaterial to the previously issued and current period financial statements.
For 2015, the company’s effective tax rate from continuing operations was 8.7 percent. The income tax expense from continuing operations was $42 million. The income tax expense from continuing operations for the year ended October 31, 2015 included net discrete tax benefits of $55 million primarily due to the settlement of an Internal Revenue Service (“IRS) audit in the U.S. and the recognition of tax expense related to the repatriation of dividends.
For 2014, the company's effective tax rate from continuing operations was (1.3) percent. The income tax benefit from continuing operations was $3 million. The income tax benefit for the year ended October 31, 2014 included a net discrete benefit of $33 million Internal Revenue Service ("IRS") audit in the U.S. and the recognition of tax expense related to the repatriation of dividends.
The breakdown between current and long-term income tax assets and liabilities, excluding deferred tax assets and liabilities, was as follows for the years 2016 and 2015:
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Current income tax assets (included within other current assets) | $ | 83 | $ | 104 | |||
| Long-term income tax assets (included within other assets) | 19 | 20 | |||||
| Current income tax liabilities (included within other accrued liabilities) | (49 | ) | (62 | ) | |||
| Long-term income tax liabilities (included within other long-term liabilities) | (190 | ) | (227 | ) | |||
| Total | $ | (137 | ) | $ | (165 | ) |
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although the guidance on the accounting for uncertainty in income taxes prescribes the use of a recognition and measurement model, the determination of whether an uncertain tax position has met those thresholds will continue to require significant judgment by management. In accordance with the guidance on the accounting for uncertainty in income taxes, for all U.S. and other tax jurisdictions, we recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes and interest will be due. The ultimate resolution of tax uncertainties may differ from what is currently estimated, which could result in a material impact on income tax expense. If our estimate of income tax liabilities proves to be less than the ultimate assessment, a further charge to expense would be required. If events occur and the payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.
The aggregate changes in the balances of our unrecognized tax benefits including all federal, state and foreign tax jurisdictions are as follows:
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Balance, beginning of year | $ | 289 | $ | 417 | $ | 512 | |||||
| Additions for tax positions related to the current year | 31 | 33 | 45 | ||||||||
| Additions for tax positions from prior years | 1 | 3 | 11 | ||||||||
| Reductions for tax positions from prior years | (27 | ) | (156 | ) | (141 | ) | |||||
| Settlements with taxing authorities | — | (4 | ) | (2 | ) | ||||||
| Statute of limitations expirations | (1 | ) | (4 | ) | (8 | ) | |||||
| Balance, end of year | $ | 293 | $ | 289 | $ | 417 |
As of October 31, 2016, we had $293 million of unrecognized tax benefits of which $271 million, if recognized, would affect our effective tax rate.
We recognized a tax expense of $2 million, a tax benefit of $2 million and a tax benefit $10 million of interest and penalties related to unrecognized tax benefits in 2016, 2015 and 2014, respectively. Interest and penalties accrued as of October 31, 2016 and 2015 were $25 million and $24 million, respectively.
On November 1, 2014, Agilent transferred deferred tax assets of $237 million, deferred tax liabilities of $37 million, current income tax payable of $40 million, and other long-term liabilities related to uncertain tax positions totaling $8 million to Keysight as part of its separation from Agilent. A current prepaid income tax asset of $19 million and long-term prepaid income tax asset of $3 million related to sales of intercompany assets was also transferred to Keysight upon separation from Agilent.
In the U.S., tax years remain open back to the year 2012 for federal income tax purposes and the year 2000 for significant states. On September 22, 2015, we reached an agreement with the Internal Revenue Service ("IRS") for the tax years 2008 through 2011. During the first quarter of 2016, we made a payment of approximately $9 million of tax plus interest as part of closing the exam. This amount was partially offset by a prepaid tax account of approximately $3 million that the IRS allowed as an offset to the $12 million in incremental taxes. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $119 million, offset by a tax liability on foreign distributions of approximately $99 million principally related to the repatriation of foreign earnings.
On January 29, 2014 we reached an agreement with the IRS for the tax years 2006 through 2007. The settlement resulted in the recognition, within the continuing operations, of previously unrecognized tax benefits of $111 million, offset by a tax liability on foreign distributions of approximately $75 million principally related to the repatriation of foreign earnings.
In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2001. With these jurisdictions and the U.S., it is reasonably possible that there could be significant changes to our unrecognized tax benefits in the next twelve months due to either the expiration of a statute of limitation or a tax audit settlement which will be partially offset by an anticipated tax liability related to unremitted foreign earnings, where applicable. Given the number of years and numerous matters that remain subject to examination in various tax jurisdictions, management is unable to estimate the range of possible changes to the balance of our unrecognized tax benefits.
On July 27, 2015, the U.S. Tax Court issued an opinion in Altera Corp. v. Commissioner related to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was entered by the U.S. Tax Court on December 1, 2015. At this time, the U.S. Department of the Treasury has not withdrawn the requirement from its regulations to include stock-based compensation. The IRS notified the U.S. Court of Appeals for the Ninth Circuit on February 19, 2016 of its intent to appeal the Tax Court's decision in the case. We concluded that no adjustment to our consolidated financial statements is appropriate at this time due to the uncertainties with respect to the ultimate resolution of this case.
- NET INCOME PER SHARE
The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the periods presented below.
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Numerator: | |||||||||||
| Income from continuing operations | $ | 462 | $ | 438 | $ | 232 | |||||
| Income (loss) from discontinued operations | $ | — | $ | (37 | ) | $ | 317 | ||||
| Net income | 462 | 401 | 549 | ||||||||
| Denominators: | |||||||||||
| Basic weighted average shares | 326 | 333 | 333 | ||||||||
| Potential common shares — stock options and other employee stock plans | 3 | 2 | 5 | ||||||||
| Diluted weighted average shares | 329 | 335 | 338 |
In connection with the separation of Keysight on November 1, 2014 and in accordance with the Employee Matters Agreement we made certain adjustments to the exercise price and number of our share-based compensation awards. These adjustments to our share-based awards did not have a material impact on our dilutive weighted average shares.
The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense and the dilutive effect of in-the-money options and non-vested restricted stock units. Under the treasury stock method, the amount the employee must pay for exercising stock options and unamortized share-based compensation expense collectively are assumed proceeds to be used to repurchase hypothetical shares. An increase in the fair market value of the company's common stock can result in a greater dilutive effect from potentially dilutive awards. The total number of share-based awards issued in 2016, 2015 and 2014 were 3 million, 3 million and 6 million, respectively.
We exclude stock options with exercise prices greater than the average market price of our common stock from the calculation of diluted earnings per share because their effect would be anti-dilutive. For 2016, 2015 and 2014, options to purchase 842,200, 1.2 million and 1,500 shares respectively were excluded from the calculation of diluted earnings per share. In addition, we also exclude from the calculation of diluted earnings per share, stock options, ESPP, LTPP and restricted stock awards whose combined exercise price and unamortized fair value collectively were greater than the average market price of our common stock because their effect would also be anti-dilutive. For the year ended 2016, 2015 and 2014, options to purchase 229,600, 368,900 and 383,200 shares respectively were excluded from the calculation of diluted earnings per share.
- INVENTORY
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Finished goods | $ | 339 | $ | 362 | |||
| Purchased parts and fabricated assemblies | 194 | 179 | |||||
| Inventory | $ | 533 | $ | 541 |
Inventory-related excess and obsolescence charges, included in continuing operations, of $20 million were recorded in total cost of products in 2016, $30 million in 2015 and $46 million in 2014, respectively. We record excess and obsolete inventory charges for both inventory on our site as well as inventory at our contract manufacturers and suppliers where we have non-cancellable purchase commitments.
- PROPERTY, PLANT AND EQUIPMENT, NET
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Land | $ | 53 | $ | 53 | |||
| Buildings and leasehold improvements | 757 | 705 | |||||
| Machinery and equipment | 420 | 405 | |||||
| Software | 176 | 171 | |||||
| Total property, plant and equipment | 1,406 | 1,334 | |||||
| Accumulated depreciation and amortization | (767 | ) | (730 | ) | |||
| Property, plant and equipment, net | $ | 639 | $ | 604 |
There were no asset impairments in 2016 and 2015. Asset impairments other than related to our exit of the NMR business were zero in 2014. Asset impairments in connection with the exit of the NMR business were $7 million in 2014. Depreciation expenses were $95 million in 2016, $98 million in 2015 and $120 million in 2014.
- GOODWILL AND OTHER INTANGIBLE ASSETS
The goodwill balances at October 31, 2016, 2015 and 2014 and the movements in 2016 and 2015 for each of our reportable segments are shown in the table below:
| Life Sciences and Applied Markets | Diagnostics and Genomics | Agilent CrossLab | Total | ||||||||||||
| (in millions) | |||||||||||||||
| Goodwill as of October 31, 2014 | $ | 668 | $ | 1,345 | $ | 494 | $ | 2,507 | |||||||
| Foreign currency translation impact | (18 | ) | (166 | ) | (12 | ) | (196 | ) | |||||||
| Goodwill arising from acquisitions | — | 55 | — | 55 | |||||||||||
| Goodwill as of October 31, 2015 | $ | 650 | $ | 1,234 | $ | 482 | $ | 2,366 | |||||||
| Foreign currency translation impact | 3 | (11 | ) | 3 | (5 | ) | |||||||||
| Goodwill arising from acquisitions | 137 | — | 19 | 156 | |||||||||||
| Goodwill as of October 31, 2016 | $ | 790 | $ | 1,223 | $ | 504 | $ | 2,517 |
As of September 30, 2016, we assessed goodwill impairment for our reporting units and no impairment of goodwill was indicated.
