filings.toolsItem 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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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 growth opportunities, including for revenue and our end markets, strength and drivers of the markets we sell into, sales funnels, our strategic direction, new product and service introductions and the position of our current products and services, market demand for and adoption of our products, the ability of our products and solutions to address customer needs and meet industry requirements, our focus on differentiating our product solutions, improving our customers’ experience and growing our earnings, future financial results, our operating margin, mix, our investments, including in manufacturing infrastructure, research and development and expanding and improving our applications and solutions portfolios, expanding our position in developing countries and emerging markets, our focus on balanced capital allocation, 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 (the "Tax Act") 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, tax valuation allowance and unrecognized tax benefits, the impact of local government regulations on our ability to pay vendors or conduct operations, our ability to satisfy our liquidity requirements, including through cash generated from operations, the potential impact of adopting new accounting pronouncements, indemnification, source and supply of materials used in our products, our sales, our purchase commitments, our capital expenditures, the integration and effects of our acquisitions and other transactions and our stock repurchase program and dividends, 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 2019, we acquired 100 percent of the stock of ACEA Biosciences Inc. ("ACEA"), a developer of cell analysis tools, for $250 million. In addition, we completed the acquisition of privately-owned Lionheart Technologies LLC ("BioTek"), a leader in the design, manufacture and distribution of innovative life science instrumentation for $1.17 billion. The financial results of these businesses have been included in our financial results from the date of the close.
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. In 2017, we acquired two businesses for a combined purchase price of approximately $125 million in cash.
Agilent's net revenue of $5,163 million in 2019 increased 5 percent when compared to 2018. Foreign currency movements for 2019 had an overall unfavorable impact on revenue of approximately 2 percentage points compared to 2018. Acquisitions in 2019 had an overall favorable impact of 2 percentage points when compared to 2018. Revenue in the life sciences and applied markets business increased 1 percent in 2019 when compared to 2018. Foreign currency movements had an unfavorable impact on revenue of 2 percentage points in 2019 when compared to 2018. Revenue in the diagnostics and genomics business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an unfavorable impact on revenue of 3 percentage points in 2019 when compared to 2018. Revenue in the Agilent CrossLab business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an unfavorable impact on revenue of 3 percentage points in 2019 when compared to 2018.
Agilent's net revenue of $4,914 million increased 10 percent in 2018 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 overall favorable impact on revenue of 2 percentage point 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 overall favorable impact of 3 percentage points on revenue 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 overall favorable impact on revenue of 2 percentage points in 2018 when compared to 2017.
Net income was $1,071 million in 2019 compared to net income of $316 million and $684 million in 2018 and 2017, respectively. Net income for the year ended October 31, 2019 was impacted by a discrete tax benefit of $299 million related to
restructuring and the extension of the company's tax incentive in Singapore. 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 that was passed on December 22, 2017. As of October 31, 2019 and 2018, we had cash and cash equivalents balances of $1,382 million and $2,247 million, respectively.
On May 28, 2015 we announced that our board of directors had approved a 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 did not require the company to acquire a specific number of shares and could have been suspended or discontinued at any time. During the year ended October 31, 2017, we repurchased and retired 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, 2019, we repurchased and retired approximately 10.4 million shares for $723 million under this authorization. As of October 31, 2019, we had remaining authorization to repurchase up to $1.03 billion of our common stock under this program.
During the year ended October 31, 2019, cash dividends of 0.656 per share, or $206 million were declared and paid on the company's outstanding common stock. 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.
On November 20, 2019 we declared a quarterly dividend of $0.18 per share of common stock, or approximately $56 million which will be paid on January 22, 2020 to shareholders of record as of the close of business on December 31, 2019. 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, continued growth and earnings expansion. We remain optimistic that we have the ability and resilience to manage any changing market conditions to deliver positive results in fiscal year 2020. 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 for 2020 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, retirement and post-retirement plan assumptions, valuation of goodwill and purchased intangible assets and accounting for income taxes.
Revenue Recognition. On November 1, 2018, we adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers ("ASC 606").
We enter into contracts to sell products, services or combinations of products and services. Products may include hardware or software and services may include one-time service events or services performed over time.
We derive revenue primarily from the sale of analytical and diagnostics products and services. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. Revenue is recognized when control of the promised products or services is transferred to our customers and the performance obligation
is fulfilled in an amount that reflects the consideration that we expect to be entitled in exchange for those products or services, the transaction price. For equipment, consumables, and most software licenses, control transfers to the customer at a point in time. We use present right to payment, legal title, physical possession of the asset, and risks and rewards of ownership as indicators to determine the transfer of control to the customer. Where acceptance is not a formality, the customer must have documented their acceptance of the product or service. For products that include installation, if the installation meets the criteria to be considered a separate performance obligation, product revenue is recognized when control has passed to the customer, and recognition of installation revenue occurs once completed. Product revenue, including sales to resellers and distributors is reduced for provisions for warranties, returns, and other adjustments in the period the related sales are recorded.
