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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, seasonality and growth in, and drivers of, the markets we sell into, our strategic direction, new product and service introductions and future products and services, adoption of our products, the ability of our products to meet market and customer needs, improving our customers’ experience, future financial results, our operating margin, mix, our investments, including in manufacturing infrastructure and research and development, our ability to identify and enable synergies across our businesses, our focus on balanced capital allocation, competition, our contributions to our pension and other defined benefit plans, impairment of goodwill and other intangible assets, the effect of the U.S. Tax Cuts and Jobs Act of 2017 and U.S. and other tariffs, the impact of foreign currency movements, our hedging programs and other actions to offset the effects of tariffs and foreign currency movements, our future effective tax rate and tax valuation allowance, earnings from our foreign subsidiaries, repatriation of our earnings from foreign jurisdictions, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position, our ability to generate cash from operations, the potential impact of adopting new accounting pronouncements,indemnification, the use of contract manufacturers, out sourcing and third-party package delivery services, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration of our acquisitions and other transactions, write down of investment values or loans and convertible notes, our stock repurchase program, our declared dividends, and the existence of economic instability, that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed in Part I Item 1A and elsewhere in this Form 10-K.
Overview and Executive Summary
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 include instruments, software, services and consumables for the entire laboratory workflow.
In 2018, we acquired seven businesses for a combined purchase price of approximately $536 million. The largest of which was Advanced Analytical Technologies, Inc. ("AATI") for approximately $268 million in cash. On November 14, 2018, we acquired 100 percent of the stock of ACEA Biosciences Inc. ("ACEA"), a developer of cell analysis tools, for $250 million in cash. The financial results of ACEA will be included within our financial results from the date of the close. In 2017, we acquired two businesses for a combined purchase price of approximately $125 million in cash.
Agilent's net revenue of $4,914 million in 2018 increased 10 percent when compared to 2017. Foreign currency movements for 2018 had an overall favorable impact on revenue of approximately 2 percentage points compared to 2017. Acquisitions in 2018 had an overall favorable impact of 1 percentage point when compared to 2017. Revenue in the life sciences and applied markets business increased 9 percent in 2018 when compared to 2017. Foreign currency movements had an favorable impact on revenue of 2 percentage points in 2018 when compared to 2017. Revenue in the diagnostics and genomics business increased 10 percent in 2018 when compared to 2017. Foreign currency movements had an favorable impact on revenue of 3 percentage points in 2018 when compared to 2017. Revenue in the Agilent CrossLab business increased 11 percent in 2018 when compared to 2017. Foreign currency movements had an favorable impact on revenue of 2 percentage points in 2018 when compared to 2017.
Agilent's net revenue of $4,472 million increased 6 percent in 2017 when compared to 2016. Foreign currency movements for 2017 had an overall unfavorable impact on revenue of approximately 1 percentage point compared to 2016. Revenue in the life sciences and applied markets business increased 4 percent in 2017 when compared to 2016. Foreign currency movements had an overall unfavorable impact on revenue of less than 1 percentage point in 2017 when compared to 2016. Revenue in the diagnostics and genomics business increased 9 percent in 2017 when compared to 2016. Foreign currency movements had no overall impact on revenue in 2017 when compared to 2016. Revenue in the Agilent CrossLab business increased 8 percent in 2017 when compared to 2016. Foreign currency movements had an overall unfavorable impact on revenue of less than 1 percentage point in 2017 when compared to 2016.
Net income was $316 million in 2018 compared to net income of $684 million and $462 million in 2017 and 2016, respectively. Net income for the year ended October 31, 2018 was impacted by a discrete tax charge of $552 million related to the enactment of the Tax Act passed on December 22, 2017. See Note 4, "Income Taxes" for more details. As of October 31, 2018 and 2017, we had cash and cash equivalents balances of $2,247 million and $2,678 million, respectively.
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 million shares for $98 million which completed the purchases under this authorization.
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 at the company's discretion 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. During the year ended October 31, 2017, we repurchased approximately 4.1 million shares for $194 million under this authorization. During the year ended October 31, 2018 we repurchased and retired approximately 6.4 million shares for $422 million under this authorization. As of October 31, 2018, we had remaining authorization to repurchase up to $188 million of our common stock under this program which expired on November 1, 2018.
On November 19, 2018 we announced that our board of directors had approved a new share repurchase program (the "2019 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2019 share repurchase program authorizes the purchase of up to $1.75 billion of our common stock at the company's discretion and has no fixed termination date. The 2019 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time.
During the year ended October 31, 2018, cash dividends of $0.596 per share, or $191 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2017, cash dividends of $0.528 per share, or $170 million were declared and paid on the company's outstanding common stock. During the year ended October 31, 2016, cash dividends of $0.460 per share, or $150 million were declared and paid on the company's outstanding common stock.
On November 14, 2018 we declared a quarterly dividend of $0.164 per share of common stock, or approximately $52 million which will be paid on January 23, 2019 to shareholders of record as of the close of business on December 31, 2018. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Looking forward, we continue to focus on differentiating product solutions, improving our customers' experience and growing our operating margin. In addition, we remain focused on a balanced capital allocation through our dividend and share repurchase programs. We expect foreign currency to negatively impact revenue in 2019 but we also anticipate the contribution from our recent acquisitions to partially offset the currency impact.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. 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. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. 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, inventory valuation, share-based compensation, retirement and post-retirement plan assumptions, valuation of goodwill and purchased intangible assets and accounting for income taxes.
Revenue Recognition. We enter into agreements to sell products (hardware or software), services, and other arrangements (multiple element arrangements) that include combinations of products and services. Revenue from product sales, net of trade discounts and allowances, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenue is reduced for estimated product returns, when appropriate. For sales that include customer-specified acceptance criteria, 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 occurs when the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete. Revenue from services is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. 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 our vendor specific objective evidence (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 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. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element have been met. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements.
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.
Inventory Valuation. We assess the valuation of our inventory on a periodic basis and make adjustments to the value for estimated excess and obsolete inventory based upon estimates about future demand and actual usage. Such estimates are difficult to make under most economic conditions. 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. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold to customers, resulting in lower cost of sales and higher income from operations than expected in that period.
Share-Based Compensation. We account for share-based awards in accordance with the authoritative guidance. Under the authoritative guidance, share-based compensation expense is primarily based on estimated grant date fair value and is recognized on a straight-line basis. The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Stock options were granted in years prior to fiscal year 2016. Shares granted under the Long-Term Performance Program based on Total Shareholders Return ("LTPP-TSR") were valued using the Monte Carlo simulation model. The estimated fair value of restricted stock unit awards, LTPP based on Operating Margin (“LTPP-OM”) and LTPP based on Earnings per share (“LTPP-EPS”) is determined based on the market price of Agilent's common stock on the date of grant adjusted for expected dividend yield. The compensation cost for LTPP (OM) and LTPP (EPS) reflects the cost of awards that are probable to vest at the end of the performance period. In the case of LTPP-OM, the performance targets for all the three years of performance period is set at the time of grant. The performance targets for LTPP-EPS grants for year 2 and year 3 of the performance period will be set in the first quarter of year 2 and year 3, respectively. The probable shares to vest are estimated based on the forecasted OM and EPS at the time of the grant and updated every quarter with latest forecast and actual information. The Employee Stock Purchase Plan ("ESPP") allows eligible employees to purchase shares of our common stock at 85 percent of the fair market value at the purchase date. All awards granted after 2015 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.