The component parts of other intangible assets at October 31, 2016 and 2015 are shown in the table below:
| Other Intangible Assets | |||||||||||
| Gross Carrying Amount | Accumulated Amortization and Impairments | Net Book Value | |||||||||
| (in millions) | |||||||||||
| As of October 31, 2015: | |||||||||||
| Purchased technology | $ | 746 | $ | 476 | $ | 270 | |||||
| Trademark/Tradename | 141 | 50 | 91 | ||||||||
| Customer relationships | 230 | 168 | 62 | ||||||||
| Total amortizable intangible assets | $ | 1,117 | $ | 694 | $ | 423 | |||||
| In-Process R&D | 22 | — | 22 | ||||||||
| Total | $ | 1,139 | $ | 694 | $ | 445 | |||||
| As of October 31, 2016: | |||||||||||
| Purchased technology | $ | 823 | $ | 572 | $ | 251 | |||||
| Backlog | 1 | 1 | — | ||||||||
| Trademark/Tradename | 149 | 61 | 88 | ||||||||
| Customer relationships | 263 | 211 | 52 | ||||||||
| Total amortizable intangible assets | $ | 1,236 | $ | 845 | $ | 391 | |||||
| In-Process R&D | 17 | — | 17 | ||||||||
| Total | $ | 1,253 | $ | 845 | $ | 408 |
In 2016, we acquired Seahorse Bioscience, a leader in providing instruments and assay kits for measuring cell metabolism and bioenergetics, for $242 million and iLab Solutions LLC ("iLab"), a cloud-based solutions provider for core laboratory management for $26 million. We have not included the pro forma impact of these acquisitions since they are not material to our current or prior period results. In 2016, we recorded additions to goodwill of $156 million and to other intangible assets of $121 million related to these acquisitions. During the year other intangible assets decreased $2 million, due to the impact of foreign exchange translation.
In 2015, we recorded additions to goodwill of $55 million and to intangible assets of $13 million related to a single acquisition of the company, Cartegenia. During the year other intangible assets decreased $58 million, due to the impact of foreign exchange translation. During 2015, we also removed the gross carrying amount of $246 million and the related accumulated amortization of fully amortized intangible assets which were no longer being used.
In addition, we recorded $4 million, $3 million and $4 million of impairments of other intangibles related to the cancellation of in-process research and development projects during 2016, 2015 and 2014, respectively.
Amortization of intangible assets was $152 million in 2016, $156 million in 2015, and $189 million in 2014.
Future amortization expense related to existing finite-lived purchased intangible assets for the next five fiscal years and thereafter is estimated below:
| Estimated future amortization expense: | |||
| (in millions) | |||
| 2017 | $ | 112 | |
| 2018 | $ | 82 | |
| 2019 | $ | 58 | |
| 2020 | $ | 47 | |
| 2021 | $ | 35 | |
| Thereafter | $ | 57 |
- INVESTMENTS
The following table summarizes the company's equity investments as of October 31, 2016 and 2015 (net book value):
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Long-Term | |||||||
| Cost method investments | $ | 104 | $ | 23 | |||
| Trading securities | 31 | 35 | |||||
| Equity method investments | — | 28 | |||||
| Total | $ | 135 | $ | 86 |
Cost method investments consist of non-marketable equity securities and a fund and are accounted for at historical cost. Approximately $80 million relates to our variable interest entity investment, see Note 1, "Overview and Summary of Significant Accounting Policies". Trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. Equity method investments are reported at the amount of the company’s initial investment and adjusted each period for the company’s share of the investee’s income or loss and dividend paid.
All of our investments, excluding trading securities, are subject to periodic impairment review. The impairment analysis requires significant judgment to identify events or circumstances that would likely have significant adverse effect on the future value of the investment. We consider various factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment, forecasted recovery, the financial condition and near-term prospects of the investee, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. During the year ended October 31, 2016, we have identified certain events and circumstances that indicates the decline in value of an equity method investment is other-than-temporary. As a result, we have written down the investment to its fair value of zero, resulting in an impairment charge of approximately $18 million.
Amounts included in other income (expense), net for the appropriate share of loss on equity method investments and other than temporary impairments were as follows:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Equity method investments - share of losses | $ | (10 | ) | $ | (9 | ) | $ | (7 | ) | ||
| Equity method investments - other than temporary impairments | (18 | ) | — | — | |||||||
| Total | $ | (28 | ) | $ | (9 | ) | $ | (7 | ) |
Net unrealized gains on our trading securities portfolio were $1 million in 2016, $2 million in 2015 and $2 million in 2014.
- FAIR VALUE MEASUREMENTS
The authoritative guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market and assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The guidance establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into three levels. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
Level 1 — applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 — applies to assets or liabilities for which there are inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, for the asset or liability such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in less active markets; or other inputs that can be derived principally from, or corroborated by, observable market data.
Level 3 — applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2016 were as follows:
| Fair Value Measurement at October 31, 2016 Using | |||||||||||||||
| October 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Assets: | |||||||||||||||
| Short-term | |||||||||||||||
| Cash equivalents (money market funds) | $ | 1,482 | $ | 1,482 | $ | — | $ | — | |||||||
| Derivative instruments (foreign exchange contracts) | 9 | — | 9 | — | |||||||||||
| Long-term | |||||||||||||||
| Trading securities | 31 | 31 | — | — | |||||||||||
| Total assets measured at fair value | $ | 1,522 | $ | 1,513 | $ | 9 | $ | — | |||||||
| Liabilities: | |||||||||||||||
| Short-term | |||||||||||||||
| Derivative instruments (foreign exchange contracts) | $ | 8 | $ | — | $ | 8 | $ | — | |||||||
| Long-term | |||||||||||||||
| Deferred compensation liability | 31 | — | 31 | — | |||||||||||
| Total liabilities measured at fair value | $ | 39 | $ | — | $ | 39 | $ | — |
Financial assets and liabilities measured at fair value on a recurring basis as of October 31, 2015 were as follows:
| Fair Value Measurement at October 31, 2015 Using | |||||||||||||||
| October 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Assets: | |||||||||||||||
| Short-term | |||||||||||||||
| Cash equivalents (money market funds) | $ | 1,411 | $ | 1,411 | $ | — | $ | — | |||||||
| Derivative instruments (foreign exchange contracts) | 4 | — | 4 | — | |||||||||||
| Long-term | |||||||||||||||
| Trading securities | 35 | 35 | — | — | |||||||||||
| Total assets measured at fair value | $ | 1,450 | $ | 1,446 | $ | 4 | $ | — | |||||||
| Liabilities: | |||||||||||||||
| Short-term | |||||||||||||||
| Derivative instruments (foreign exchange contracts) | $ | 5 | $ | — | $ | 5 | $ | — | |||||||
| Long-term | |||||||||||||||
| Deferred compensation liability | 35 | — | 35 | — | |||||||||||
| Total liabilities measured at fair value | $ | 40 | $ | — | $ | 40 | $ | — |
Our money market funds and trading securities are generally valued using quoted market prices and therefore are classified within level 1 of the fair value hierarchy. Our derivative financial instruments are classified within level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets. Our deferred compensation liability is classified as level 2 because although the values are not directly based on quoted market prices, the inputs used in the calculations are observable.
Trading securities and deferred compensation liability are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in net income. Certain derivative instruments are reported at fair value, with unrealized gains and losses, net of tax, included in stockholders' equity. Realized gains and losses from the sale of these instruments are recorded in net income.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Long-Lived Assets
For assets measured at fair value on a non-recurring basis, the following table summarizes the impairments included in net income for the years ended October 31, 2016, 2015 and 2014:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Long-lived assets held and used | $ | 4 | $ | 3 | $ | 23 | |||||
| Long-lived assets held for sale | $ | — | $ | — | $ | — |
Long-lived assets held and used with a carrying amount of $4 million were written down to their fair value of zero, resulting in an impairment charge of $4 million, which was included in net income for 2016. Long-lived assets held and used with a carrying amount of $3 million were written down to their fair value of zero, resulting in an impairment charge of $3 million, which was included in net income for 2015. Long-lived assets held and used with a carrying amount of $23 million were written down to their fair value of zero, resulting in an impairment charge of $23 million, which was included in net income for 2014.
The impairment charge in 2016 and 2015 of $4 million and $3 million, respectively, relates to IPR&D projects that were abandoned and written down to their fair value of zero. The impairment charge in 2014 includes $19 million relating to the exit of a business and $4 million related to various IPR&D projects that were abandoned and written down to their fair value of zero.
There were no impairments of long-lived assets held for sale in 2016, 2015 and 2014.
Fair values for the impaired long-lived assets were measured using level 2 inputs.
- DERIVATIVES
We are exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of our business. As part of risk management strategy, we use derivative instruments, primarily forward contracts, purchased options, and interest rate swaps, to hedge economic and/or accounting exposures resulting from changes in foreign currency exchange rates and interest rates.
Fair Value Hedges
We are exposed to interest rate risk due to the mismatch between the interest expense we pay on our loans at fixed rates and the variable rates of interest we receive from cash, cash equivalents and other short-term investments. We have issued long-term debt in U.S. dollars at fixed interest rates based on the market conditions at the time of financing. The fair value of our fixed rate debt changes when the underlying market rates of interest change, and, in the past, we have used interest rate swaps to change our fixed interest rate payments to U.S. dollar LIBOR-based variable interest expense to match the floating interest income from our cash, cash equivalents and other short term investments. As of October 31, 2016, all interest rate swap contracts had either been terminated or had expired.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented the notional amount of $400 million. On October 20, 2014 we prepaid $500 million out of $600 million principal of our 2017 senior notes and fully amortized the associated proportionate deferred gain to other income (expense). The remaining gain to be amortized related to the $100 million of 2017 senior notes at October 31, 2016 was $1 million. On August 9, 2011, we terminated five interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million. The gain to be amortized at October 31, 2016 was $15 million. All deferred gains from terminated interest rate swaps are being amortized over the remaining life of the respective senior notes.
Cash Flow Hedges
We enter into foreign exchange contracts to hedge our forecasted operational cash flow exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts, carried at fair value, have maturities between one and twelve months. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. The changes in the fair value of the effective portion of the derivative instrument are recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified to cost of sales in the consolidated statement of operations when the forecasted transaction occurs. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in other comprehensive income will be reclassified to other income (expense) in the current period. Changes in the fair value of the ineffective portion of derivative instruments are recognized in other income (expense) in the consolidated statement of operations in the current period. We record the premium paid (time value) of an option on the date of purchase as an asset. For options designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in other income (expense) over the life of the option contract. Ineffectiveness in 2016, 2015 and 2014 was not significant. For the years ended October 31, 2016, 2015 and 2014 gains and losses recognized in earnings due to de-designation of cash flow hedge contracts were not significant.