Service revenue includes extended warranty, customer and software support including: Software as a Service, post contract support, consulting including companion diagnostics, and training and education. Instrument service contracts and software maintenance contracts are typically annual contracts, which are billed at the beginning of the contract or maintenance period. Revenue for these contracts is recognized on a straight-line basis to revenue over the service period, as a time-based measure of progress best reflects our performance in satisfying this obligation. There are no deferred costs associated with the service contract, as the cost of the service is recorded when the service is performed. Service calls not included in a support contract are recognized to revenue at the time a service is performed.
We have sales from standalone software. These arrangements typically include software licenses and maintenance contracts, both of which we have determined are distinct performance obligations. We determine the amount of the transaction price to allocate to the license and maintenance contract based on the relative standalone selling price of each performance obligation. Software license revenue is recognized at the point in time when control has been transferred to the customer. The revenue allocated to the software maintenance contract is recognized on a straight-line basis over the maintenance period, which is the contractual term of the contract, as a time-based measure of progress best reflects our performance in satisfying this obligation. Unspecified rights to software upgrades are typically sold as part of the maintenance contract on a when-and-if-available basis.
Our multiple-element arrangements are generally comprised of a combination of instruments, installation or other start-up services, and/or software, and/or support or services. Hardware and software elements are typically delivered at the same time and revenue is recognized when control passes to the customer. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.
For contracts with multiple performance obligations, we allocate the consideration to which we expect to be entitled to each performance obligation based on relative standalone selling prices and recognize the related revenue when or as control of each individual performance obligation is transferred to customers. We estimate the standalone selling price by calculating the average historical selling price of our products and services per country for each performance obligation. Stand-alone selling prices are determined for each distinct good or service in the contract and then we allocate the transaction price in proportion to those standalone selling prices by performance obligations.
A portion of our revenue relate to lease arrangements. Standalone lease arrangements are outside the scope of ASC 606 and are therefore accounted for in accordance with ASC 840, Leases. Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type capital lease using the current lease classification guidance.
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.
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 2019 and 2018, 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 2019, discount rates for the U.S. plans decreased compared to the previous year. For 2019 and 2018, the discount rate for non-U.S. plans was generally based on published rates for high quality corporate bonds and in 2019, decreased 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 $13 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.
In the U.S., target asset allocations for our retirement and post-retirement benefit plans are approximately 80 percent to equities and approximately 20 percent to fixed income investments. Our Deferred Profit-Sharing Plan target asset allocation is approximately 60 percent to equities and approximately 40 percent to fixed income investments. Approximately 3 percent of our U.S. equity portfolio consists of limited partnerships. Outside the U.S., our target asset allocation ranges from 31 to 60 percent to equities, from 38 to 61 percent to fixed income investments, and from zero to 25 percent to real estate, depending on the plan. All plans' assets are broadly diversified. Due to fluctuations in equity markets, our actual allocations of plan assets at October 31, 2019 and 2018 differ from the target allocation. Our policy is to bring the actual allocation in line with the target allocation.
Equity securities include exchange-traded common stock and preferred stock of companies from broadly diversified industries. Fixed income securities include a global portfolio of corporate bonds of companies from diversified industries, government securities, mortgage-backed securities, asset-backed securities, derivative instruments and other. Other investments include a group trust consisting primarily of private equity partnerships.
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 2019, actual return on assets was above expectations which, along with contributions during the year, decreased next year’s pension cost as well as resulting in an increase of the funded status at year end. The net periodic pension and post-retirement benefit costs recorded were a $10 million expense in 2019, $3 million benefit in 2018 and $15 million expense in 2017. The years ended October 31, 2018 and 2017 included a gain on curtailment and settlements of $5 million and $32 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 2019, 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, 2019. Based on the results of our qualitative testing, we believe that it is more-likely-than-not that the fair value of each reporting unit is greater than its respective carrying value. 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, 2019, 2018 and 2017.
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. Our determination of the fair value of the intangible assets acquired involves the use of significant estimates and assumptions. Specifically, our determination of the fair value of the developed product technology and in-process research and development ("IPR&D") acquired involve significant estimates and assumptions related to revenue growth rates and discount rates. Our determination of the fair value of customer relationships acquired involved significant estimates and assumptions related to revenue growth rates, discount rates, and customer attrition rates. Our determination of the fair value of the tradename acquired involved the use of significant estimates and assumptions related to revenue growth rates, royalty rates and discount rates. The company believes that the fair value assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that marketplace participants would use. Actual results could differ materially from these estimates. 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, 2019. 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 year ended October 31, 2019, 2018 and 2017 there were no impairments of indefinite-lived intangible assets.
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.
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 changed the existing U.S. tax law and included numerous provisions that affect our business. There were no substantial changes from our 2018 Annual Report on Form 10-K to the transition tax expenses amount. 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. We have completed our analysis and elected to treat global intangible low-tax income ("GILTI") as “current period cost”. See Note 6, "Income Taxes" for more details.