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. For LTPP (TSR) grants in 2016, we used the 3-year average historical stock price volatility of a group of our peer companies. We believed our historical volatility prior to the separation of Keysight in 2015 was no longer relevant to use. For the 2017 and 2018 LTPP (TSR) grants and calculation of the post-vest discount using the Finnerty model, we used our own post-separation historical stock price volatility. See Note 3, "Share-based Compensation," to the consolidated financial statements for more information.
The assumptions used in calculating the fair value of share-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results.
Retirement and Post-Retirement Benefit Plan Assumptions. Retirement and post-retirement benefit plan costs are a significant cost of doing business. They represent obligations that will ultimately be settled sometime in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employees' average expected future service to Agilent based on the terms of the plans and investment and funding decisions. To estimate the impact of these future payments and our decisions concerning funding of these obligations, we are required to make assumptions using actuarial concepts within the framework of accounting principles generally accepted in the U.S. Two critical assumptions are the discount rate and the expected long-term return on plan assets. Other important assumptions include, expected future salary increases, expected future increases to benefit payments, expected retirement dates, employee turnover, retiree mortality rates, and portfolio composition. We evaluate these assumptions at least annually.
The discount rate is used to determine the present value of future benefit payments at the measurement date - October 31 for both U.S. and non-U.S. plans. For 2018 and 2017, the U.S. discount rates were based on the results of matching expected plan benefit payments with cash flows from a hypothetically constructed bond portfolio. In 2018, discount rates for the U.S. plans
increased compared to the previous year. For 2018 and 2017, the discount rate for non-U.S. plans was generally based on published rates for high quality corporate bonds and in 2018, slightly increased compared to the previous year. If we changed our discount rate by 1 percent, the impact would be less than $1 million in U.S. pension expense and $16 million on non-U.S. pension expense. Lower discount rates increase present values of the pension benefit obligation and subsequent year pension expense; higher discount rates decrease present values of the pension benefit obligation and subsequent year pension expense.
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. The expected long-term return on plan assets is estimated using current and expected asset allocations as well as historical and expected returns. Plan assets are valued at fair value. If we changed our estimated return on assets by 1 percent, the impact would be $4 million on U.S. pension expense and $9 million on non-U.S. pension expense. For 2018, actual return on assets was below expectations which, along with contributions during the year, increased next year’s pension cost as well as resulting in a decrease of the funded status at year end. The net periodic pension and post-retirement benefit costs recorded were a $3 million benefit in 2018, $15 million benefit in 2017 and $3 million expense in 2016. The years ended October 31, 2018, 2017 and 2016, included a gain on curtailment and settlements of $5 million, $32 million and $16 million, respectively.
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 2018, 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, 2018. 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, 2018, 2017 and 2016.
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, we will record a charge for the value of the related intangible asset to our consolidated statement of operations in the period it is abandoned.
We continually monitor events and changes in circumstances that could indicate carrying amounts of finite-lived intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of finite-lived intangible 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. During 2018, we recorded an impairment charge of $21 million related to purchased intangible assets within the diagnostics and genomics segment that were deemed unrecoverable.
Our 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, 2018. 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. During the years ended October 31, 2018 and 2017, there were no impairments of indefinite-lived intangible assets. Based on triggering events in the year ended October 31, 2016, we recorded an impairment of $4 million due to the cancellation of certain IPR&D projects.
Accounting for Income Taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period. On a quarterly basis, we provide for income taxes based upon an estimated annual effective tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.
Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more-likely-than-not that all or some portion of deferred tax assets may not be realized, a valuation allowance must be established against such deferred tax assets. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of losses in recent years and our forecast of future taxable income. At October 31, 2018, we continue to recognize a valuation allowance for certain U.S. and U.S state and foreign deferred tax assets. We intend to maintain a valuation allowance in these jurisdictions until sufficient positive evidence exists to support its reversal.
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. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated statements of operations.
On December 22, 2017, the Tax Act was enacted into law. The Tax Act significantly changes the existing U.S. tax law and includes numerous provisions that affect our business. ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 which allowed companies to record provisional amounts during a measurement period that should not extend beyond one year from the Tax Act enactment date. We have recognized the tax charge of $499 million due to transition tax liability and $53 million due to the impact of reduction in U.S. tax rates in the period when the tax law was enacted as a component of provision for income taxes from continuing operations. We have completed the accounting for all the impacts of the Tax Act except for the policy election for the treatment of the tax on global intangible low-tax income (“GILTI”) inclusions. See Note 4, "Income Taxes" for more details. These computations are based on the regulations and guidance already provided by federal and state tax authorities. The company will continue to assess the impact of the further guidance from federal and state tax authorities on its business and consolidated financial statements. Any future adjustments will be recognized as discrete income tax expense or benefit in the period the adjustments are determined.
Adoption of New Pronouncements
See Note 2, "New Accounting Pronouncements," to the consolidated financial statements for a description of new accounting pronouncements.
Foreign Currency
Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. The favorable effects of changes in foreign currency exchange rates has increased revenue by approximately 2 percentage point for the year ended October 31, 2018. When movements in foreign currency exchange rates have a positive impact on revenue it will also have a negative impact on our costs and expenses. The unfavorable effects of changes in foreign currency exchange rates has decreased revenue by approximately 1 percentage point for the year ended October 31, 2017. When movements in foreign currency exchange rates have a negative impact on revenue it will also have a positive impact on our costs and expenses. We calculate the impact of foreign currency exchange rates movements by applying the actual foreign currency exchange rates in effect during the last month of each quarter of the current year to both the applicable current and prior year periods. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (up to a rolling twelve-month period). Therefore, we are exposed to currency fluctuations over the longer term. To the extent that we are required to pay for all, or portions, of an acquisition price in foreign currencies, we may enter into foreign exchange contracts to reduce the risk that currency movements will impact the U.S. dollar cost of the transaction.