In July 2012, Agilent executed treasury lock agreements for $400 million in connection with future interest payments to be made on our 2022 senior notes issued on September 10, 2012. We designated the treasury lock as a cash flow hedge. The treasury lock contracts were terminated on September 10, 2012 and we recognized a deferred gain in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2022 senior notes. The remaining gain to be amortized related to the treasury lock agreements at October 31, 2016 was $2 million.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional amount of $300 million in connection with future interest payments to be made on our 2026 senior notes issued on September 15, 2016. These derivative instruments were designated and qualified as cash flow hedges under the criteria prescribed in the authoritative guidance. The swap arrangements were terminated on September 15, 2016 with a payment of $10 million and we recognized this as a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2026 senior notes. The remaining loss to be amortized related to the interest rate swap agreements at October 31, 2016 was $9 million.
Other Hedges
Additionally, we enter into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in value of the derivative are recognized in other income (expense) in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.
Our use of derivative instruments exposes us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. We do, however, seek to mitigate such risks by limiting our counterparties to major financial institutions which are selected based on their credit ratings and other factors. We have established policies and procedures for mitigating credit risk that include establishing counterparty credit limits, monitoring credit exposures, and continually assessing the creditworthiness of counterparties.
A number of our derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on our corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.
The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liability position as of October 31, 2016, was $4 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of October 31, 2016.
There were 46 foreign exchange forward contracts open as of October 31, 2016 and designated as cash flow hedges. There were 165 foreign exchange forward contracts open as of October 31, 2016 not designated as hedging instruments. The aggregated notional amounts by currency and designation as of October 31, 2016 were as follows:
| Derivatives Designated as Cash Flow Hedges | Derivatives Not Designated as Hedging Instruments | |||||||||||
| Forward Contracts USD | Forward Contracts USD | Forward Contracts DKK | ||||||||||
| Currency | Buy/(Sell) | Buy/(Sell) | Buy/(Sell) | |||||||||
| (in millions) | ||||||||||||
| Euro | $ | (32 | ) | $ | 106 | $ | (57 | ) | ||||
| British Pound | (22 | ) | (2 | ) | (3 | ) | ||||||
| Canadian Dollar | (17 | ) | — | (4 | ) | |||||||
| Australian Dollars | 3 | 12 | (4 | ) | ||||||||
| Malaysian Ringgit | — | (3 | ) | — | ||||||||
| Japanese Yen | (46 | ) | 15 | (4 | ) | |||||||
| American Dollar | — | — | (49 | ) | ||||||||
| Other | (5 | ) | (6 | ) | (14 | ) | ||||||
| $ | (119 | ) | $ | 122 | $ | (135 | ) |
Derivative instruments are subject to master netting arrangements and are disclosed gross in the balance sheet in accordance with the authoritative guidance. The gross fair values and balance sheet location of derivative instruments held in the consolidated balance sheet as of October 31, 2016 and 2015 were as follows:
| Fair Values of Derivative Instruments | ||||||||||||||||||
| Asset Derivatives | Liability Derivatives | |||||||||||||||||
| Fair Value | Fair Value | |||||||||||||||||
| Balance Sheet Location | October 31, 2016 | October 31, 2015 | Balance Sheet Location | October 31, 2016 | October 31, 2015 | |||||||||||||
| (in millions) | ||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||
| Cash flow hedges | ||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||
| Other current assets | $ | 5 | $ | 2 | Other accrued liabilities | $ | 3 | $ | 1 | |||||||||
| $ | 5 | $ | 2 | $ | 3 | $ | 1 | |||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||
| Other current assets | $ | 4 | $ | 2 | Other accrued liabilities | $ | 5 | $ | 4 | |||||||||
| Total derivatives | $ | 9 | $ | 4 | $ | 8 | $ | 5 |
The effect of derivative instruments for foreign exchange contracts designated as hedging instruments and not designated as hedging instruments in our consolidated statement of operations were as follows:
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Derivatives designated as hedging instruments: | |||||||||||
| Cash Flow Hedges | |||||||||||
| Loss on interest rate swaps recognized in other comprehensive income (loss) | $ | (9 | ) | $ | — | $ | — | ||||
| Gain (loss) recognized in accumulated other comprehensive income (loss) | $ | (1 | ) | $ | 11 | $ | 13 | ||||
| Gain (loss) reclassified from accumulated other comprehensive income (loss) into cost of sales | $ | (3 | ) | $ | 18 | $ | (1 | ) | |||
| Derivatives not designated as hedging instruments: | |||||||||||
| Gain (loss) recognized in other income (expense), net within continuing operations | $ | 1 | $ | (21 | ) | $ | (20 | ) |
The estimated net amount of existing gain at October 31, 2016 that is expected to be reclassified from other comprehensive income to the cost of sales within the next twelve months is $4 million.
- RETIREMENT PLANS AND POST RETIREMENT PENSION PLANS
General. Substantially all of our employees are covered under various defined benefit and/or defined contribution retirement plans. Additionally, we sponsor post-retirement health care benefits for our eligible U.S. employees.
Agilent provides U.S. employees, who meet eligibility criteria under the Agilent Technologies, Inc. Retirement Plan (the "RP"), defined benefits which are based on an employee's base or target pay during the years of employment and on length of service. For eligible service through October 31, 1993, the benefit payable under the Agilent Retirement Plans is reduced by any amounts due to the eligible employee under the Agilent defined contribution Deferred Profit-Sharing Plan (the "DPSP"), which was closed to new participants as of November 1993. Effective November 1, 2014, Agilent’s U.S. defined benefit retirement plan is closed to new entrants including new employees, new transfers to the U.S. payroll and rehires. As of April 30, 2016, benefits under the RP were frozen. See Plan Amendments below.
As of October 31, 2016 and 2015, the fair value of plan assets of the DPSP was $157 million and $169 million, respectively. Note that the projected benefit obligation for the DPSP equals the fair value of plan assets.
In addition to the DPSP, in the U.S., Agilent maintains a Supplemental Benefits Retirement Plan ("SBRP"), supplemental unfunded non-qualified defined benefit plan to provide benefits that would be provided under the RP but for limitations imposed by the Internal Revenue Code. The RP and the SBRP comprise the "U.S. Plans" in the tables below.
Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans based upon factors such as years of service and/or employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements.
401(k) defined contribution plan. Eligible Agilent U.S. employees may participate in the Agilent Technologies, Inc. 401(k) Plan. During the six months ended April 30, 2016, we provided matching contributions to employees up to a maximum of 6 percent of an employee's annual eligible compensation. Effective May 1, 2016, we provide matching contributions to employees up to a maximum of 6 percent of an employee's annual eligible compensation and an additional transitional company contribution for certain eligible employees equal to 3 percent, 4 percent or 5 percent of an employee's annual eligible compensation due to the RP benefits being frozen. The maximum contribution to the 401(k) Plan is 50 percent of an employee's annual eligible compensation, subject to regulatory limitations.
Post-retirement medical benefit plans. In addition to receiving retirement benefits, Agilent U.S. employees who meet eligibility requirements as of their termination date may participate in the Agilent Technologies, Inc. Health Plan for Retirees. Eligible retirees who were less than age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of service are eligible for a fixed amount which can be utilized to pay for either sponsored plans and/or individual medicare plans. Effective January 1, 2012, employees who were at least age 50 as of January 1, 2005 and who retire after age 55 with 15 or more years of service are eligible for fixed dollar subsidies and stipends. Grandfathered retirees receive a fixed monthly subsidy toward pre-65 premium costs (subsidy capped at 2011 levels) and a fixed monthly stipend post-65. The subsidy amounts will not increase. In addition, any new employee hired on or after November 1, 2014, will not be eligible to participate in the retiree medical plans upon retiring. Current eligible employees will continue to participate in the retiree medical program in place as of November 1, 2014. Retirees will maintain the retiree medical benefits they are eligible for as of November 1, 2014. As of April 30, 2016, benefits under this plan were changed - see Plan Amendments below.
Plan Amendments. In 2016, we made changes to our U.S. Retirement Plan and Supplemental Benefits Retirement Plan ("U.S. Plans"). Effective April 30, 2016, benefit accruals under the U.S. Plans were frozen. Any pension benefit earned in the U.S. Plans through April 30, 2016 remained fully vested, and there were no additional benefit accruals after April 30, 2016. In addition, active employees who have not met the eligibility requirement for the Retiree Medical Account (RMA) under the U.S. Post Retirement Benefit Plan - 55 years old with at least 15 years of Agilent service - as of April 30, 2016 - will only be eligible for 50 percent of the current RMA reimbursement amount upon retirement.
Due to these plan amendments, we recorded a curtailment gain of $15 million in the U.S. Plans during the year ended October 31, 2016. In addition, we recognized a settlement gain of $1 million related to the U.S. Supplemental Benefits Retirement Plan during the year ended October 31, 2016.