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 unfavorable effects of changes in foreign currency exchange rates has decreased revenue by approximately 2 percentage point for the year ended October 31, 2019. 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. The favorable effects of changes in foreign currency exchange rates has increased revenue by approximately 2 percentage points 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. 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, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue: | |||||||||||||||
| Products | $ | 3,877 | $ | 3,746 | $ | 3,397 | 3% | 10% | |||||||
| Services and other | $ | 1,286 | $ | 1,168 | $ | 1,075 | 10% | 9% | |||||||
| Total net revenue | $ | 5,163 | $ | 4,914 | $ | 4,472 | 5% | 10% |
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | ||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| % of total net revenue: | ||||||||||||
| Products | 75 | % | 76 | % | 76 | % | (1) ppt | — | ||||
| Services and other | 25 | % | 24 | % | 24 | % | 1 ppt | — | ||||
| Total | 100 | % | 100 | % | 100 | % |
Agilent's net revenue of $5,163 million for the year ended October 31, 2019 increased 5 percent when compared to 2018. Foreign currency movements for 2019 had an unfavorable impact of approximately 2 percentage points when compared to 2018. Agilent's net revenue of $4,914 million increased 10 percent in 2018 when compared to 2017. Foreign currency movements for 2018 had a favorable impact of approximately 2 percentage points when compared to 2017.
Product revenue includes revenue generated from the sales of our analytical instrumentation, software and consumables. Revenue from products increased 3 percent for the year ended October 31, 2019, when compared to 2018. The growth in product revenue was impacted by increased sales within our cell analysis business, mainly due to contributions from our recent acquisitions. In addition, product revenue growth was impacted by strong sales in our consumables and nucleic acid solutions businesses partially offset by revenue weakness in our liquid chromatography, gas chromatography, liquid chromatography mass spectrometry and spectroscopy products. Revenue from products increased 10 percent for the year ended October 31, 2018, when compared to 2017. The growth in product revenue was led by strong revenue growth from products within our spectroscopy, mass spectrometry and our consumables businesses.
Services and other revenue primarily consists of revenue generated from Agilent CrossLab services and services in the diagnostics and genomics business. Some of the prominent services in the Agilent CrossLab business include repair and maintenance on multi-vendor instruments, compliance services and installation services. Some of the prominent services in the diagnostics and genomics business include consulting services related to the companion diagnostics and nucleic acid businesses.
Services and other revenue increased 10 percent in 2019 as compared to 2018. Services and other revenue in the Agilent CrossLab business increased 9 percent in 2019 as compared to 2018, with a 3 percentage point unfavorable currency impact. Nearly all major service offerings from the Agilent CrossLab business contributed to the revenue growth across all geographic regions. Services in the diagnostics and genomics business is increasing due to growth in service revenue throughout all our businesses.
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 service revenue in our genomics and pathology businesses.
Net Revenue By Segment
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue by segment: | |||||||||||||||
| Life sciences and applied markets | $ | 2,302 | $ | 2,270 | $ | 2,081 | 1% | 9% | |||||||
| Diagnostics and genomics | $ | 1,021 | $ | 943 | $ | 860 | 8% | 10% | |||||||
| Agilent CrossLab | $ | 1,840 | $ | 1,701 | $ | 1,531 | 8% | 11% | |||||||
| Total net revenue | $ | 5,163 | $ | 4,914 | $ | 4,472 | 5% | 10% |
Revenue in the life sciences and applied markets business increased 1 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact on revenue of 2 percentage points in 2019 when compared to 2018. Acquisitions had an overall favorable impact on revenue growth of 4 percentage points and primarily impacted the pharmaceutical and academia and government markets when compared to the same period last year. As a result, revenue growth was favorable within academia and government, moderate within the pharmaceutical and moderate within the environmental and forensics markets which was mostly offset by declines in revenue from the food market and to a lesser extent from the chemical and energy market when compared to the same period last year. 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 of 2 percentage points in 2018 when compared to 2017. For the year ended October 31, 2018, 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 2017.
Revenue in the diagnostics and genomics business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact on revenue of 3 percentage points in 2019 when compared to 2018. Revenue growth within the diagnostics and clinical market and the pharmaceutical market continued to be strong led by performance from our nucleic acid solutions and biomolecular analysis businesses. 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 points in 2018 when compared to 2017. For the year ended October 31, 2018, 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 Agilent CrossLab business increased 8 percent in 2019 when compared to 2018. Foreign currency movements had an overall unfavorable impact on revenue of 3 percentage points in 2019 when compared to 2018. Our performance in the Agilent CrossLab business saw continued growth in all key end markets with strong growth in the pharmaceutical, academia and government and food markets. Revenue generated by Agilent CrossLab increased 11 percent in 2018 when compared to 2017. Foreign currency movements had an overall favorable impact of 2 percent percentage points 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.