Results from Operations
Net Revenue
| Years Ended October 31, | 2018 over 2017 % Change | 2017 over 2016 % Change | |||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue: | |||||||||||||||
| Products | $ | 3,746 | $ | 3,397 | $ | 3,213 | 10% | 6% | |||||||
| Services and other | $ | 1,168 | $ | 1,075 | $ | 989 | 9% | 9% | |||||||
| Total net revenue | $ | 4,914 | $ | 4,472 | $ | 4,202 | 10% | 6% |
| Years Ended October 31, | 2018 over 2017 ppts Change | 2017 over 2016 ppts Change | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| % of total net revenue: | ||||||||||||
| Products | 76 | % | 76 | % | 76 | % | — | — | ||||
| Services and other | 24 | % | 24 | % | 24 | % | — | — | ||||
| Total | 100 | % | 100 | % | 100 | % |
Agilent's net revenue of $4,914 million in October 31, 2018 increased 10 percent when compared to 2017. Foreign currency movements for 2018 had an favorable impact of approximately 2 percentage points compared to 2017. Agilent's net revenue of $4,472 million increased 6 percent in 2017 when compared to 2016. Foreign currency movements for 2017 had an unfavorable impact of approximately 1 percentage point compared to 2016.
Product revenue includes revenue generated from the sales of our analytical instrumentation, software and consumables. Services and other revenue primarily consists of revenue generated from Agilent CrossLab services and services in the diagnostics and genomics business including consulting services related to the companion diagnostics and nucleic acid businesses. Some of the prominent services include repair and maintenance on multi-vendor instruments, compliance services and installation services.
Services and other revenue increased 9 percent in 2018 as compared to 2017. Services and other revenue increased in all major service categories within our Agilent CrossLab business. Services in the diagnostics and genomics business is increasing due to growth in our genomics and pathology businesses.
Services and other revenue increased 9 percent in 2017 as compared to 2016. The service and other revenue growth is impacted by a portion of the revenue being driven by the current and previously installed product base. Service and other revenue increased due to strong companion diagnostics revenue and increases across nearly all service types.
Net Revenue By Segment
| Years Ended October 31, | 2018 over 2017 % Change | 2017 over 2016 % Change | |||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue by segment: | |||||||||||||||
| Life sciences and applied markets | $ | 2,270 | $ | 2,081 | $ | 1,992 | 9% | 4% | |||||||
| Diagnostics and genomics | $ | 943 | $ | 860 | $ | 790 | 10% | 9% | |||||||
| Agilent CrossLab | $ | 1,701 | $ | 1,531 | $ | 1,420 | 11% | 8% | |||||||
| Total net revenue | $ | 4,914 | $ | 4,472 | $ | 4,202 | 10% | 6% |
Revenue in the life sciences and applied markets business increased 9 percent in 2018 when compared to 2017. Foreign currency movements had an overall favorable impact on revenue of 2 percentage point in 2018 when compared to 2017. Our performance within the life science and applied markets business was led by strong growth throughout the year in the pharmaceutical market. Chemical and energy markets and the environmental and forensics markets continued to show strong growth when compared to last year. Revenue in the life sciences and applied markets business increased 4 percent in 2017 when compared to 2016. Foreign currency movements had an unfavorable impact of less than 1 percentage point in 2017 when compared to 2016. For the year ended October 31, 2017, our performance within the life sciences markets was led by solid growth in the biotechnology and pharmaceutical markets. Within the applied markets, there was strong growth in the chemical and energy, food and environmental markets.
Revenue in the diagnostics and genomics business increased 10 percent in 2018 when compared to 2017. Foreign currency movements had an overall favorable impact on revenue of 3 percentage point in 2018 when compared to 2017. Our performance within the diagnostics and genomics business was led by strong growth in our genomics, companion diagnostics and biomolecular analysis businesses. Revenue in the diagnostics and genomics business increased 9 percent in 2017 when compared to 2016. Foreign currency movements had no overall currency impact on revenue growth in 2017 when compared to 2016. For the year ended October 31, 2017, our performance within the clinical and diagnostics market continued to improve with strong revenue growth from our companion diagnostics and pathology businesses.
Revenue in the Agilent CrossLab business increased 11 percent in 2018 when compared to 2017. Foreign currency movements had an overall favorable impact on revenue of 2 percentage point in 2018 when compared to 2017. Our performance in the Agilent CrossLab business saw continued growth in all key end markets with strong growth in the pharmaceutical and food markets. Revenue generated by Agilent CrossLab increased 8 percent in 2017 when compared to 2016. Foreign currency movements had an unfavorable impact of less than 1 percentage point in 2017 when compared to 2016. Revenue grew across all key end markets led by strong growth in the biotechnology and pharmaceutical, chemical and energy and food markets.
Costs and Expenses
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Gross margin on products | 57.6 | % | 57.0 | % | 54.7 | % | 1 ppt | 2 ppts | ||||
| Gross margin on services and other | 45.3 | % | 44.1 | % | 44.6 | % | 1 ppt | — | ||||
| Total gross margin | 54.7 | % | 53.9 | % | 52.3 | % | 1 ppt | 2 ppts | ||||
| Operating margin | 18.9 | % | 18.8 | % | 14.6 | % | — | 4 ppts |
| (in millions) | |||||||||||||||
| Research and development | $ | 385 | $ | 339 | $ | 329 | 14% | 3% | |||||||
| Selling, general and administrative | $ | 1,374 | $ | 1,229 | $ | 1,253 | 12% | (2)% |
Total gross margin for the year ended October 31, 2018 increased 1 percentage point when compared to last year. Increases in total gross margins for the year ended October 31, 2018 reflects higher sales volume, favorable business mix, lower manufacturing material costs and lower amortization expense of intangible assets partially offset by increased wages and variable pay, an impairment of certain intangible assets and unfavorable currency movements. Total gross margin for the year ended October 31, 2017 increased 2 percentage points when compared to last year. Increases in total gross margins for the year ended October 31, 2017 reflects higher sales volume, results from margin improvement initiatives, lower amortization expense of intangible assets and the impact of an employee pension settlement gain partially offset by higher wages and variable pay.
Total operating margin was flat for the year ended October 31, 2018, when compared to last year. Operating margins was impacted by higher gross margins, lower acquisition and integration costs and lower amortization expense offset by increased wages and variable pay, an impairment of certain intangible assets, higher transformational initiative costs and the additional research and development and selling, general and administrative expenses related to our recent acquisitions. Total operating margin increased 4 percentage points for the year ended October 31, 2017, when compared to 2016. Operating margins increased due to improvements in gross margins, the impact of lower amortization expense of intangible assets, lower transformation initiatives costs, lower acquisition and integration costs and the impact of an employee pension settlement gain when compared to 2016.
Gross inventory charges were $26 million in 2018, $24 million in 2017 and $20 million in 2016. Sales of previously written down inventory were $8 million in 2018, $9 million in 2017 and $9 million in 2016.
Research and development expenses increased 14 percent for the year ended October 31, 2018 when compared with last year. Research and development expenses increased due to increased program spending on new products related to all of our businesses in addition to higher wages and variable pay, unfavorable currency movements and additional expenses related to acquired businesses when compared to spending in 2017. Research and development expenses increased 3 percent for the year ended October 31, 2017 when compared with 2016. Research and development expenditures increased due to increased spending on new products related to all of our businesses, additional expenses related to increased headcount from acquisitions, and higher wages and variable pay.