Components of net periodic cost. The company uses alternate methods of amortization as allowed by the authoritative guidance which amortizes the actuarial gains and losses on a consistent basis for the years presented. For U.S. Plans, gains and losses are amortized over the average future lifetime of participants using the corridor method. For most Non-U.S. Plans and U.S. Post-Retirement Benefit Plans, gains and losses are amortized using a separate layer for each year's gains and losses. For the years ended October 31, 2016, 2015 and 2014, components of net periodic benefit cost and other amounts recognized in other comprehensive income were comprised of:
| Pensions | U.S. Post-Retirement Benefit Plans | ||||||||||||||||||||||||||||||||||
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | |||||||||||||||||||||||||||||||||||
| Service cost — benefits earned during the period | $ | 12 | $ | 25 | $ | 46 | $ | 19 | $ | 18 | $ | 36 | $ | 1 | $ | 2 | $ | 3 | |||||||||||||||||
| Interest cost on benefit obligation | 16 | 14 | 34 | 16 | 23 | 74 | 4 | 4 | 12 | ||||||||||||||||||||||||||
| Expected return on plan assets | (25 | ) | (27 | ) | (64 | ) | (44 | ) | (42 | ) | (118 | ) | (7 | ) | (8 | ) | (22 | ) | |||||||||||||||||
| Amortization of net actuarial loss | 3 | 3 | 1 | 27 | 25 | 48 | 10 | 6 | 14 | ||||||||||||||||||||||||||
| Amortization of prior service benefit | (3 | ) | (5 | ) | (12 | ) | — | — | (1 | ) | (10 | ) | (12 | ) | (35 | ) | |||||||||||||||||||
| Total periodic benefit cost (benefit) | $ | 3 | $ | 10 | $ | 5 | $ | 18 | $ | 24 | $ | 39 | $ | (2 | ) | $ | (8 | ) | $ | (28 | ) | ||||||||||||||
| Summary of total periodic benefit cost (benefit): | |||||||||||||||||||||||||||||||||||
| Continuing operations | $ | 3 | $ | 10 | $ | 2 | $ | 18 | $ | 24 | $ | 27 | $ | (2 | ) | $ | (8 | ) | $ | (14 | ) | ||||||||||||||
| Discontinued operations | — | — | 3 | — | — | 12 | — | — | (14 | ) | |||||||||||||||||||||||||
| Total periodic benefit cost (benefit) | $ | 3 | $ | 10 | $ | 5 | $ | 18 | $ | 24 | $ | 39 | $ | (2 | ) | $ | (8 | ) | $ | (28 | ) | ||||||||||||||
| Curtailments and settlements | $ | (16 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss | |||||||||||||||||||||||||||||||||||
| Net actuarial (gain) loss | $ | 22 | $ | 44 | $ | 86 | $ | 149 | $ | 32 | $ | 173 | $ | 3 | $ | 16 | $ | 12 | |||||||||||||||||
| Amortization of net actuarial loss | (3 | ) | (3 | ) | (1 | ) | (27 | ) | (25 | ) | (48 | ) | (10 | ) | (6 | ) | (14 | ) | |||||||||||||||||
| Prior service cost (benefit) | 15 | — | — | — | — | (2 | ) | (7 | ) | — | — | ||||||||||||||||||||||||
| Amortization of prior service benefit | 3 | 5 | 12 | — | — | 1 | 10 | 12 | 35 | ||||||||||||||||||||||||||
| Foreign currency | — | — | — | (3 | ) | 10 | (28 | ) | — | — | — | ||||||||||||||||||||||||
| Total recognized in other comprehensive (income) loss | $ | 37 | $ | 46 | $ | 97 | $ | 119 | $ | 17 | $ | 96 | $ | (4 | ) | $ | 22 | $ | 33 | ||||||||||||||||
| Total recognized in net periodic benefit cost (benefit) and other comprehensive (income) loss | $ | 24 | $ | 56 | $ | 102 | $ | 137 | $ | 41 | $ | 135 | $ | (6 | ) | $ | 14 | $ | 5 |
Funded status. As of October 31, 2016 and 2015, the funded status of the defined benefit and post-retirement benefit plans was:
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plans | |||||||||||||||||||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Change in fair value of plan assets: | |||||||||||||||||||||||
| Fair value — beginning of year | $ | 347 | $ | 837 | $ | 778 | $ | 2,108 | $ | 91 | $ | 284 | |||||||||||
| Actual return on plan assets | 13 | 6 | 25 | 53 | 3 | 2 | |||||||||||||||||
| Employer contributions | — | 15 | 24 | 25 | — | — | |||||||||||||||||
| Participants' contributions | — | — | 1 | 1 | — | — | |||||||||||||||||
| Benefits paid | (19 | ) | (21 | ) | (27 | ) | (20 | ) | (6 | ) | (8 | ) | |||||||||||
| Transfer due to Keysight separation | — | (490 | ) | — | (1,327 | ) | — | (187 | ) | ||||||||||||||
| Currency impact | — | — | (27 | ) | (62 | ) | — | — | |||||||||||||||
| Fair value — end of year | $ | 341 | $ | 347 | $ | 774 | $ | 778 | $ | 88 | $ | 91 | |||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||
| Benefit obligation — beginning of year | $ | 415 | $ | 889 | $ | 900 | $ | 2,344 | $ | 112 | $ | 309 | |||||||||||
| Service cost | 12 | 25 | 19 | 18 | 1 | 2 | |||||||||||||||||
| Interest cost | 16 | 14 | 16 | 23 | 4 | 4 | |||||||||||||||||
| Participants' contributions | — | — | 1 | 1 | — | — | |||||||||||||||||
| Plan amendment | — | — | — | — | (7 | ) | — | ||||||||||||||||
| Actuarial (gain) loss | 41 | 23 | 130 | 40 | (1 | ) | 11 | ||||||||||||||||
| Benefits paid | (20 | ) | (22 | ) | (27 | ) | (20 | ) | (6 | ) | (8 | ) | |||||||||||
| Curtailments | (30 | ) | — | — | — | — | — | ||||||||||||||||
| Transfer due to Keysight separation | — | (514 | ) | — | (1,429 | ) | — | (206 | ) | ||||||||||||||
| Currency impact | — | — | (37 | ) | (77 | ) | — | — | |||||||||||||||
| Benefit obligation — end of year | $ | 434 | $ | 415 | $ | 1,002 | $ | 900 | $ | 103 | $ | 112 | |||||||||||
| Overfunded (underfunded) status of PBO | $ | (93 | ) | $ | (68 | ) | $ | (228 | ) | $ | (122 | ) | $ | (15 | ) | $ | (21 | ) | |||||
| Amounts recognized in the consolidated balance sheet consist of: | |||||||||||||||||||||||
| Other assets | $ | — | $ | — | $ | 1 | $ | 26 | $ | — | $ | — | |||||||||||
| Employee compensation and benefits | (1 | ) | (2 | ) | — | — | — | — | |||||||||||||||
| Retirement and post-retirement benefits | (92 | ) | (66 | ) | (229 | ) | (148 | ) | (15 | ) | (21 | ) | |||||||||||
| Total net asset (liability) | $ | (93 | ) | $ | (68 | ) | $ | (228 | ) | $ | (122 | ) | $ | (15 | ) | $ | (21 | ) | |||||
| Amounts Recognized in Accumulated Other Comprehensive Income (loss): | |||||||||||||||||||||||
| Actuarial (gains) losses | $ | 93 | $ | 73 | $ | 375 | $ | 256 | $ | 41 | $ | 49 | |||||||||||
| Prior service costs (benefits) | — | (18 | ) | — | — | (37 | ) | (40 | ) | ||||||||||||||
| Total | $ | 93 | $ | 55 | $ | 375 | $ | 256 | $ | 4 | $ | 9 |
In Japan, Agilent has employees' pension fund plans, which are defined benefit pension plans established under the Japanese Welfare Pension Insurance Law (JWPIL). The plans are composed of (a) a substitutional portion based on the pay-related part of the old-age pension benefits prescribed by JWPIL (similar to social security benefits in the United States) and (b) a corporate portion based on a contributory defined benefit pension arrangement established at the discretion of the company. As required by law, Agilent will disburse the substitutional portion of Agilent’s plans to the government. In December 2016, Agilent has received approval from the Japanese government to disburse the substitutional portion of Agilent’s plans, equal to $27 million. We anticipate that Agilent will recognize a settlement gain in the first quarter of 2017 on the payment of the substitutional portion.
In connection with the separation of Keysight Technologies on November 1, 2014, Agilent transferred certain liabilities and assets of the U.S. and Non-U.S. defined benefit pension plans, and U.S. Post-Retirement Benefit Plans to similar plans created for Keysight Technologies employees. Total transfers are as follows:
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plans | |||||||||
| (in millions) | |||||||||||
| Fair value of plan assets transferred to Keysight | $ | 490 | $ | 1,327 | $ | 187 | |||||
| Benefit obligation transferred to Keysight | $ | 514 | $ | 1,429 | $ | 206 |
The amounts in accumulated other comprehensive income expected to be recognized by Agilent as components of net expense during 2017 are as follows:
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plans | |||||||||
| (in millions) | |||||||||||
| Amortization of net prior service cost (benefit) | $ | — | $ | — | $ | (9 | ) | ||||
| Amortization of actuarial net loss (gain) | $ | 3 | $ | 35 | $ | 11 |
Investment policies and strategies as of October 31, 2016 and 2015. In the U.S., target asset allocations for our retirement and post-retirement benefit plans are approximately 80 percent to equities and approximately 20 percent to fixed income investments. Our DPSP target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income investments. Approximately, 5 percent of our U.S. equity portfolio consists of limited partnerships. The general investment objective for all our plan assets is to obtain the optimum rate of investment return on the total investment portfolio consistent with the assumption of a reasonable level of risk. Specific investment objectives for the plans' portfolios are to: maintain and enhance the purchasing power of the plans' assets; achieve investment returns consistent with the level of risk being taken; and earn performance rates of return in accordance with the benchmarks adopted for each asset class. Outside the U.S., our target asset allocation is from 37 to 60 percent to equities, from 40 to 60 percent to fixed income investments, and from zero to 6 percent to real estate investments and from zero to 7 percent to cash, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity markets, our actual allocations of plan assets at October 31, 2016 and 2015 differ from the target allocation. Our policy is to bring the actual allocation in line with the target allocation.
Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified industries. Fixed income securities include a global portfolio of corporate bonds of companies from diversified industries, government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Other investments include a group trust consisting primarily of private equity partnerships. Portions of the cash and cash equivalent, equity, and fixed income investments are held in commingled funds.
Fair Value. The measurement of the fair value of pension and post-retirement plan assets uses the valuation methodologies and the inputs as described in Note 11, "Fair Value Measurements".
Cash and Cash Equivalents - Cash and cash equivalents consist of short-term investment funds. The funds also invest in short-term domestic fixed income securities and other securities with debt-like characteristics emphasizing short-term maturities and quality. Cash and cash equivalents are classified as Level 1 investments except when the cash and cash equivalents are held in commingled funds, which have a daily net value derived from quoted prices for the underlying securities in active markets; these are classified as Level 2 investments.
Equity - Some equity securities consisting of common and preferred stock are held in commingled funds, which have daily net asset values derived from quoted prices for the underlying securities in active markets; these are classified as Level 2 investments. Commingled funds which have quoted prices in active markets are classified as Level 1 investments.
Fixed Income - Some of the fixed income securities are held in commingled funds, which have daily net asset values derived from the underlying securities; these are classified as Level 2 investments. Commingled funds which have quoted prices in active markets are classified as Level 1 investments.