Costs and Expenses
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions, except margin data) | |||||||||||||||
| Gross margin on products | 56.7 | % | 57.4 | % | 56.6 | % | (1) ppt | 1 ppt | |||||||
| Gross margin on services and other | 47.3 | % | 45.3 | % | 44.2 | % | 2 ppts | 1 ppt | |||||||
| Total gross margin | 54.3 | % | 54.5 | % | 53.6 | % | — | 1 ppt | |||||||
| Research and development | $ | 404 | $ | 387 | $ | 341 | 5% | 14% | |||||||
| Selling, general and administrative | $ | 1,460 | $ | 1,389 | $ | 1,251 | 5% | 11% | |||||||
| Operating margin | 18.2 | % | 18.4 | % | 18.1 | % | — | — |
Total gross margin growth for the year ended October 31, 2019 was flat when compared to last year. Total gross margins for the year ended October 31, 2019 reflects the impact of efficiency gains, lower inventory charges and favorable currency impact on costs offset by higher wages and variable pay, product mix, higher expenses related to tariffs and higher amortization expense of intangible assets.
Total gross margin growth for the year ended October 31, 2018 increased 1 percentage point when compared to the prior 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 higher wages and variable pay, an impairment of certain intangible assets and unfavorable currency movements.
Gross inventory charges were $19 million in 2019, $26 million in 2018 and $24 million in 2017. Sales of previously written down inventory were $6 million in 2019, $8 million in 2018 and $9 million in 2017.
Research and development expenses increased 5 percent for the year ended October 31, 2019 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 and additional expenses related to acquired businesses partially offset by favorable currency movements when compared to spending in the same periods last year. Research and development expenses increased 14 percent for the year ended October 31, 2018 when compared with 2017. 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.
Selling, general and administrative expenses increased 5 percent in 2019 compared to 2018. Selling, general and administrative expenses increase was due to increased wages and variable pay, higher commissions, higher legal expenses, higher acquisition and integration costs and higher transformation initiatives expenses partially offset by operational efficiencies and savings and favorable currency impact. Selling, general and administrative expenses increased 11 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.
Total operating margin was flat for the year ended October 31, 2019, when compared to last year. Operating margins was impacted by higher wages and variable pay, higher acquisition and integration costs, higher expenses related to tariffs and higher transformation initiatives expenses offset by operational efficiencies and savings and favorable currency impact. Total operating margin was flat for the year ended October 31, 2018, when compared to 2017. 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.
Interest expense for the years ended October 31, 2019, 2018 and 2017 was $74 million, $75 million and $79 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 partially offset by the amortization of deferred gains recorded upon termination of interest rate swap contracts.
At October 31, 2019, our headcount was approximately 16,300 compared to 14,800 in 2018.
Other income (expense), net
For the year ended October 31, 2019, other income (expense), net includes income of $12 million related to the provision of site service costs to, and lease income from, Keysight Technologies, Inc. ("Keysight") and $9 million loss on the extinguishment of debt.
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, a $5 million pension settlement gain related to the substitutional portion of the defined benefit pension plans established under the Japanese Welfare Pension Insurance Law and income of $12 million related to the provision of site service costs to, and lease income from, Keysight.
For the year ended October 31, 2017, other income (expense), net includes $32 million pension settlement gain related to the substitutional portion of the defined benefit pension plans established under the Japanese Welfare Pension Insurance Law and$12 million of income related to the provision of site service costs to and lease income from Keysight.
Income Taxes
| Years Ended October 31, | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| (in millions) | |||||||||||
| Provision (benefit) for income taxes | $ | (152 | ) | $ | 630 | $ | 119 |
For 2019, the company's income tax benefit was $152 million with an effective tax rate of (16.5) percent. For the year ended October 31, 2019, our effective tax rate and the resulting provision for income taxes were significantly impacted by the discrete benefit of $299 million related to the extension of the company’s tax incentive in Singapore.
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 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.
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. Other tax holidays are due for renewal in 2020. As a result of the incentives, the impact of the tax holidays decreased income taxes by $368 million, $87 million, and $93 million in 2019, 2018, and 2017, respectively. The benefit of the tax holidays on net income per share (diluted) was approximately $1.16, $0.27, and $0.29 in 2019, 2018 and 2017, respectively. The increase in the benefit from 2018 to 2019 is primarily due to the Singapore restructuring and tax incentive modifications completed in 2019 in response to Singapore tax law changes. Of the $1.16 benefit of the tax incentives on net income per share (diluted) in 2019, $0.94 of the benefit relates to one-time items from the Singapore restructuring.
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 established 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.
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.
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”). We have completed our analysis and elected to treat GILTI as a “current period cost”.
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 has recorded a deferred tax liability of $10 million for foreign withholding taxes on repatriation of remaining undistributed earnings.
In the U.S., tax years remain open back to the year 2016 for federal income tax purposes and the year 2015 for significant states. In other major jurisdictions where the company conducts business, the tax years generally remain open back to the year 2009.
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
Through October 31, 2019, we have three business segments comprised of the life sciences and applied markets business, diagnostics and genomics business and the Agilent CrossLab business.
In 2019, we adopted new guidance related to the presentation of the net periodic pension and postretirement benefit cost. See Note 2, "New Accounting Pronouncements" for more information. As a result, we have recast our historical segment results to conform to this new presentation required under this guidance.