Selling, general and administrative expenses increased 12 percent in 2018 compared to 2017. Selling, general and administrative expenses increase was due to higher wages and variable pay, higher commissions, increased corporate costs, higher share-based compensation expense, higher transformational initiative costs, an impairment of certain intangible assets and unfavorable currency movements. Selling, general and administrative expenses decreased 2 percent in 2017 compared to 2016. Selling, general and administrative expenses decreased due to lower amortization expense from intangible assets, lower transformational initiatives, lower acquisition and integration costs, the impact of an employee pension settlement gain and reduced costs due to business improvement initiatives partially offset by higher wages and variable pay and additional selling, general and administrative expenses associated with our acquisitions in 2017.
Interest expense for the years ended October 31, 2018, 2017 and 2016 was $75 million, $79 million and $72 million, respectively, and relates to the interest charged on our senior notes and the amortization of the deferred loss recorded upon termination of the forward starting interest rate swap contracts offset by the amortization of deferred gains recorded upon termination of interest rate swap contracts.
At October 31, 2018, our headcount was approximately 14,800 compared to 13,500 in 2017.
Other income (expense), net
For the year ended October 31, 2018, other income (expense), net includes the net gain of $20 million related to the step-up of our initial investment in Lasergen, $15 million of income related to a special one-time settlement with a third-party and income of $12 million related to the provision of site service costs to, and lease income from, Keysight Technologies, Inc. ("Keysight").
For the year ended October 31, 2017, other income (expense), net includes $12 million of income related to the provision of site service costs to and lease income from Keysight.
For the year ended October 31, 2016, other income (expense), net includes $12 million of income related to the provision of certain IT and site service costs to and lease income from Keysight and an $18 million expense related to the impairment of an investment. The costs associated with Keysight services are reported within income from operations in 2018, 2017 and 2016.
Income Taxes
| Years Ended October 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (in millions) | |||||||||||
| Provision for income taxes | $ | 630 | $ | 119 | $ | 82 |
For 2018, the company's income tax expense was $630 million with an effective tax rate of 66.6 percent. For the year ended October 31, 2018, our effective tax rate and the resulting provision for income taxes were significantly impacted by the discrete charge of $552 million related to the enactment of the U.S. Tax Cuts and Jobs Act (the “Tax Act”) as discussed below.
For 2017, the company's income tax expense was $119 million with an effective tax rate of 14.8 percent. Our effective tax rate is impacted by earnings realized in foreign jurisdictions with statutory tax rates lower than the federal statutory tax rate. During the year, the company determined a portion of current year foreign earnings from its low tax jurisdictions would not be considered as indefinitely reinvested. As such, a deferred tax liability for that portion of unremitted foreign earnings was accrued causing an increase in the annual tax expense. Our annual effective tax rate also included tax benefits due to the settlement of an audit in Germany for the years 2005 through 2008 and the lapse of U.S. statute of limitation for the fiscal years 2012 and 2013. This benefit was offset by a deferred tax liability required for the tax expected upon repatriation of related unremitted foreign earnings that were not asserted as indefinitely invested outside the U.S.
For 2016, the company’s income tax expense was $82 million with an effective tax rate of 15.1 percent. The income tax provision for the year ended October 31, 2016 included net discrete tax expense of $17 million primarily due to tax expense related to the establishment of a valuation allowance on an equity method investment impairment that would generate a capital loss when realized.
The company has negotiated 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. In December 2018, the tax holiday in Singapore was renegotiated and extended through 2027 see Note 19, "Subsequent Events" for more information. Other tax holidays are due for renewal between 2019 and 2020. As a result of the incentives, the impact of the tax holidays decreased income taxes by $87 million, $93 million, and $86 million in 2018, 2017, and 2016, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $0.27, $0.29, and $0.26 in 2018, 2017 and 2016, respectively.
2017 U.S. Tax Reform - Tax Cuts and Jobs Act
On December 22, 2017, the Tax Act was enacted into law. The Tax Act enacted significant changes affecting our fiscal year 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate and (2) imposing a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that had not been previously taxed in the U.S.
The Tax Act also establishes new tax provisions affecting our fiscal year 2019, including, but not limited to, (1) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (2) generally eliminating U.S. federal taxes on dividends from foreign subsidiaries; (3) eliminating the corporate alternative minimum tax (“AMT”); (4) creating the base erosion anti-abuse tax (“BEAT”); (5) establishing a deduction for foreign derived intangible income ("FDII"); (6) repealing domestic production activity deduction; and (7) establishing new limitations on deductible interest expense and certain executive compensation.
The Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent effective January 1, 2018. Due to our fiscal year end, the lower corporate tax rate will be phased in, resulting in a U.S. statutory federal rate of 23 percent for our fiscal year ending October 31, 2018 and 21 percent for subsequent fiscal years.
ASC 740, Income Taxes, requires companies to recognize the effect of the tax law changes in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin 118 ("SAB 118") which allowed companies to record provisional amounts during a measurement period not extending beyond one year from the Tax Act enactment date. For the year ended October 31, 2018, the company recognized income tax expense related to the Tax Act of $552 million which includes (1) an expense of $499 million of U.S. transition tax and correlative items on deemed repatriated earnings of non-U.S. subsidiaries and (2) an expense of $53 million associated with the impact on deferred taxes resulting from the decreased U.S. corporate tax rate as described below. As of October 31, 2018, the company has completed the accounting for all the impacts of the Tax Act except for the policy election for the treatment of the tax on GILTI inclusions.
Deemed Repatriation Transition Tax ("Transition Tax"): The Transition Tax is based on the company’s total unrepatriated post-1986 earnings and profits ("E&P") of its foreign subsidiaries and the amount of non-U.S. taxes paid (Tax Pools) on such earnings. Historically, the company permanently reinvested a significant portion of these post-1986 E&P outside the U.S. For the remaining portion, the company previously accrued deferred taxes. Since the Tax Act required all foreign earnings to be taxed currently, the company recorded an income tax expense of $651 million for its one-time transition U.S. federal tax and a benefit of $152 million for the reversal of related deferred tax liabilities. The resulting $499 million net transition tax, reduced by existing tax credits, will be paid over 8 years in accordance with the election available under the Tax Act. We have completed our accounting for charges related to the Transition Tax.
Reduction of U.S. Federal Corporate Tax Rate: The reduction of the corporate income tax rate requires companies to remeasure their deferred tax assets and liabilities as of the date of enactment. The amount recorded for the year ended October31, 2018 for the remeasurement due to tax rate change is $53 million. We have completed our accounting for the measurement of deferred taxes.