Other Investments - Other investments includes property based pooled vehicles which invest in real estate. Market net asset values are regularly published in the financial press or on corporate websites and so these investments are classified as Level 2. Other investments also includes partnership investments where, due to their private nature, pricing inputs are not readily observable. Asset valuations are developed by the general partners that manage the partnerships. These valuations are based on proprietary appraisals, application of public market multiples to private company cash flows, utilization of market transactions that provide valuation information for comparable companies and other methods. Holdings of limited partnerships are classified as Level 3.
The following tables present the fair value of U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2016 and 2015.
| Fair Value Measurement at October 31, 2016 Using | |||||||||||||||
| October 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 4 | $ | 1 | $ | 3 | $ | — | |||||||
| Equity | 248 | 62 | 186 | — | |||||||||||
| Fixed Income | 80 | 24 | 56 | — | |||||||||||
| Other Investments | 9 | — | — | 9 | |||||||||||
| Total assets measured at fair value | $ | 341 | $ | 87 | $ | 245 | $ | 9 |
| Fair Value Measurement at October 31, 2015 Using | |||||||||||||||
| October 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 3 | $ | 1 | $ | 2 | $ | — | |||||||
| Equity | 258 | 61 | 197 | — | |||||||||||
| Fixed Income | 76 | 22 | 54 | — | |||||||||||
| Other Investments | 10 | — | 1 | 9 | |||||||||||
| Total assets measured at fair value | $ | 347 | $ | 84 | $ | 254 | $ | 9 | |||||||
For U.S. Defined Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during 2016 and 2015 for continuing operations:
| Years Ended October 31. | |||||||
| 2016 | 2015 | ||||||
| Balance, beginning of year | $ | 9 | $ | 14 | |||
| Realized gains/(losses) | — | (1 | ) | ||||
| Unrealized gains/(losses) | 3 | (2 | ) | ||||
| Purchases, sales, issuances, and settlements | (3 | ) | (2 | ) | |||
| Transfers in (out) | — | — | |||||
| Balance, end of year | $ | 9 | $ | 9 |
The following tables present the fair value of U.S. Post-Retirement Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2016 and 2015.
| Fair Value Measurement at October 31, 2016 Using | |||||||||||||||
| October 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 3 | $ | 2 | $ | 1 | $ | — | |||||||
| Equity | 59 | 15 | 44 | — | |||||||||||
| Fixed Income | 21 | 6 | 15 | — | |||||||||||
| Other Investments | 5 | — | — | 5 | |||||||||||
| Total assets measured at fair value | $ | 88 | $ | 23 | $ | 60 | $ | 5 |
| Fair Value Measurement at October 31, 2015 Using | |||||||||||||||
| October 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 3 | $ | 2 | $ | 1 | $ | — | |||||||
| Equity | 62 | 15 | 47 | — | |||||||||||
| Fixed Income | 20 | 6 | 14 | — | |||||||||||
| Other Investments | 6 | — | — | 6 | |||||||||||
| Total assets measured at fair value | $ | 91 | $ | 23 | $ | 62 | $ | 6 |
For U.S. Post-Retirement Benefit Plans assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the change in balances during 2016 and 2015 for continuing operations:
| Years Ended October 31, | |||||||
| 2016 | 2015 | ||||||
| Balance, beginning of year | $ | 6 | $ | 8 | |||
| Realized gains/(losses) | — | (1 | ) | ||||
| Unrealized gains/(losses) | 1 | — | |||||
| Purchases, sales, issuances, and settlements | (2 | ) | (1 | ) | |||
| Transfers in (out) | — | — | |||||
| Balance, end of year | $ | 5 | $ | 6 |
The following tables present the fair value of non-U.S. Defined Benefit Plans assets classified under the appropriate level of the fair value hierarchy as of October 31, 2016 and 2015:
| Fair Value Measurement at October 31, 2016 Using | |||||||||||||||
| October 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 26 | $ | 18 | $ | 8 | $ | — | |||||||
| Equity | 422 | 156 | 266 | — | |||||||||||
| Fixed Income | 325 | 9 | 316 | — | |||||||||||
| Other Investments | 1 | — | 1 | — | |||||||||||
| Total assets measured at fair value | $ | 774 | $ | 183 | $ | 591 | $ | — |
| Fair Value Measurement at October 31, 2015 Using | |||||||||||||||
| October 31, 2015 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| (in millions) | |||||||||||||||
| Cash and Cash Equivalents | $ | 3 | $ | 1 | $ | 2 | $ | — | |||||||
| Equity | 396 | 172 | 224 | — | |||||||||||
| Fixed Income | 379 | 13 | 366 | — | |||||||||||
| Other Investments | — | — | — | — | |||||||||||
| Total assets measured at fair value | $ | 778 | $ | 186 | $ | 592 | $ | — |
For non-U.S. Defined Benefit Plans, assets measured at fair value using significant unobservable inputs (level 3), the following table summarizes the changes in balances during 2015 for continuing operations:
| Year Ended | ||||
| October 31, 2015 | ||||
| Balance, beginning of year | $ | 4 | ||
| Realized gains/(losses) | 1 | |||
| Unrealized gains/(losses) | — | |||
| Purchases, sales, issuances, and settlements | (5 | ) | ||
| Transfers in (out) | — | |||
| Balance, end of year | $ | — |
The table below presents the combined projected benefit obligation ("PBO"), accumulated benefit obligation ("ABO") and fair value of plan assets, grouping plans using comparisons of the PBO and ABO relative to the plan assets for continuing operations as of October 31, 2016 or 2015.
| 2016 | 2015 | ||||||||||||||
| Benefit Obligation | Benefit Obligation | ||||||||||||||
| Fair Value of Plan Assets | Fair Value of Plan Assets | ||||||||||||||
| PBO | PBO | ||||||||||||||
| (in millions) | |||||||||||||||
| U.S. defined benefit plans where PBO exceeds the fair value of plan assets | $ | 434 | $ | 341 | $ | 415 | $ | 347 | |||||||
| U.S. defined benefit plans where fair value of plan assets exceeds PBO | — | — | — | — | |||||||||||
| Total | $ | 434 | $ | 341 | $ | 415 | $ | 347 | |||||||
| Non-U.S. defined benefit plans where PBO exceeds or is equal to the fair value of plan assets | $ | 970 | $ | 741 | $ | 771 | $ | 623 | |||||||
| Non-U.S. defined benefit plans where fair value of plan assets exceeds PBO | 32 | 33 | 129 | 155 | |||||||||||
| Total | $ | 1,002 | $ | 774 | $ | 900 | $ | 778 | |||||||
| ABO | ABO | ||||||||||||||
| U.S. defined benefit plans where ABO exceeds the fair value of plan assets | $ | 434 | $ | 341 | $ | 389 | $ | 347 | |||||||
| U.S. defined benefit plans where the fair value of plan assets exceeds ABO | — | — | — | — | |||||||||||
| Total | $ | 434 | $ | 341 | $ | 389 | $ | 347 | |||||||
| Non-U.S. defined benefit plans where ABO exceeds or is equal to the fair value of plan assets | $ | 737 | $ | 542 | $ | 732 | $ | 623 | |||||||
| Non-U.S. defined benefit plans where fair value of plan assets exceeds ABO | 226 | 232 | 127 | 155 | |||||||||||
| Total | $ | 963 | $ | 774 | $ | 859 | $ | 778 |
Contributions and estimated future benefit payments. During fiscal year 2017, we expect to contribute $26 million to the U.S. defined benefit plans, $20 million to plans outside the U.S., and zero to the Post-Retirement Medical Plans. The following table presents expected future benefit payments for the next 10 years:
| U.S. Defined Benefit Plans | Non-U.S. Defined Benefit Plans | U.S. Post-Retirement Benefit Plans | |||||||||
| (in millions) | |||||||||||
| 2017 | $ | 27 | $ | 48 | $ | 8 | |||||
| 2018 | $ | 25 | $ | 22 | $ | 8 | |||||
| 2019 | $ | 26 | $ | 24 | $ | 8 | |||||
| 2020 | $ | 28 | $ | 25 | $ | 7 | |||||
| 2021 | $ | 27 | $ | 27 | $ | 7 | |||||
| 2022 - 2026 | $ | 137 | $ | 168 | $ | 35 |
Assumptions. The assumptions used to determine the benefit obligations and expense for our defined benefit and post-retirement benefit plans are presented in the tables below. The expected long-term return on assets below represents an estimate of long-term returns on investment portfolios consisting of a mixture of equities, fixed income and alternative investments in proportion to the asset allocations of each of our plans. We consider long-term rates of return, which are weighted based on the asset classes (both historical and forecasted) in which we expect our pension and post-retirement funds to be invested. Discount rates reflect the current rate at which pension and post-retirement obligations could be settled based on the measurement dates of the plans - October 31. The U.S. discount rates at October 31, 2016 and 2015, were determined based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. The non-U.S. rates were generally
based on published rates for high-quality corporate bonds. The range of assumptions that were used for the non-U.S. defined benefit plans reflects the different economic environments within various countries.
Assumptions used to calculate the net periodic cost in each year were as follows:
| For years ended October 31, | |||||
| 2016 | 2015 | 2014 | |||
| U.S. defined benefit plans: | |||||
| Discount rate | 4.20% | 4.00% | 4.00-4.50% | ||
| Average increase in compensation levels | 3.50% | 3.50% | 3.50% | ||
| Expected long-term return on assets | 7.50% | 8.00% | 8.00% | ||
| Non-U.S. defined benefit plans: | |||||
| Discount rate | 0.77-3.76% | 1.50-4.00% | 1.50-4.50% | ||
| Average increase in compensation levels | 2.25-4.00% | 2.50-3.25% | 2.50-3.25% | ||
| Expected long-term return on assets | 4.25-6.50% | 4.00-6.50% | 4.00-6.50% | ||
| U.S. post-retirement benefits plans: | |||||
| Discount rate | 4.00% | 4.00% | 4.00-4.25% | ||
| Expected long-term return on assets | 7.50% | 8.00% | 8.00% | ||
| Current medical cost trend rate | 7.00% | 8.00% | 8.00% | ||
| Ultimate medical cost trend rate | 3.50% | 3.50% | 3.50% | ||
| Medical cost trend rate decreases to ultimate rate in year | 2029 | 2028 | 2028 |
Assumptions used to calculate the benefit obligation were as follows:
| As of the Years Ending October 31, | |||
| 2016 | 2015 | ||
| U.S. defined benefit plans: | |||
| Discount rate | 3.75% | 4.20% | |
| Average increase in compensation levels | N/A | 3.50% | |
| Non-U.S. defined benefit plans: | |||
| Discount rate | 0.40-2.62% | 0.77-3.76% | |
| Average increase in compensation levels | 2.00-4.25% | 2.25-4.00% | |
| U.S. post-retirement benefits plans: | |||
| Discount rate | 3.50% | 4.00% | |
| Current medical cost trend rate | 6.00% | 7.00% | |
| Ultimate medical cost trend rate | 3.50% | 3.50% | |
| Medical cost trend rate decreases to ultimate rate in year | 2029 | 2029 |
Health care trend rates do not have a significant effect on the total service and interest cost components or on the post-retirement benefit obligation amounts reported for the U.S. Post-Retirement Benefit Plan for the year ended October 31, 2016.