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; cell imaging systems; microplate reader; 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, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue | $ | 2,302 | $ | 2,270 | $ | 2,081 | 1% | 9% |
Life science and applied markets business revenue in 2019 increased 1 percent compared to 2018. Foreign currency movements for 2019 had an overall unfavorable currency impact of 2 percentage points on revenue growth when compared to the same period last year. Acquisitions had an overall favorable impact on revenue growth of 3 percentage points when compared to the same period last year. Geographically, revenue increased 12 percent in the Americas with a 1 percentage point unfavorable currency impact, decreased 4 percent in Europe with a 3 percentage point unfavorable currency impact and decreased 2 percent in Asia Pacific with a 1 percentage point unfavorable currency impact. From a product standpoint revenue was driven by strength in sales in our gas chromatography mass spectrometry, cell analysis primarily due to contributions from our recent acquisitions and informatics businesses which was offset by weakness in our liquid chromatography, gas chromatography, liquid chromatography mass spectrometry and spectroscopy products when compared to the same period last year.
End market revenue performance in 2019 were also mixed with the pharmaceutical, academia and government, diagnostics and clinical and forensics markets delivering strong revenue growth, environmental delivering moderate growth while chemical and energy markets decreased modestly, and food delivered weak results compared to the same period last year.
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 2017. 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.
Looking forward, despite short term uncertainties, we are optimistic about our long-term 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 growth from our new product introductions and recent acquisitions 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 in the long term.
Gross Margin and Operating Margin
The following table shows the life sciences and applied markets business' margins, expenses and income from operations for 2019 versus 2018, and 2018 versus 2017.
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions, except margin data) | |||||||||||||||
| Total gross margin | 61.0 | % | 61.3 | % | 60.3 | % | — | 1 ppt | |||||||
| Research and development | $ | 216 | $ | 220 | $ | 199 | (1)% | 10% | |||||||
| Selling, general and administrative | $ | 646 | $ | 630 | $ | 587 | 3% | 7% | |||||||
| Operating margin | 23.5 | % | 23.9 | % | 22.6 | % | — | 1 ppt | |||||||
| Income from operations | $ | 542 | $ | 543 | $ | 470 | — | 16% |
Gross margin was flat in 2019 compared to 2018. Gross margin was impacted by unfavorable mix and higher expenses related to tariffs which was offset by favorable currency impact. Gross margin increased 1 percentage point in 2018 compared to 2017. The increase was due to increased volume and lower manufacturing material costs.
Research and development expenses decreased 1 percent in 2019 when compared to 2018. Research and development was impacted by lower discretionary spending and a favorable currency offset by additional expenses related to our recent acquisitions as well as higher wages and variable pay. Research and development expenses increased 10 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.
Selling, general and administrative expenses increased 3 percent in 2019 compared to 2018. Selling, general and administrative expenses was impacted by higher wages and variable pay and additional expenses related to our recent acquisitions partially offset by operational savings and a favorable currency impact. 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 wages and variable pay increases, higher share-based compensation expense and unfavorable currency related effects.
Operating margin was relatively flat in 2019 compared to 2018. Operating margin reflects relatively flat revenue growth partially offset by an increase in selling, general and administrative expenses. Operating margin increased 1 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.
Income from Operations
Income from operations in 2019 decreased by $1 million or was relatively flat when compared to 2018 on a revenue increase of $32 million. The decrease was due to the impact of our recent acquisitions. Income from operations in 2018 increased by $73 million or 16 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.
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, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions) | |||||||||||||||
| Net revenue | $ | 1,021 | $ | 943 | $ | 860 | 8% | 10% |
Diagnostics and genomics business revenue in 2019 increased 8 percent compared to 2018. Foreign currency movements for 2019 had an overall unfavorable impact on revenue growth of 3 percentage points when compared to the same period last year. Geographically, revenue increased 17 percent in the Americas with a 1 percentage point unfavorable currency impact, was flat in Europe with a 4 percentage point unfavorable currency impact and increased 2 percent in Asia Pacific with a 2 percentage point unfavorable currency impact. The growth in Americas was driven by strong growth in our nucleic acid solutions, companion diagnostics and biomolecular analysis business. In Europe we saw strong growth in the biomolecular analysis business offset by softness in the genomics business. In Asia Pacific the growth was driven by our biomolecular analysis businesses and negatively impacted by softness in the genomics business.
Revenue growth in 2019 was led by strong revenue performance in our nucleic acid solutions, companion diagnostics and biomolecular analysis business. The diagnostics and clinical research market remains strong and growing driven by an aging population and unhealthy lifestyle developments such as poor diet and physical inactivity.
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). In Asia Pacific, our relatively smaller region, growth increased due to higher shipment volumes in China.
The 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.
Looking forward, we are optimistic about our growth opportunities in our end markets and continue to invest in expanding and improving our applications and solutions portfolio. We remain positive about our growth in our end 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 and, with our newly opened nucleic acid solutions production facility in Frederick, we are well positioned to serve more of the market demand. We will continue to invest in research and development and seek to expand our position in developing countries and emerging markets.
Gross Margin and Operating Margin
The following table shows the diagnostics and genomics business's margins, expenses and income from operations for 2019 versus 2018, and 2018 versus 2017.