GILTI: The Tax Act subjects a U.S. corporation to tax on its GILTI. U.S. GAAP allows companies to make an accounting policy election to either (1) treat taxes due on future GILTI inclusions in the U.S. taxable income as a current-period expense when incurred (“period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (“deferred method”). Our analysis of the new GILTI rules and how they may impact us is incomplete. Accordingly, we have not made a policy election regarding the treatment of GILTI tax.
Indefinite Reinvestment Assertion: Prior to the enactment of the Tax Act, the company had indefinite investment assertion on a significant portion of its undistributed earnings from foreign subsidiaries. As a result of the enactment of the Tax Act, we have reevaluated our historic assertion and no longer consider these earnings to be indefinitely reinvested in our foreign subsidiaries. The company repatriated $1,921 million of foreign earnings in fiscal year 2018. The company has recorded a deferred tax liability of $11 million for foreign withholding taxes on repatriation of remaining undistributed earnings.
In the U.S., tax years remain open back to the year 2015 for federal income tax purposes and the year 2000 for significant states. There were no substantial changes to the status of these open tax years during 2018. The U.S. statute of limitation for audit of tax returns for the fiscal years 2014 expired in July 2018. The statute expiration resulted in the recognition of previously unrecognized tax benefits of $23 million.
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.
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.
Segment Overview
In 2018, we re-organized our operating segments and moved the microfluidics business from our life sciences and applied markets operating segment to our diagnostics and genomics operating segment. Following this re-organization, we continue to have three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business. All historical financial segment information for both the life sciences and applied markets segment and the diagnostics and genomics segment has been recast to reflect this reorganization in our financial statements.
Life Sciences and Applied Markets
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 and cellular 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; Raman spectroscopy, cell analysis plate based assays, flow cytometer; real-time cell analyzer, laboratory software for sample tracking, information management and analytics; laboratory automation and robotic systems; dissolution testing; vacuum pumps and measurement technologies.
Net Revenue
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | |||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue | $ | 2,270 | $ | 2,081 | $ | 1,992 | 9% | 4% |
Life science and applied markets business revenue in 2018 increased 9 percent compared to 2017. Foreign currency movements for 2018 had an overall favorable currency impact of 2 percentage points on revenue growth when compared to the same period last year. Geographically, revenue increased 8 percent in the Americas with no currency impact, increased 12 percent in Europe with a 5 percentage point favorable currency impact and increased 8 percent in Asia Pacific with a 1 percentage point favorable currency impact. From a product standpoint liquid chromatography mass spectrometry, spectroscopy and cell analysis systems led with double digit growth. Gas chromatography mass spectrometry and gas chromatography also posted strong results helped by growth in the chemical and energy markets.
End market performance in 2018 was led by pharmaceutical markets which were strong throughout the year. Chemical and energy markets kept the momentum from 2017 and delivered strong growth. Academic and government and environmental markets also delivered strong growth. Food market contracted mainly driven by consolidations of governmental agencies in China.
Life science and applied markets business revenue in 2017 increased 4 percent compared to 2016. From a product standpoint, gas chromatography mass spectrometry, software and informatics systems, and cell analysis systems led with double digit growth during the year. Gas chromatography returned to strong growth on the strength of rebounding chemical and energy markets. Liquid chromatography grew single digits compared to 2016 as the pharmaceutical markets moderated.
End market performance in 2017 showed a shift in growth trends from those of 2016. Chemical and energy markets rebounded sharply from the depressed levels of 2016 and delivered strong growth. The growth from pharmaceutical markets, which led the way in 2016, was modest reflecting difficult year on year comparisons. Food and environmental markets demonstrated continued growth during the year. Academic and government and diagnostic and clinical market sales saw improvement as the year progressed.
Looking forward, we are optimistic about our growth opportunities in the life sciences and applied markets as our broad portfolio of products and solutions are well suited to address customer needs. We anticipate strong sales funnels given new product introductions as we continue to invest in expanding and improving our applications and solutions portfolio. While we anticipate volatility in our markets, we expect continued growth across most end markets.
Gross Margin and Operating Margin
The following table shows the life sciences and applied markets business' margins, expenses and income from operations for 2018 versus 2017, and 2017 versus 2016.
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Total gross margin | 61.3 | % | 60.2 | % | 58.8 | % | 1 ppt | 1 ppt | ||||
| Operating margin | 24.1 | % | 22.5 | % | 20.7 | % | 2 ppts | 2 ppts |
| (in millions) | |||||||||||||||
| Research and development | $ | 219 | $ | 201 | $ | 191 | 9% | 5% | |||||||
| Selling, general and administrative | $ | 625 | $ | 585 | $ | 569 | 7% | 3% | |||||||
| Income from operations | $ | 547 | $ | 468 | $ | 412 | 17% | 14% |
Gross margin increased 1 percentage point in 2018 compared to 2017. The increase was due to increased volume and lower manufacturing material costs. Gross margin increased 1 percentage point in 2017 compared to 2016. The increase was due to a combination of moderate price increases, margin improvement initiatives, and reduced logistics costs.
Research and development expenses increased 9 percent in 2018 when compared to 2017. The increase in research and development was due to higher program funding in product development as well as wage and variable pay increases and unfavorable currency related effects. Research and development expenses increased 5 percent in 2017 when compared to 2016. Research and development expenses increased due to higher project investments across our businesses as well as higher wages and variable pay.
Selling, general and administrative expenses increased 7 percent in 2018 compared to 2017. Selling, general and administrative expenses increased due to increased marketing and sales force investments as well as wage and variable pay increases, higher share-based compensation expense and unfavorable currency related effects. Selling, general and administrative expenses increased 3 percent in 2017 compared to 2016. Selling, general and administrative expenses increased due to higher funding in marketing programs to promote newly released products as well as higher wages and variable pay.
Operating margin increased 2 percentage points in 2018 compared to 2017. The increase in operating margin was a product of revenue growth and improved gross margin offset slightly by unfavorable currency impact. Operating margin increased 2 percentage points in 2017 compared to 2016. Operating margin increased due to revenue growth paired with improvements from gross margin initiatives and moderate price increases.
Income from Operations
Income from operations in 2018 increased by $79 million or 17 percent when compared to 2017 on a revenue increase of $189 million. The increase was due to higher revenues and lower cost of sales on incremental revenues. Income from operations in 2017 increased by $56 million or 14 percent when compared to 2016 on a revenue increase of $89 million. The increase was due to higher revenues and lower cost of sales on incremental revenues.
Diagnostics and Genomics
Our diagnostics and genomics business includes the genomics, nucleic acid contract manufacturing and research and development, pathology, companion diagnostics, reagent partnership and biomolecular analysis businesses.