- GUARANTEES
Standard Warranty
We accrue for standard warranty costs based on historical trends in warranty charges as a percentage of net product shipments. The accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. Estimated warranty charges are recorded within cost of products at the time products are sold. The standard warranty accrual balances are held in other accrued and other long-term liabilities on our consolidated balance sheet. Our standard warranty terms typically extend between one and three years from the date of delivery, depending on the product.
A summary of the standard warranty accrual activity is shown in the table below. The standard warranty accrual balances are held in other accrued and other long-term liabilities.
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Balance as of October 31, 2015 and 2014 | $ | 31 | $ | 30 | |||
| Accruals for warranties including change in estimates | 53 | 53 | |||||
| Settlements made during the period | (49 | ) | (52 | ) | |||
| Balance as of October 31, 2016 and 2015 | $ | 35 | $ | 31 |
| Accruals for warranties due within one year | 34 | 29 | |||||
| Accruals for warranties due after one year | 1 | 2 | |||||
| Balance as of October 31, 2016 and 2015 | $ | 35 | $ | 31 |
Indemnifications in Connection with Transactions
In connection with various divestitures, acquisitions, spin-offs and other transactions, we have agreed to indemnify certain parties, their affiliates and/or other related parties against certain damages and expenses that might occur in the future. These indemnifications may cover a variety of liabilities, including, but not limited to, employee, tax, environmental, intellectual property, litigation and other liabilities related to the business conducted prior to the date of the transaction. In our opinion, the fair value of these indemnification obligations was not material as of October 31, 2016.
Indemnifications to Officers and Directors
Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Agilent and such other entities, including service with respect to employee benefit plans. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Agilent which provide for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and the fair value for these indemnification obligations was not material as of October 31, 2016.
Other Indemnifications
As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability was not material as of October 31, 2016.
In connection with the sale of several of our businesses, we have agreed to indemnify the buyers of such business, their respective affiliates and other related parties against certain damages that they might incur in the future. The continuing indemnifications primarily cover damages relating to liabilities of the businesses that Agilent retained and did not transfer to the buyers, as well as other specified items. In our opinion, the fair value of these indemnification obligations was not material as of October 31, 2016.
- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments: We lease certain real and personal property from unrelated third parties under non-cancelable operating leases. Future minimum lease payments under operating leases at October 31, 2016 were $38 million for 2017, $35 million for 2018, $25 million for 2019, $14 million for 2020, $8 million for 2021 and $26 million thereafter. Future minimum lease income under leases at October 31, 2016 was $11 million for 2017, $10 million for 2018, $9 million for 2019, and $19 million thereafter. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. Total rent expense was $61 million in 2016, $65 million in 2015 and $55 million in 2014.
Contingencies: We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. There are no matters pending that we currently believe are reasonably possible of having a material impact to our business, consolidated financial condition, results of operations or cash flows.
- SHORT-TERM DEBT
Credit Facilities
On September 15, 2014, Agilent entered into a credit agreement with a financial institution which provides for a $400 million five-year unsecured credit facility that will expire on September 15, 2019. On June 9, 2015, the commitments under the existing credit facility were increased by $300 million so that the aggregate commitments under the facility now total $700 million. For the year ended October 31, 2016, we borrowed $255 million and repaid $255 million by October 31, 2016. As of October 31, 2016, the company had no borrowings outstanding under the facility. We were in compliance with the covenants for the credit facility during the years ended October 31, 2016 and 2015.
As of December 20, 2016, the company had borrowings of $65 million outstanding under this credit facility and may borrow more during fiscal year 2017.
- LONG-TERM DEBT
Senior Notes
The following table summarizes the company's long-term senior notes and the related interest rate swaps:
| October 31, 2016 | October 31, 2015 | ||||||||||||||||||||||
| Amortized Principal | Swap | Total | Amortized Principal | Swap | Total | ||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| 2017 Senior Notes | 100 | 1 | 101 | 100 | 2 | 102 | |||||||||||||||||
| 2020 Senior Notes | 499 | 15 | 514 | 499 | 19 | 518 | |||||||||||||||||
| 2022 Senior Notes | 400 | — | 400 | 399 | — | 399 | |||||||||||||||||
| 2023 Senior Notes | 598 | — | 598 | 598 | — | 598 | |||||||||||||||||
| 2026 Senior Notes | 299 | — | 299 | — | — | — | |||||||||||||||||
| Total | $ | 1,896 | $ | 16 | $ | 1,912 | $ | 1,596 | $ | 21 | $ | 1,617 |
2017 Senior Notes
In October 2007, the company issued an aggregate principal amount of $600 million in senior notes ("2017 senior notes"). The 2017 senior notes were issued at 99.60% of their principal amount. The notes will mature on November 1, 2017, and bear interest at a fixed rate of 6.50% per annum. The interest is payable semi-annually on May 1st and November 1st of each year and payments commenced on May 1, 2008.
On November 25, 2008, we terminated two interest rate swap contracts associated with our 2017 senior notes that represented the notional amount of $400 million. The asset value, including interest receivable, upon termination was approximately $43 million and the amount to be amortized at October 31, 2016 was $1 million. The gain is being deferred and amortized to interest expense over the remaining life of the 2017 senior notes.
On October 20, 2014, we settled the redemption of $500 million of the $600 million outstanding aggregate principal amount of our 2017 senior notes due November 1, 2017 that had been called for redemption on September 19, 2014. The redemption price of approximately $580 million included a $80 million prepayment penalty computed in accordance with the terms of the 2017 senior notes as the present value of the remaining scheduled payments of principal and unpaid interest related to $500 million partial redemption. The prepayment penalty less partial amortization of previously deferred interest rate swap gain of approximately $14 million together with $2 million of amortization of debt issuance costs and discount was disclosed in other income (expense), net in the condensed consolidated statement of operations. We also paid accrued and unpaid interest of $15 million on the 2017 senior notes up to but not including the redemption date.
2020 Senior Notes
In July 2010, the company issued an aggregate principal amount of $500 million in senior notes ("2020 senior notes"). The 2020 senior notes were issued at 99.54% of their principal amount. The notes will mature on July 15, 2020, and bear interest at a fixed rate of 5.00% per annum. The interest is payable semi-annually on January 15th and July 15th of each year, payments commenced on January 15, 2011.
On August 9, 2011, we terminated our interest rate swap contracts related to our 2020 senior notes that represented the notional amount of $500 million. The asset value, including interest receivable, upon termination for these contracts was approximately $34 million and the amount to be amortized at October 31, 2016 was $15 million. The gain is being deferred and amortized to interest expense over the remaining life of the 2020 senior notes.
2022 Senior Notes
In September 2012, the company issued an aggregate principal amount of $400 million in senior notes ("2022 senior notes"). The 2022 senior notes were issued at 99.80% of their principal amount. The notes will mature on October 1, 2022, and bear interest at a fixed rate of 3.20% per annum. The interest is payable semi-annually on April 1st and October 1st of each year, payments commenced on April 1, 2013.
2023 Senior Notes
In June 2013, the company issued aggregate principal amount of $600 million in senior notes ("2023 senior notes"). The 2023 senior notes were issued at 99.544% of their principal amount. The notes will mature on July 15, 2023 and bear interest at a fixed rate of 3.875% per annum. The interest is payable semi-annually on January 15th and July 15th of each year and payments will commence January 15, 2014.
2026 Senior Notes
On September 15, 2016, the company issued aggregate principal amount of $300 million in senior notes ("2026 senior notes"). The 2026 senior notes were issued at 99.624%% of their principal amount. The notes will mature on September 22, 2026 and bear interest at a fixed rate of 3.050% per annum. The interest is payable semi-annually on March 22nd and September 22nd of each year and payments will commence March 22, 2017.
In February 2016, Agilent executed three forward-starting pay fixed/receive variable interest rate swaps for the notional amount of $300 million in connection with future interest payments to be made on our 2026 senior notes issued on September 15, 2016. The swap arrangements were terminated on September 15, 2016 with a payment of $10 million and we recognized this as a deferred loss in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2026 senior notes.The remaining loss to be amortized related to the interest rate swap agreements at October 31, 2016 was $9 million.
Other debt
In 2016, we paid approximately $37 million of our mortgage debt, secured on buildings in Denmark, to a Danish financial institution. The gain recognized upon early payment was not material. No balance exists on this debt as of October 31. 2016.
- STOCKHOLDERS' EQUITY
Stock Repurchase Program
On November 22, 2013 we announced that our board of directors had authorized a share repurchase program. The program was designed to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs to target maintaining a weighted average share count of approximately 335 million diluted shares. For the year ended October 31, 2016, we repurchased 2.4 million shares for $98 million, which completed the purchases under this authorization. For the year ended October 31, 2015 we repurchased approximately 6 million shares for $267 million. For the year ended October 31, 2014 we repurchased 4 million shares for $200 million. All such shares and related costs are held as treasury stock and accounted for using the cost method.
On May 28, 2015 we announced that our board of directors had approved a new share repurchase program (the "2015 repurchase program"). The 2015 share repurchase program authorizes the purchase of up to $1.14 billion of our common stock through and including November 1, 2018. The 2015 repurchase program does not require the company to acquire a specific number of shares and may be suspended or discontinued at any time. During the year ended October 31, 2016, upon the completion of our previous repurchase program, we repurchased approximately 8.3 million shares for $336 million under this authorization. All such shares and related costs are held as treasury stock and accounted for using the cost method. As of October 31, 2016, we had remaining authorization to repurchase up to $804 million of our common stock under this program.