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions, except margin data) | |||||||||||||||
| Total gross margin | 54.7 | % | 56.3 | % | 55.2 | % | (2) ppts | 1 ppt | |||||||
| Research and development | $ | 125 | $ | 109 | $ | 89 | 15% | 22% | |||||||
| Selling, general and administrative | $ | 248 | $ | 249 | $ | 218 | — | 14% | |||||||
| Operating margin | 18.2 | % | 18.4 | % | 19.4 | % | — | (1) ppt | |||||||
| Income from operations | $ | 185 | $ | 173 | $ | 167 | 7% | 4% |
Gross margin decreased 2 percentage points in 2019 when compared to 2018. The decrease in gross margin was driven by an unfavorable product mix and a higher fixed cost structure due to the addition of a second nucleic acid manufacturing facility that offset gains from higher sales volumes. Gross margin increased 1 percentage point in 2018 when compared to 2017, mainly driven from higher volumes were partially offset by higher wages and variable pay.
Research and development expenses increased 15 percent in 2019 when compared to 2018. The increase was due to additional expenses related to prior year's acquisitions, higher wages and variable pay and increased spending around the development of clinical applications and solutions. 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.
Selling, general and administrative expenses was flat in 2019 when compared to 2018. Selling, general and administrative expenses were impacted by efficiency gains offsetting higher wages and variable pay. Selling, general and administrative expenses increased 14 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.
Operating margin was flat in 2019 when compared to 2018. Operating margin was impacted by higher sales volume, offsetting the gross margin deterioration and the increase in research and development spending. 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.
Income from Operations
Income from operations in 2019 increased by $12 million or 7 percent when compared to 2018 on a revenue increase of $78 million. The increase was due to higher volume partially offset by the gross margin percentage decline and higher research and development expenses. Income from operations in 2018 increased by $6 million or 4 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.
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, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions) | |||||||||||||||
| Total net revenue | $ | 1,840 | $ | 1,701 | $ | 1,531 | 8% | 11% |
Agilent CrossLab business revenue in 2019 increased 8 percent when compared to 2018. Foreign currency movements for 2019 had an overall unfavorable impact of 3 percentage points when compared to 2018. Acquisitions in 2018 added 1 percentage point to the revenue growth reported for 2019. Revenue growth in 2019 was driven broadly by our entire services and consumables portfolio. Geographically, revenue increased 9 percent in the Americas with an 1 percentage point unfavorable currency impact, increased 5 percent in Europe with a 5 percentage points unfavorable currency impact and increased 10 percent in Asia Pacific with a 3 percentage points unfavorable currency impact. In 2019, Agilent CrossLab business saw strong revenue growth in all key end markets, except in the diagnostics and clinical market, when compared to the same periods last year.
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. Acquisitions in 2018 did not have a material impact on the revenue growth for 2018. 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.
Looking forward, we anticipate strength in key end markets will continue to drive our revenue growth in the near term. The Agilent CrossLab portfolio of products and service capabilities are well positioned to succeed in changing market conditions in our key end markets. Geographically, the business is well diversified across all regions to swiftly take advantage of local market opportunities and to help hedge against market volatility in any one region. Other factors for near term revenue growth include continued expansion of digital capabilities and leveraging of our deep understanding of customer work flows.
Gross Margin and Operating Margin
The following table shows the Agilent CrossLab business's margins, expenses and income from operations for 2019 versus 2018 and 2018 versus 2017.
| Years Ended October 31, | 2019 over 2018 Change | 2018 over 2017 Change | |||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||
| (in millions, except margin data) | |||||||||||||||
| Total gross margin | 51.8 | % | 50.4 | % | 49.4 | % | 1 ppt | 1 ppt | |||||||
| Research and development | $ | 58 | $ | 56 | $ | 50 | 3% | 12% | |||||||
| Selling, general and administrative | $ | 421 | $ | 413 | $ | 371 | 2% | 11% | |||||||
| Operating margin | 25.8 | % | 22.8 | % | 21.9 | % | 3 ppts | 1 ppt | |||||||
| Income from operations | $ | 475 | $ | 388 | $ | 336 | 23% | 16% |
Gross margin for products and services increased 1 percentage point in 2019 when compared to 2018. Gross margin was impacted by higher sales volume, combined with efficiency gains in the service delivery operation and efficiency gains in the logistics and manufacturing processes for the consumables business partially offset by higher wages and variable pay partly due to increased headcount. Gross margin for products and services increased 1 percentage point in 2018 when compared to 2017. Gross margin increase came primarily from higher sales volume.
Research and development expenses increased 3 percent in 2019 when compared to 2018. Research and development increased due to higher wages and variable pay and additional research and development expenditures from our prior year's acquisitions. 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.
Selling, general and administrative expenses increased 2 percent in 2019 when compared to 2018. Selling, general and administrative expenses were impacted by additional operating expenses from our prior year's acquisitions and overall higher wages and variable pay partially offset by a favorable impact from foreign currency movements. 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.