Our diagnostics and genomics business is comprised of six areas of activity providing active pharmaceutical ingredients ("APIs") for oligo-based therapeutics as well as 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. This business also includes solutions that enable clinical labs to identify DNA variants associated with genetic disease and help direct cancer therapy. 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 API in an emerging class of drugs that utilize nucleic acid molecules for disease therapy. Third, our pathology solutions business is focused on product offerings for 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. Fourth, 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. Fifth, the reagent partnership business is a provider of reagents used for turbidimetry and flow cytometry. Finally, our biomolecular analysis business provides complete workflow solutions, including instruments, consumables and software, for quality control analysis of nucleic acid samples. Samples are analyzed using quantitative and qualitative techniques to ensure accuracy in further genomics analysis techniques utilized in clinical and life science research applications.
Net Revenue
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | |||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue | $ | 943 | $ | 860 | $ | 790 | 10% | 9% |
Diagnostics and genomics business revenue in 2018 increased 10 percent compared to 2017. Foreign currency movements for 2018 had an overall favorable impact on revenue growth of 3 percentage points when compared to the same period last year and acquisitions had an overall favorable impact on revenue growth of 2 percentage points when compared to the same period last year. Geographically, revenue increased 11 percent in the Americas with a 1 percentage point unfavorable currency impact, increased 11 percent in Europe with a 6 percentage point favorable currency impact and increased 2 percent in Asia Pacific with a 1 percentage point favorable currency impact. The growth in the Americas was supported by continued strength in our genomics business, strong growth in the companion diagnostic business and our biomolecular analysis business. Europe results represented growth in our genomics and the biomolecular analysis business. The performance in Americas and Europe were led by growth in sales in genomics (particularly target enrichment and arrays). Asia Pacific, our relatively smaller region, increased due to higher shipment volumes in China.
The 10 percent revenue growth in 2018 was due to positive growth from all businesses and strength in Americas, Europe and China regions. This was led by revenue growth in our arrays and next generation sequencing solution portfolio offering within the genomics business mainly driven by SureSelect NGS target enrichment products, continued ramp in revenue growth in our reagent partnership business due to demand for our reagents and strength in our biomolecular analysis business consumables portfolio. The end markets in diagnostics and clinical research remain strong and growing driven by an aging population and lifestyle.
Diagnostics and genomics business revenue in 2017 increased 9 percent compared to 2016. The growth in the Americas was assisted by continued demand in our nucleic acid solutions division, growth in sales in our pathology business and continuing strong growth in the companion diagnostic business. Pathology growth was a result of strength in all regions led by our companion diagnostics ("CDx") assays and molecular pathology products. Europe results were assisted by growth in our genomics, pathology, and the companion diagnostic business. Growth in Asia Pacific reflected strength mainly in China and Japan.
Looking forward, we are optimistic about our growth opportunities in the diagnostics markets and continue to invest in expanding and improving our applications and solutions portfolio. We remain positive about our growth in these markets, as our OMNIS products, PD-L1 assays and SureFISH continue to gain strength with our customers in clinical oncology applications and our next generation sequencing target enrichment solutions continue to be adopted. Market demand in the nucleic acid solutions business related to therapeutic oligo programs continues to be strong. We are investing in building further capacity in our nucleic acid business to address the future demand for the oligos. We will continue to invest in research and development and seek to expand our position in developing countries and emerging markets. For example, we completed the acquisitions of Lasergen and Advanced Analytical Technologies, Inc. ("AATI") during 2018.
Gross Margin and Operating Margin
The following table shows the diagnostics and genomics business's margins, expenses and income from operations for 2018 versus 2017, and 2017 versus 2016.
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Total gross margin | 56.5 | % | 55.2 | % | 54.5 | % | 1 ppt | 1 ppt | ||||
| Operating margin | 18.9 | % | 19.5 | % | 16.6 | % | (1) ppt | 3 ppts |
| (in millions) | |||||||||||||||
| Research and development | $ | 109 | $ | 89 | $ | 87 | 22% | 2% | |||||||
| Selling, general and administrative | $ | 246 | $ | 218 | $ | 212 | 13% | 3% | |||||||
| Income from operations | $ | 178 | $ | 168 | $ | 131 | 6% | 28% |
Gross margin increased 1 percentage point in 2018 when compared to 2017 as gains from higher volumes were partially offset by increased wage and variable pay. Gross margin increased 1 percentage point in 2017 when compared to 2016, mainly driven out of higher volumes.
Research and development expenses increased 22 percent in 2018 when compared to 2017. The increase was mainly due to additional expenses related to the acquisition of Lasergen, increase in wages and variable pay and unfavorable currency movements. Research and development expenses increased 2 percent in 2017 when compared to 2016. The spending increase was related to an acquisition and higher wages and variable pay.
Selling, general and administrative expenses increased 13 percent in 2018 when compared to 2017. Selling, general and administrative expenses increase was due to the additional expenses related to the acquisitions of Lasergen and AATI, increases in wages and variable pay and unfavorable currency movements. Selling, general and administrative expenses increased 3 percent in 2017 when compared to 2016. Selling, general and administrative expenses increase was related to additional operating expenses associated with an acquisition and higher wages and variable pay partially offset by reduced expenses due to business improvement initiatives.
Operating margin decreased 1 percentage point in 2018 when compared to 2017. The decline in operating margin was due additional expenses related to the acquisitions of Lasergen and AATI. Operating margin increased 3 percentage points in 2017 when compared to 2016. The margin improvement was driven by higher revenue volumes partially offset by adding the cost structure of an acquisition and higher wages and variable pay.
Income from Operations
Income from operations in 2018 increased by $10 million or 6 percent when compared to 2017 on a revenue increase of $83 million. The increase was due to higher volumes partially offset by higher expenses related to the acquisitions. Income from operations in 2017 increased by $37 million or 28 percent when compared to 2016 on a revenue increase of $70 million. The increase was due to higher volumes and controlled expenses.
Agilent CrossLab
The Agilent CrossLab business spans the entire lab with its extensive consumables and services portfolio, which is designed to improve customer outcomes. Most 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, software as a service, 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.
Net Revenue
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | |||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||
| (in millions) | |||||||||||||||
| Total net revenue | $ | 1,701 | $ | 1,531 | $ | 1,420 | 11% | 8% |
Agilent CrossLab business revenue in 2018 increased 11 percent when compared to 2017. Foreign currency movements for 2018 had an overall favorable impact of 2 percentage points when compared to 2017. Revenue growth in 2018 was driven by the entire portfolio, including all consumables, all major service categories and remarketed instruments. Geographically, revenue increased 7 percent in the Americas with no currency impact, increased 12 percent in Europe with a 6 percentage point favorable currency impact and increased 15 percent in Asia Pacific with a 2 percentage point favorable currency impact.
Agilent CrossLab business saw a broad based and sustained revenue growth in most key end markets throughout 2018, especially from the pharmaceutical and food markets. Agilent CrossLab business revenue in 2017 increased 8 percent when compared to 2016. Revenue growth in 2017 was led by increases in most service categories and in the remarketed instruments business.