In the first quarter of 2017, we repurchased approximately 2.5 million shares for $111 million under the 2015 repurchase program. In addition, we retired 292.5 million treasury shares at an aggregate cost of $10.6 billion, which represents all our previously repurchased shares over the past 11 years and our November 2016 repurchases. Also the retirement resulted in a decrease of $6.7 billion to retained earnings and a decrease of $3.9 billion to additional paid-in-capital.
Cash Dividends on Shares of Common Stock
During the year ended October 31, 2016, cash dividends of $0.46 per share, or $150 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2015, cash dividends of $0.40 per share, or $133 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2014, cash dividends of $0.53 per share, or $176 million were declared and paid on the company's outstanding common stock.
On November 16, 2016, we declared a quarterly dividend of $0.132 per share of common stock, or approximately $43 million which will be paid on January 25, 2017 to shareholders of record as of the close of business on January 3, 2017. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Accumulated other comprehensive income (loss)
The following table summarizes the components of our accumulated other comprehensive income (loss) as of October 31, 2016 and 2015, net of tax effect:
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Foreign currency translation, net of tax expense of $(5) and $(2) for 2016 and 2015, respectively | (197 | ) | (189 | ) | |||
| Unrealized losses on defined benefit plans, net of tax benefit of $176 and $126 for 2016 and 2015, respectively | (305 | ) | (204 | ) | |||
| Unrealized gains (losses) on derivative instruments, net of tax (expense) benefit of $2 and $(2) for 2016 and 2015, respectively | (1 | ) | 2 | ||||
| Total accumulated other comprehensive loss | $ | (503 | ) | $ | (391 | ) |
Changes in accumulated other comprehensive income (loss) by component and related tax effects for the years ended October 31, 2016 and 2015 were as follows (in millions):
| Net defined benefit pension cost and post retirement plan costs | ||||||||||||||||||||||||
| Unrealized gain on investments | Foreign currency translation | Prior service credits | Actuarial Losses | Unrealized gains (losses) on derivatives | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| As of October 31, 2014 | $ | 17 | $ | 156 | $ | 255 | $ | (771 | ) | $ | 9 | $ | (334 | ) | ||||||||||
| Transfer to Keysight | (17 | ) | (9 | ) | (83 | ) | 444 | (3 | ) | 332 | ||||||||||||||
| Balance after transfer to Keysight | — | 147 | 172 | (327 | ) | 6 | (2 | ) | ||||||||||||||||
| Other comprehensive income (loss) before reclassifications | — | (360 | ) | — | (90 | ) | 11 | (439 | ) | |||||||||||||||
| Amounts reclassified out of accumulated other comprehensive income | — | — | (17 | ) | 35 | (18 | ) | — | ||||||||||||||||
| Tax benefit | — | 24 | 6 | 17 | 3 | 50 | ||||||||||||||||||
| Other comprehensive loss | — | (336 | ) | (11 | ) | (38 | ) | (4 | ) | (389 | ) | |||||||||||||
| As of October 31, 2015 | $ | — | $ | (189 | ) | $ | 161 | $ | (365 | ) | $ | 2 | $ | (391 | ) | |||||||||
| Other comprehensive income (loss) before reclassifications | — | (5 | ) | 6 | (171 | ) | (10 | ) | (180 | ) | ||||||||||||||
| Amounts reclassified out of accumulated other comprehensive income | — | — | (29 | ) | 43 | 3 | 17 | |||||||||||||||||
| Tax (expense) benefit | — | (3 | ) | 8 | 42 | 4 | 51 | |||||||||||||||||
| Other comprehensive loss | — | (8 | ) | (15 | ) | (86 | ) | (3 | ) | (112 | ) | |||||||||||||
| As of October 31, 2016 | $ | — | $ | (197 | ) | $ | 146 | $ | (451 | ) | $ | (1 | ) | $ | (503 | ) | ||||||||
Reclassifications out of accumulated other comprehensive income (loss) for the years ended October 31, 2016 and 2015 were as follows (in millions):
| Details about accumulated other | Amounts Reclassified | Affected line item in | ||||||||
| comprehensive income components | from other comprehensive income | statement of operations | ||||||||
| 2016 | 2015 | |||||||||
| Unrealized gains and (losses) on derivatives | (3 | ) | 18 | Cost of products | ||||||
| (3 | ) | 18 | Total before income tax | |||||||
| — | (6 | ) | (Provision)/benefit for income tax | |||||||
| (3 | ) | 12 | Total net of income tax | |||||||
| Net defined benefit pension cost and post retirement plan costs: | ||||||||||
| Actuarial net loss | (43 | ) | (35 | ) | ||||||
| Prior service benefit | 29 | 17 | ||||||||
| (14 | ) | (18 | ) | Total before income tax | ||||||
| 4 | 5 | (Provision)/benefit for income tax | ||||||||
| (10 | ) | (13 | ) | Total net of income tax | ||||||
| Total reclassifications for the period | $ | (13 | ) | $ | (1 | ) |
Amounts in parentheses indicate reductions to income and increases to other comprehensive income.
Reclassifications of prior service benefit and actuarial net loss in respect of retirement plans and post retirement pension plans are included in the computation of net periodic cost (see Note 13 "Retirement Plans and Post Retirement Pension Plans").
- SEGMENT INFORMATION
Description of segments. We are a global leader in life sciences, diagnostics and applied chemical markets, providing application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. In the first fiscal quarter of 2015, we completed the separation of our electronic measurement business. See Note 3, "Discontinued Operations" for further information.
Agilent has three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business each of which comprises a reportable segment. The three operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and services and manufacturing are considered in determining the formation of these operating segments.
A description of our three reportable segments is as follows:
Our life sciences and applied markets business provides application-focused solutions that include instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Key product categories include: liquid chromatography ("LC") systems and components; liquid chromatography mass spectrometry ("LCMS") systems; gas chromatography ("GC") systems and components; gas chromatography mass spectrometry ("GCMS") systems; inductively coupled plasma mass spectrometry ("ICP-MS") instruments; atomic absorption ("AA") instruments; microwave plasma-atomic emission spectrometry (“MP-AES”) instruments; inductively coupled plasma optical emission spectrometry ("ICP-
OES") instruments; cell analysis plate based assays; laboratory software and informatics systems; laboratory automation; dissolution testing; vacuum pumps and measurement technologies.
Our diagnostics and genomics business is comprised of five areas of activity providing solutions that include reagents, instruments, software and consumables, which enable customers in the clinical and life sciences research areas to interrogate samples at the cellular and molecular level. First, our genomics business includes arrays for DNA mutation detection, genotyping, gene copy number determination, identification of gene rearrangements, DNA methylation profiling, gene expression profiling, as well as next generation sequencing ("NGS") target enrichment and genetic data management and interpretation support software. Second, our nucleic acid solutions business provides equipment and expertise focused on production of synthesized oligonucleotides under pharmaceutical good manufacturing practices ("GMP") conditions for use as active pharmaceutical ingredients ("API") in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Next, our pathology solutions business is focused on product offerings to cancer diagnostics and anatomic pathology workflows. The broad portfolio of offerings includes immunohistochemistry (“IHC”), in situ hybridization (“ISH”), hematoxylin and eosin (“H&E”) staining and special staining. We also collaborate with a number of major pharmaceutical companies to develop new potential pharmacodiagnostics, also known as companion diagnostics, which may be used to identify patients most likely to benefit from a specific targeted therapy. Finally, the reagent partnership business is a provider of reagents used for turbidimetry and flow cytometry.
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed to improve customer outcomes. The majority of the portfolio is vendor neutral, meaning Agilent can serve and supply customers regardless of their instrument purchase choices. Solutions range from chemistries and supplies to services and software helping to connect the entire lab. Key product categories in consumables include GC and LC columns, sample preparation products, custom chemistries, and a large selection of laboratory instrument supplies. Services include startup, operational, training and compliance support, as well as asset management and consultative services that help increase customer productivity. Custom service and consumable bundles are tailored to meet the specific application needs of various industries and to keep instruments fully operational and compliant with the respective industry requirements.
A significant portion of the segments' expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include legal, accounting, real estate, insurance services, information technology services, treasury, other corporate infrastructure expenses and costs of centralized research and development. Charges are allocated to the segments, and the allocations have been determined on a basis that we consider to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. Corporate charges previously allocated to our electronic measurement business, but not classified within discontinued operations, were not reallocated to our other segments. These charges are presented below as a component of the reconciliation between segments' income from operations and Agilent's income from continuing operations and are classified as unallocated corporate charges. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, restructuring and transformational expenses, acquisition and integration costs and certain other charges to the operating margin for each segment because management does not include this information in its measurement of the performance of the operating segments.
The following tables reflect the results of our reportable segments under our management reporting system. The performance of each segment is measured based on several metrics, including segment income from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.
The profitability of each of the segments is measured after excluding restructuring and asset impairment charges, investment gains and losses, interest income, interest expense, acquisition and integration costs, non-cash amortization and other items as noted in the reconciliations below.
| Life Sciences and Applied Markets | Diagnostics and Genomics | Agilent CrossLab | Total Segments | ||||||||||||
| (in millions) | |||||||||||||||
| Year ended October 31, 2016: | |||||||||||||||
| Total net revenue | $ | 2,073 | $ | 709 | $ | 1,420 | $ | 4,202 | |||||||
| Income from operations | $ | 429 | $ | 114 | $ | 316 | $ | 859 | |||||||
| Depreciation expense | $ | 36 | $ | 31 | $ | 28 | $ | 95 | |||||||
| Share-based compensation expense | $ | 29 | $ | 10 | $ | 21 | $ | 60 | |||||||
| Year ended October 31, 2015: | |||||||||||||||
| Total net revenue | $ | 2,046 | $ | 662 | $ | 1,330 | $ | 4,038 | |||||||
| Income from operations | $ | 380 | $ | 88 | $ | 299 | $ | 767 | |||||||
| Depreciation expense | $ | 27 | $ | 37 | $ | 34 | $ | 98 | |||||||
| Share-based compensation expense | $ | 27 | $ | 9 | $ | 18 | $ | 54 | |||||||
| Year ended October 31, 2014: | |||||||||||||||
| Total net revenue | $ | 2,078 | $ | 663 | $ | 1,307 | $ | 4,048 | |||||||
| Income from operations | $ | 369 | $ | 93 | $ | 301 | $ | 763 | |||||||
| Depreciation expense | $ | 29 | $ | 43 | $ | 33 | $ | 105 | |||||||
| Share-based compensation expense | $ | 29 | $ | 9 | $ | 18 | $ | 56 |
For the year ended October 31, 2014, depreciation expense and share-based compensation expense excludes unallocated corporate charges.