Operating margin increased 3 percentage points in 2019 when compared to 2018. The increase in operating margin was driven by the higher sales volume, combined with efficiency gains across the service delivery operations, order fulfillment processes and other operations. Operating margin increased 1 percentage point in 2018 when compared to 2017. The increase in operating margin was primarily due to higher sales volume.
Income from Operations
Income from operations in 2019 increased by $87 million or 23 percent when compared to 2018 on a revenue increase of $139 million. Income from operations in 2018 increased by $52 million or 16 percent when compared to 2017 on a revenue increase of $170 million.
Financial Condition
Liquidity and Capital Resources
Our financial position as of October 31, 2019 consisted of cash and cash equivalents of $1,382 million as compared to $2,247 million as of October 31, 2018.
As of October 31, 2019, approximately $1,310 million of our cash and cash equivalents is held outside of the U.S. by our foreign subsidiaries and can be repatriated to the U.S. as local working capital and other regulatory conditions permit. 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 on deferred foreign income not previously subject to U.S. federal income tax. This is offset by tax attributes that results in a net tax payable of $200 million. The first installment of $36 million was paid in the second quarter of 2019 and the remaining will be paid over the next seven years. As part of the
business integration of some of our prior acquisitions, we undertook corporate restructurings in the fourth quarter of fiscal year 2019 that involved on-shoring certain intangible properties held by our foreign subsidiaries to the United States. These restructurings resulted in a cash tax liability of $231 million which is payable in the first quarter of fiscal year 2020.
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 $1,021 million in 2019 as compared to $1,087 million provided in 2018 and $889 million provided in 2017. We paid approximately $118 million under our variable and incentive pay programs in 2019, as compared to a total of $103 million paid in 2018 and $91 million in 2017. Net cash paid for income taxes was approximately $159 million in 2019, as compared to $102 million in 2018 and $63 million in 2017. For the year ended October 31, 2019, the net change of zero in tax-related assets and liabilities related to the enactment of the U.S. Tax Act compared to $552 million in the same period of 2018, which 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, 2019, 2018 and 2017, other assets and liabilities used cash of $43 million, $4 million and $98 million, respectively. The increase in cash usage for the year ended October 31, 2019 and October 31, 2017 in other assets and liabilities is primarily due to taxes.
In 2019, the change in accounts receivable used cash of $106 million, $65 million in 2018, and $81 million in 2017. Days' sales outstanding as of October 31, were 61 days in 2019, 54 days in 2018 and 55 days in 2017. The change in accounts payable provided cash of $29 million in 2019, $40 million in 2018 and $2 million in 2017. Cash used in inventory was $36 million in 2019, $83 million in 2018 and $61 million in 2017. Inventory days on-hand decreased to 97 days in 2019 compared to 98 days in 2018 and increased compared to 95 days in 2017.
We made no contributions to our U.S defined benefit plans in 2019 and 2018. We contributed $25 million to our U.S. defined benefit plans in 2017. We contributed $21 million each year to our non-U.S. defined benefit plans in 2019, 2018 and 2017, respectively. We did not contribute to our U.S. post-retirement benefit plans in 2019, 2018 and 2017. Our non-U.S. defined benefit plans are generally funded ratably throughout the year. Total contributions in 2019 were $21 million or equal to total contribution in 2018. 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 2020. We expect to contribute $24 million to our non-U.S. defined benefit plans during 2020.
Net Cash Used in Investing Activities
Net cash used in investing activities in 2019 was $1,590 million and in 2018 was $705 million as compared to net cash used of $304 million in 2017.
Investments in property, plant and equipment were $155 million in 2019, $177 million in 2018 and $176 million in 2017. In 2019 we invested $1,408 million in acquisitions of businesses and intangible assets, net of cash acquired for the acquisition of two businesses compared to the acquisition of seven businesses for $516 million in 2018 and the acquisition of two businesses for $128 million in 2017. In 2019 there were approximately $23 million in purchases of fair value investments compared to $11 million outlay in 2018 and $1 million in 2017.
Net Cash Used in Financing Activities
Net cash used in financing activities in 2019 was $299 million compared to $797 million in 2018 and $202 million in 2017.
Treasury Stock Repurchases
On May 28, 2015 we announced that our board of directors had approved a 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 did not require the company to acquire a specific number of shares and could have been suspended or discontinued at any time. During the year ended October 31, 2017, we repurchased and retired 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, 2019, we repurchased and retired approximately 10.4 million shares for $723 million under this authorization. As of October 31, 2019, we had remaining authorization to repurchase up to $1.03 billion of our common stock under this program.
Dividends
For the years ended October 31, 2019, 2018 and 2017 cash dividends of $206 million, $191 million and $170 million were paid on the company's outstanding common stock, respectively. On November 20, 2019 we declared a quarterly dividend of $0.18 per share of common stock, or approximately $56 million which will be paid on January 22, 2020 to shareholders of record as of the close of business on December 31, 2019. The timing and amounts of any future dividends are subject to determination and approval by our board of directors.