Agilent CrossLab business saw positive revenue growth in all the key end markets in 2017, except in the forensics market. In 2017, revenue growth, from a percentage perspective, was led by the food market. The pharmaceutical and biotechnology market in 2017 saw slower growth than in 2016, but was still the primary growth driver from a volume perspective. The chemical and energy market provided the same level of solid revenue growth in 2017 as it did in 2016.
Looking forward, we anticipate that the balanced strength in nearly all key end markets will continue to drive the revenue growth in the near term. The Agilent CrossLab portfolio of products and services are well positioned to succeed in both accelerating and decelerating market conditions in any of our key end markets. Geographically, we remain optimistic on the market growth and market penetration opportunities in China and emerging markets. Other factors for near term revenue growth include our recently completed acquisitions of Ultra Scientific and ProZyme, as well as investment in our laboratory enterprise offerings and in our continuing expansion of our e-commerce sales channel.
Gross Margin and Operating Margin
The following table shows the Agilent CrossLab business's margins, expenses and income from operations for 2018 versus 2017 and 2017 versus 2016.
| Years Ended October 31, | 2018 over 2017 Change | 2017 over 2016 Change | ||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Total gross margin | 50.7 | % | 49.5 | % | 49.4 | % | 1 ppt | — | ||||
| Operating margin | 23.3 | % | 22.1 | % | 22.3 | % | 1 ppt | — |
| (in millions) | |||||||||||||||
| Research and development | $ | 55 | $ | 49 | $ | 46 | 12% | 7% | |||||||
| Selling, general and administrative | $ | 410 | $ | 370 | $ | 339 | 11% | 9% | |||||||
| Income from operations | $ | 397 | $ | 338 | $ | 316 | 17% | 7% |
Gross margin for products and services increased 1 percentage points in 2018 when compared to 2017. Gross margin increase came primarily from higher sales volume. Gross margin was flat in 2017 when compared to 2016, due to the higher sales volume offset by higher wages and variable pay.
Research and development expenses increased 12 percent in 2018 when compared to 2017. Research and development increase was primarily due to higher wages across the various research organizations, and due to increased headcount in the areas of software development, iLab development and customer training curriculum development. Research and development expenses increased 7 percent in 2017 when compared to 2016, due to increased investment related to an acquisition, as well as higher wages and variable pay.
Selling, general and administrative expenses increased 11 percent in 2018 when compared to 2017. Selling, general and administrative expenses increased due to higher wages, higher variable pay, increased corporate infrastructure costs, and increased sales force investments. Selling, general and administrative expenses increased 9 percent in 2017 when compared to 2016, due to higher orders driving higher selling costs, as well as higher wages and variable pay and the additional operating expenses from an acquisition.
Operating margin increased 1 percentage point in 2018 when compared to 2017. The increase in operating margin was primarily due to higher sales volume. Operating margin was flat in 2017 when compared to 2016, due to higher sales volume helping to offset growth in the number of service workforce, higher wages and variable pay and higher field selling costs.
Income from Operations
Income from operations in 2018 increased by $59 million or 17 percent when compared to 2017 on a revenue increase of $170 million. Income from operations in 2017 increased by $22 million or 7 percent when compared to 2016 on a revenue increase of $111 million.
Financial Condition
Liquidity and Capital Resources
Our financial position as of October 31, 2018 consisted of cash and cash equivalents of $2,247 million as compared to $2,678 million as of October 31, 2017.
As of October 31, 2018, approximately $1,361 million of our cash and cash equivalents is held outside of the U.S. by our foreign subsidiaries. In 2018, we repatriated $1,921 million of the cash held outside the U.S. The cash remaining outside the U.S. can be repatriated to the U.S. as local working capital and other regulatory conditions permit. As a result of the Tax Act, our cash and cash equivalents are no longer subjected to U.S. federal tax on repatriation into the U.S. We utilize a variety of funding strategies to ensure that our worldwide cash is available in the locations in which it is needed.
As a result of the Tax Act, we are required to pay a one-time transition tax of $426 million on deferred foreign income not previously subject to U.S. federal income tax. The transition tax is payable, beginning in fiscal year 2019 over eight years with 8 percent due in each of the first five years, 15 percent in year six, 20 percent in year seven and 25 percent in year eight.
We believe our cash and cash equivalents, cash generated from operations, and ability to access capital markets and credit lines will satisfy, for at least the next twelve months, our liquidity requirements, both globally and domestically, including the following: working capital needs, capital expenditures, business acquisitions, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $1,087 million in 2018 as compared to $889 million provided in 2017 and $793 million provided in 2016. We paid approximately $103 million under our variable and incentive pay programs, as compared to a total of $91 million paid during the same period of 2017. Net cash paid for income taxes was approximately $102 million in 2018, as compared to $63 million in 2017 and $67 million in 2016. For the year ended October 31, 2018, the net change in tax-related assets and liabilities of $552 million was due to the enactment of the U.S. Tax Act and primarily consisted of an estimated provision of $499 million of U.S. transition tax on deemed repatriated earnings of non-U.S. subsidiaries as well as an estimated $53 million associated with the impact on deferred taxes resulting from the decreased U.S. corporate income tax rate. For the years ended October 31, 2018, 2017 and 2016, other assets and liabilities used cash of $4 million, used cash of $98 million and provided cash of $10 million, respectively. The increase in cash usage for the year ended October 31, 2017 in other assets and liabilities is primarily due to pension contributions and taxes.
In 2018, the change in accounts receivable used cash of $65 million, $81 million in 2017, and $33 million in 2016. Days' sales outstanding as of October 31, were 54 days in 2018, 55 days in 2017 and 51 days in 2016. The change in accounts payable provided cash of $40 million in 2018, provided cash of $2 million in 2017 and used cash of $15 million in 2016. Cash used in inventory was $83 million in 2018, in $61 million in 2017 and $7 million in 2016. Inventory days on-hand increased to 98 days in 2018 compared to 95 days in 2017 and increased compared to 92 days in 2016.
We contributed zero, $25 million and zero to our U.S. defined benefit plans in 2018, 2017 and 2016, respectively. We
contributed $21 million, $21 million and $24 million to our non-U.S. defined benefit plans in 2018, 2017 and 2016, respectively. We contributed less than $1 million in 2018, 2017 and 2016 to our U.S. post-retirement benefit plans. Our non-U.S. defined benefit plans are generally funded ratably throughout the year. Total contributions in 2018 were $21 million or 54 percent less than 2017. Our annual contributions are highly dependent on the relative performance of our assets versus our projected liabilities, among other factors. We do not expect to contribute to our U.S. plans and U.S. post-retirement benefit plans during 2019. We expect to contribute $23 million to our non-U.S. defined benefit plans during 2019.
Net Cash Used in Investing Activities
Net cash used in investing activities in 2018 was $704 million and in 2017 was $305 million as compared to net cash used of $238 million in 2016.