The following table reconciles reportable segments' income from operations to Agilent's total enterprise income before taxes:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Total reportable segments' income from operations | $ | 859 | $ | 767 | $ | 763 | |||||
| Restructuring and business exit related costs | (11 | ) | (12 | ) | (66 | ) | |||||
| Asset Impairments | (4 | ) | (3 | ) | (4 | ) | |||||
| Transformational programs | (38 | ) | (56 | ) | (29 | ) | |||||
| Amortization of intangibles | (152 | ) | (156 | ) | (189 | ) | |||||
| Acquisition and integration costs | (41 | ) | (13 | ) | (11 | ) | |||||
| Acceleration of share-based compensation expense related to workforce reduction | — | (2 | ) | (1 | ) | ||||||
| One-time and pre-separation costs | — | — | (14 | ) | |||||||
| Pension curtailment gain | 16 | — | — | ||||||||
| Impairment of loans | (7 | ) | — | — | |||||||
| Other | (7 | ) | (3 | ) | 10 | ||||||
| Interest Income | 11 | 7 | 9 | ||||||||
| Interest Expense | (72 | ) | (66 | ) | (110 | ) | |||||
| Other income (expense), net | (10 | ) | 17 | (89 | ) | ||||||
| Unallocated corporate charges | — | — | (40 | ) | |||||||
| Income before taxes, as reported | $ | 544 | $ | 480 | $ | 229 |
Major customers. No customer represented 10 percent or more of our total net revenue in 2016, 2015 or 2014.
The following table presents assets and capital expenditures directly managed by each segment. Unallocated assets primarily consist of cash, cash equivalents, accumulated amortization of other intangibles and other assets.
| Life Sciences and Applied Markets | Diagnostics and Genomics | Agilent CrossLab | Total Segments | ||||||||||||
| (in millions) | |||||||||||||||
| As of October 31, 2016: | |||||||||||||||
| Assets | $ | 1,687 | $ | 1,960 | $ | 1,082 | $ | 4,729 | |||||||
| Capital expenditures | $ | 53 | $ | 41 | $ | 45 | $ | 139 | |||||||
| As of October 31, 2015: | |||||||||||||||
| Assets | $ | 1,539 | $ | 2,027 | $ | 1,008 | $ | 4,574 | |||||||
| Capital expenditures | $ | 28 | $ | 33 | $ | 37 | $ | 98 |
The following table reconciles segment assets to Agilent's total assets:
| October 31, | |||||||
| 2016 | 2015 | ||||||
| (in millions) | |||||||
| Total reportable segments' assets | $ | 4,729 | $ | 4,574 | |||
| Cash, cash equivalents and short-term investments | 2,289 | 2,003 | |||||
| Short-term restricted cash and cash equivalents | — | 242 | |||||
| Prepaid expenses | 92 | 105 | |||||
| Investments | 135 | 86 | |||||
| Long-term and other receivables | 92 | 104 | |||||
| Other | 465 | 365 | |||||
| Total assets | $ | 7,802 | $ | 7,479 |
The other category primarily includes deferred tax assets and long-term investments which are not allocated to the segments.
The following table represents total revenue by product category:
| Years Ended October 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Instrumentation | $ | 1,871 | $ | 1,827 | $ | 1,839 | |||||
| Analytical lab services | 910 | 843 | 831 | ||||||||
| Analytical lab consumables | 510 | 489 | 476 | ||||||||
| Diagnostics and genomics solutions | 709 | 662 | 663 | ||||||||
| Informatics and other | 202 | 217 | 239 | ||||||||
| Total | $ | 4,202 | $ | 4,038 | $ | 4,048 |
The following table presents summarized information for net revenue and long-lived assets by geographic region. Revenues from external customers are generally attributed to countries based upon the customer's location. Long lived assets consist of property, plant, and equipment, long-term receivables and other long-term assets excluding intangible assets. The rest of the world primarily consists of rest of Asia and Europe.
| United States | China | Rest of the World | Total | ||||||||||||
| (in millions) | |||||||||||||||
| Net revenue: | |||||||||||||||
| Year ended October 31, 2016 | $ | 1,251 | $ | 821 | $ | 2,130 | $ | 4,202 | |||||||
| Year ended October 31, 2015 | $ | 1,206 | $ | 633 | $ | 2,199 | $ | 4,038 | |||||||
| Year ended October 31, 2014 | $ | 1,019 | $ | 543 | $ | 2,486 | $ | 4,048 |
| United States | Germany | Rest of the World | Total | ||||||||||||
| (in millions) | |||||||||||||||
| Long-lived assets: | |||||||||||||||
| October 31, 2016 | $ | 449 | $ | 89 | $ | 266 | $ | 804 | |||||||
| October 31, 2015 | $ | 391 | $ | 64 | $ | 315 | $ | 770 |
- SUBSEQUENT EVENT
On December 19, 2016 we signed an agreement to acquire 100 percent of the stock of Multiplicom NV (“Multiplicom”), a leading European diagnostics company with state-of-the-art genetic testing technology and products, for approximately €68 million in cash. Multiplicom, headquartered in Belgium, develops, manufactures and commercializes molecular diagnostic assays, provided as kits, which enable personalized medicine. The acquisition is expected to be completed by mid-January, subject to local laws and regulations and customary closing conditions. The financial results of Multiplicom will be included within Agilent's from the date of the close, which is expected to be during the first quarter of 2017.
QUARTERLY SUMMARY
(Unaudited)
| Three Months Ended | |||||||||||||||
| January 31, (As Adjusted) | April 30, | July 31, | October 31, | ||||||||||||
| (in millions, except per share data) | |||||||||||||||
| 2016 | |||||||||||||||
| Net revenue | $ | 1,028 | $ | 1,019 | $ | 1,044 | $ | 1,111 | |||||||
| Gross profit | 537 | 530 | 542 | 588 | |||||||||||
| Income from operations | 155 | 131 | 146 | 183 | |||||||||||
| Income from continuing operations | 121 | 91 | 124 | 126 | |||||||||||
| Loss from discontinued operations, net of tax | — | — | — | — | |||||||||||
| Net income | $ | 121 | $ | 91 | $ | 124 | $ | 126 | |||||||
| Net income per share — basic: | |||||||||||||||
| Income from continuing operations | $ | 0.37 | $ | 0.28 | $ | 0.38 | $ | 0.39 | |||||||
| Loss from discontinued operations | — | $ | — | $ | — | $ | — | ||||||||
| Net income per share - basic | $ | 0.37 | $ | 0.28 | $ | 0.38 | $ | 0.39 | |||||||
| Net income per share — diluted: | |||||||||||||||
| Income from continuing operations | $ | 0.36 | $ | 0.28 | $ | 0.38 | $ | 0.38 | |||||||
| Loss from discontinued operations | — | — | — | — | |||||||||||
| Net income per share — diluted | $ | 0.36 | $ | 0.28 | $ | 0.38 | $ | 0.38 | |||||||
| Weighted average shares used in computing net income per share: | |||||||||||||||
| Basic | 329 | 326 | 325 | 324 | |||||||||||
| Diluted | 332 | 328 | 328 | 328 | |||||||||||
| Cash dividends per common share | $ | 0.115 | $ | 0.115 | $ | 0.115 | $ | 0.115 | |||||||
| Range of stock prices on NYSE | $36.01-$42.48 | $34.15-$42.00 | $40.39-$48.18 | $43.11-$48.63 | |||||||||||
| 2015 | |||||||||||||||
| Net revenue | $ | 1,026 | $ | 963 | $ | 1,014 | $ | 1,035 | |||||||
| Gross profit | 513 | 480 | 513 | 535 | |||||||||||
| Income from operations | 115 | 107 | 144 | 156 | |||||||||||
| Income from continuing operations | 93 | 92 | 113 | 140 | |||||||||||
| Income from discontinued operations, net of tax | (30 | ) | (5 | ) | (2 | ) | — | ||||||||
| Net income | $ | 63 | $ | 87 | $ | 111 | $ | 140 | |||||||
| Net income per share — basic: | |||||||||||||||
| Income from continuing operations | $ | 0.28 | $ | 0.28 | $ | 0.34 | $ | 0.42 | |||||||
| Income from discontinued operations | (0.09 | ) | (0.02 | ) | (0.01 | ) | — | ||||||||
| Net income per share - basic | $ | 0.19 | $ | 0.26 | $ | 0.33 | $ | 0.42 | |||||||
| Net income per share — diluted: | |||||||||||||||
| Income from continuing operations | $ | 0.28 | $ | 0.27 | $ | 0.34 | $ | 0.42 | |||||||
| Income from discontinued operations | (0.09 | ) | (0.01 | ) | (0.01 | ) | — | ||||||||
| Net income per share — diluted | $ | 0.19 | $ | 0.26 | $ | 0.33 | $ | 0.42 | |||||||
| Weighted average shares used in computing net income per share: | |||||||||||||||
| Basic | 336 | 334 | 332 | 331 | |||||||||||
| Diluted | 338 | 337 | 334 | 333 | |||||||||||
| Cash dividends per common share | $ | 0.100 | $ | 0.100 | $ | 0.100 | $ | 0.100 | |||||||
| Range of stock prices on NYSE | $37.68-$42.99 | $37.71-$43.59 | $38.48-$42.93 | $33.12-$41.35 |
The above quarterly financial data includes Keysight which is presented as discontinued operations. See Note 3, "Discontinued Operations" for additional information. In addition, the first quarter of fiscal year 2016 has been adjusted to include an additional $2 million of tax expense as a result of our early adoption of Accounting Standard Update (ASU) 2016-09 "Improvements to Employees Share-based Payment Accounting", in the third quarter of fiscal year 2016. Please refer to Note 2, "New Accounting Pronouncements."
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