Credit Facility
On March 13, 2019, Agilent entered into a credit agreement with a group of financial institutions which provides for a $1 billion five-year unsecured credit facility that will expire on March 13, 2024. The credit facility replaces the existing credit facility which terminated on the closing date of the new facility. For the year ended October 31, 2019, we borrowed $305 million and repaid $190 million. As of October 31, 2019, the company had borrowings of $115 million outstanding under the credit facility. We were in compliance with the covenants for the credit facility during the year ended October 31, 2019. On August 7, 2019, we entered into an amendment to the credit agreement, which provides for a $500 million short-term loan facility that was used in full to complete the BioTek acquisition and which is outstanding at October 31, 2019. On October 21, 2019, we entered into a second amendment to the credit agreement, which refreshed the amount available for additional incremental term loan facilities under the credit agreement to permit additional incremental facilities of up to $500 million. We had no borrowings under the additional incremental facilities as of October 31, 2019.
Short-term and Long-term Debt
On October 24, 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 2017 senior notes were repayable within one year as of October 31, 2017 and were reclassified to short-term debt. The remaining $100 million in 2017 senior notes matured and were paid in full on November 1, 2017.
On July 13, 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 were scheduled to mature on July 15, 2020, and bear interest at a fixed rate of 5.00% per annum. The interest was payable semi-annually on January 15th and July 15th of each year and 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. The gain was deferred and amortized to interest expense over the remaining life of the 2020 senior notes.
On September 17, 2019, we repaid the $500 million outstanding aggregate principal amount of our 2020 senior notes due July 15, 2020 that were called for redemption on August 16, 2019. The redemption price of approximately $512 million included a $12 million prepayment penalty. The redemption price was computed in accordance with the terms of the 2020 senior notes as the present value of the remaining scheduled payments of principal and unpaid interest related to the redemption. The prepayment penalty plus amortization of the previously deferred interest swap gain of $4 million and amortization of previously deferred debt issuance costs and discount of $1 million was recorded in other income (expense) net in the consolidated statement of operations. We also paid accrued and unpaid interest of $4 million on the 2020 senior notes up to but not including the redemption date.
On September 10, 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 and 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, 2019 was $1 million.
On June 18, 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, 2019 was $7 million.
On September 5, 2019, the company issued an aggregate principal amount of $500 million in senior notes ("2029 senior notes"). The 2029 senior notes were issued at 99.316% of their principal amount. The notes will mature on September 15, 2029, and bear interest at a fixed rate of 2.75% per annum. The interest is payable semi-annually on March 15th and September 15th of each year and payments commence on March 15, 2020.
In August 2019, Agilent executed treasury lock agreements for $250 million in connection with future interest payments to be made on our 2029 senior notes issued on September 5, 2019. The treasury lock contracts were terminated on September 6, 2019 and we recognized a deferred loss of $6 million in accumulated other comprehensive income which is being amortized to interest expense over the life of the 2029 senior notes. The remaining loss to be amortized related to the treasury lock agreements at October 31, 2019 was $6 million.
Capital Leases
The company leases certain property and equipment under capital leases. As of October 31, 2019, the current and non-current portion of the company’s capital lease obligations had an aggregate carrying value of approximately $6 million.
Off Balance Sheet Arrangements and Other
We have contractual commitments for non-cancelable operating leases. See Note 16, "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, 2019 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 | $ | 52 | $ | 70 | $ | 35 | $ | 56 | |||||||
| Commitments to contract manufacturers and suppliers | 481 | 12 | — | — | |||||||||||
| Other purchase commitments | 77 | — | — | — | |||||||||||
| Retirement plans | 24 | — | — | — | |||||||||||
| Transitional pension contributions to our U.S. 401(k) plan | $ | 6 | $ | 3 | $ | — | $ | — | |||||||
| Total | $ | 640 | $ | 85 | $ | 35 | $ | 56 |
Operating Leases. Commitments under operating leases relate primarily to leasehold property, see Note 16, "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, 2019 and 2018, the liability for our firm, non-cancelable and unconditional purchase commitments was less than $1 million. 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 $77 million within the next year. Approximately $25 million of the contracts relate to penalties that will reduce over the next 14 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, 2019 or October 31, 2018.
On Balance Sheet Arrangements
The following table summarizes our total contractual obligations on our October 31, 2019 balance sheet (in millions):
| Less than one year | One to three years | Three to five years | More than five years | ||||||||||||
| Senior notes | $ | — | $ | 400 | $ | 600 | $ | 800 | |||||||
| Credit facility | 115 | — | — | — | |||||||||||
| Short term loan | 500 | — | — | — | |||||||||||
| Interest expense | 59 | 118 | 69 | 87 | |||||||||||
| Transition tax | 35 | — | 39 | 90 | |||||||||||
| Capital leases | 1 | 1 | 1 | 3 | |||||||||||
| Total | $ | 710 | $ | 519 | $ | 709 | $ | 980 |
Other long-term liabilities as of October 31, 2019 and October 31, 2018 include $328 million and $607 million, respectively, related to long-term income tax liabilities. Of these amounts, $199 million and $215 million related to uncertain tax positions as of October 31, 2019 and October 31, 2018, 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 $129 million in other long-term liabilities relates to the one-time transition tax payable.
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