Investments in property, plant and equipment were $177 million in 2018, $176 million in 2017 and $139 million in 2016. In 2018 we invested $516 million in acquisitions of businesses and intangible assets, net of cash acquired for the acquisition of seven businesses compared to the acquisition of two businesses for $128 million in 2017 and the acquisition of two businesses for $261 million in 2016. In 2018 there were approximately $11 million purchases of cost method investments compared to $1 million outlay in 2017 and $80 million in 2016. Change in restricted cash and cash equivalents was $1 million inflow in 2018, $1 million outflow in 2017 and $245 million inflow in 2016, respectively (changes in 2016 related to our Seahorse Biosciences acquisition).
Net Cash Used in Financing Activities
Net cash used in financing activities in 2018 was $797 million compared to $202 million in 2017 and $268 million in 2016, respectively.
Treasury Stock Repurchases
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 million shares for $98 million which completed the purchases under this authorization.
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 at the company's discretion 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. During the year ended October 31, 2017, we repurchased approximately 4.1 million shares for $194 million under this authorization. During the year ended October 31, 2018 we repurchased and retired approximately 6.4 million shares for $422 million under this authorization. As of October 31, 2018, we had remaining authorization to repurchase up to $188 million of our common stock under this program which expired on November 1, 2018.
On November 19, 2018 we announced that our board of directors had approved a new share repurchase program (the "2019 repurchase program") designed, among other things, to reduce or eliminate dilution resulting from issuance of stock under the company's employee equity incentive programs. The 2019 share repurchase program authorizes the purchase of up to $1.75 billion of our common stock at the company's discretion and has no fixed termination date. The 2019 repurchase program does not require the company to acquire a specific number of shares and may be suspended, amended or discontinued at any time.
Dividends
For the years ended October 31, 2018, 2017 and 2016 cash dividends of $191 million, $170 million and $150 million were paid on the company's outstanding common stock, respectively. On November 14, 2018 we declared a quarterly dividend of $0.164 per share of common stock, or approximately $52 million which will be paid on January 23, 2019 to shareholders of record as of the close of business on December 31, 2018. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Credit Facility
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 and on July 14, 2017, the commitments under the existing credit facility were increased by an additional $300 million so that the aggregate commitments under the facility now total $1 billion. As of October 31, 2018, 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, 2018 and 2017.
Short-term and Long-term Debt
In October 2007, the company issued an aggregate principal amount of $600 million in senior notes ("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. The remaining $100 million in senior notes matured and were paid in full on November 1, 2017.
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, 2018 was $7 million. The gain is being deferred and amortized to interest expense over the remaining life of the 2020 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.
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. 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, 2018 was $1 million.
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 commenced January 15, 2014.
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 commenced 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, 2018 was $7 million.
Off Balance Sheet Arrangements and Other
We have contractual commitments for non-cancelable operating leases. See Note 14, "Commitments and Contingencies", to our consolidated financial statements for further information on our non-cancelable operating leases.
Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many
locations throughout the world. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization.
Contractual Commitments
Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.
The following table summarizes our total contractual obligations at October 31, 2018 for Agilent operations and excludes amounts recorded in our consolidated balance sheet (in millions):
| Less than one year | One to three years | Three to five years | More than five years | ||||||||||||
| Operating leases | $ | 42 | $ | 58 | $ | 23 | $ | 57 | |||||||
| Commitments to contract manufacturers and suppliers | 412 | 2 | — | — | |||||||||||
| Other purchase commitments | 80 | — | — | — | |||||||||||
| Retirement plans | 23 | — | — | — | |||||||||||
| Transitional pension contributions to our U.S. 401(k) plan | $ | 7 | $ | 15 | $ | 3 | $ | — | |||||||
| Total | $ | 564 | $ | 75 | $ | 26 | $ | 57 |
Operating Leases. Commitments under operating leases relate primarily to leasehold property, see Note 14, "Commitments and Contingencies".
Commitments to Contract Manufacturers and Suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. The above amounts represent the commitments under the open purchase orders with our suppliers that have not yet been received. However, our agreements with these suppliers usually provide us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. We expect to fulfill most of our purchase commitments for inventory within one year.
In addition to the above mentioned commitments to contract manufacturers and suppliers, in the past we recorded a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with our policy relating to excess inventory. As of October 31, 2018, the liability for our firm, non-cancelable and unconditional purchase commitments was less than $1 million, $1 million as of October 31, 2017 and less than $1 million as of October 31, 2016. These amounts are included in other accrued liabilities in our consolidated balance sheet.
Other Purchase Commitments. We have categorized "other purchase commitments" related to contracts with professional services suppliers. Typically, we can cancel contracts without penalties. For those contracts that are not cancelable without penalties, we are disclosing the termination fees and costs or commitments for continued spending that we are obligated to pay to a supplier under each contact's termination period before such contract can be cancelled. Our contractual obligations with these suppliers under "other purchase commitments" were approximately $80 million within the next year. Approximately $27 million of the new contracts relate to penalties that will reduce over the next 15 years.
Retirement Plans. Commitments under the retirement plans relate to expected contributions to be made to our U.S. and non-U.S. defined benefit plans and to our post-retirement medical plans for the next year only. Contributions after next year are impractical to estimate. Effective May 1, 2016 until April 30, 2022, we will provide 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 U.S. Retirement Plan benefits being frozen.
We had no material off-balance sheet arrangements as of October 31, 2018 or October 31, 2017.
On Balance Sheet Arrangements
The following table summarizes our total contractual obligations on our October 31, 2018 balance sheet (in millions):
| Less than one year | One to three years | Three to five years | More than five years | ||||||||||||
| Senior notes | $ | — | $ | 500 | $ | 1,000 | $ | 300 | |||||||
| Credit facility(1) | — | — | — | — | |||||||||||
| Interest expense | 70 | 116 | 79 | 27 | |||||||||||
| Transition tax(2) | 34 | 68 | 68 | 256 | |||||||||||
| Total | $ | 104 | $ | 684 | $ | 1,147 | $ | 583 |
(1) The credit facility expires on September 15, 2019.
(2) The transition tax payable may be adjusted based on our 2018 tax return filings.
Other long-term liabilities as of October 31, 2018 and October 31, 2017 include $607 million and $131 million, respectively, related to long-term income tax liabilities. Of these amounts, $215 million and $131 million related to uncertain tax positions as of October 31, 2018 and October 31, 2017, respectively. We are unable to accurately predict when these amounts will be realized or released. However, 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 limitations or a tax audit settlement. The remaining $392 million in other long-term liabilities relates to the one-time transition tax payable after fiscal year 2019. The transition tax is payable, beginning in fiscal year 2019 over eight years with 8 percent due in each of the first five years, 15 percent in year six, 20 percent in year seven and 25 percent in year eight.
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